What is an Emerging Fund Manager, and Why Do They Matter?

Heather Hartnett, CEO & GP at Human Ventures and co-founder of Transact Global, talked to an All Raise audience about the impact of emerging managers, how to demonstrate value for LPs, and how founders can pitch them, too.

“‘Emerging fund manager’ can mean so many different things,” Heather Hartnett, CEO & GP at Human Ventures and co-founder of Transact Global, told a recent All Raise audience. “Whoever you’re talking to, it changes. But when I’m talking about an emerging manager, it’s somebody who is raising or who has raised a sub-$200 million venture capital fund, and they’re generally in their vintage of fund one, two, or three.”

Heather’s definition seems to be gaining popularity. “More and more, this is becoming a common nomenclature,” she noted. People have different definitions of the type of person who starts the fund as an emerging manager, whether you’ve spun out of a big-name fund or you’re a founding fund manager. “But when I talk about emerging managers, it’s specifically early in your fund cycles. You’re investing for a world in which your exit environment is going to be eight to 10 years out, which means it’s just going to look very different” in terms of when you’ll see a return on your investment.

As emerging managers, Heather explained, “We play a very long-term game, and you can’t be a short-term thinker. You’re not mapping to quarterly earnings. You are mapping to building value. You’re creating value in these companies [you invest in]. And so I think about business fundamentals. It’s not growth at all costs. It’s also how the founders are being really smart about how they’re going to make money. It’s going back to going back to basics, which I think the tech industry has gone a little far from.”

Heather started Human Ventures, a New York City-based fund that invests in early-stage founders, in 2015 and has watched the broader landscape of VC shift significantly since then. At the time, Heather said, she already thought there were too many venture funds. “I thought the ecosystem was already too saturated.” But, she added, “Since that time, the landscape has completely exploded. COVID also had an incredible effect where location really didn’t matter, and that actually differentiated a lot of fund managers.” Now, Heather explained, there are funds based in the midwest, Washington, D.C., and other regions not thought of as venture hubs. The key thing is, these funds are looking outside of the usual focus of Silicon Valley. It even “really helps the New York ecosystem, where I am. I think it’s the fastest growing tech ecosystem. Talent gems are everywhere, and now there are so many opportunities for so many different strategies to create value.”

This more diffuse venture ecosystem leads to more opportunities for founders. Founders have more options to pursue when they’re ready to raise capital — and often, that leads them to emerging managers. “I think emerging managers, in general, start because they see an opportunity that isn’t being filled by some of the bigger firms.” Not only does this mean more access and options for entrepreneurs, Heather observed, but: “I also think that the smaller fund size for early-stage venture is really important, both from a return standpoint, but also from the perspective of finding and seeding and doing the work.”

There are also fewer layers for founders to get through to access checkwriters, but of course, in order for there to be checks to write, there has to be money to invest. “As emerging fund managers, we have to fundraise. We have to bring in limited partners as our investors.” But, Heather said, this might require casting a wider net. “The categories of people who allocate capital to emerging managers has now expanded. It used to be that a fund manager would go to the big pensions or endowments and people who could write large checks. Now the family office landscape is completely mature for venture. And we [at Human Ventures] had multiple founders who have had exits and then come in and invested in funds.” The idea of VC, Heather explained, has become more mainstream. People who might not have invested in 2015, when Heather started Human Ventures, are now far more likely to see it as a way to fuel innovation and grow both the sector they’re investing in and, eventually, their bank accounts.

That said, 2023 has posed some challenges when it comes to raising a fund. Interest rates and inflation are both up, meaning potential LPs who are newer to VC have been reluctant to invest. But, Heather added, more established venture capital LPs “understand that these cycles come and go, and if you’re in it for the long term, this is actually a very good time to fund the people who will be the next big firms and get your positions early in their Fund 1, which have been proven to actually be the best returning funds for most firms.” The temptation to wait to invest until the economy normalizes could mean missing out on a fund entirely, because, as Heather explained, “once a fund hits its max capacity, the LP base really will not change,” and there will be limited options to invest in that specific fund, as well as its thesis and leadership, in the future.

In order to make sure their LPs see returns, Heather stated, emerging fund managers still need to make sure they’re making good investments. That starts with the founder. Heather and her colleagues at Human Ventures aren’t just looking for an impressive resume. They want to know that the founder knows how to do “the hard thing.” She explained further that they want to know: “What is the hard thing that the founder has done in order to make it clear they have a leg up? What are those things that the founder has already done, or that you think they’re uniquely positioned to be able to do?” These founders, Heather said, “Have a risk tolerance that’s a little bit higher than others in their field, or they know how to navigate ambiguity. They know how to sell their vision to employees and to investors, but it’s not just storytelling.” They should be able to demonstrate that they can execute on that vision, or perhaps already have, and back up those assertions with evidence and data.

These are the same attributes that emerging managers must be able to show to potential LPs when they’re raising funds. That post-pandemic proliferation of funds means emerging managers will need to articulate why they should continue to exist, Heather said. As an emerging manager, be prepared to answer questions like: “Why didn’t you just join another fund? Why should you steward capital to make money for people?” Emerging fund managers are often asking potential LPs to make a leap of faith that more established fund managers don’t have to ask for — they don’t always have the sort of proven track record that shows they know how to make money.

Heather explained that emerging fund managers have to spend more time thinking about what their key differentiators are and how to establish their credibility. This may mean rethinking how you tell your story to each potential LP you talk to and how to express your qualifications and connections. If you’re talking to an investor who’s going to invest in your fund, Heather advised, you should know who in your network can both validate what you’re saying and is trusted by the potential LP: “If you can get that kind of external reference, if you can say, ‘I already have a preexisting relationship with X, Y, and Z. I respect the way that they invest,’ and if they’ve invested in this person, that allows you to build credibility, to create a shortcut. You have to articulate value in a short amount of time and be able to create that trust with a partner who’s going to be with you for 10 or more years,” so emphasizing the authentic elements or connections the LPs will be most interested in will be enormously helpful.

At the end of the day, however, finding the proper LP for an emerging fund, Heather said, “Is like finding your mate.” You both need to have a shared understanding of and tolerance toward risk. You need to have the same value perspective. You need to resonate with each other’s stories. And then you have to ask yourself: “Now, how do I find more of those types of people?”

You can see our full Power Conversation with Heather Hartnett here.

Notable moments include:

• ​0:00 Introduction
• 2:26 How are you today, and what have you been up to this morning?
• 3:32 What is an emerging manager?
• 5:19 Why did you start Human Ventures in 2015, and how has the landscape changed since then?
• 7:08 Do you think the market is saturated with too many firms?
• 9:47 What are some macroeconomic trends you’re seeing?
• 11:47 Why should you invest in emerging managers when public markets are experiencing volatility?
• 14:39 How can founders be smart about building value in their company at the early stage?
• 16:53 How can companies generate value that is defensible by what’s happening in the market?
• 20:02 What does the term “alpha-generator” mean?
• 22:01 What do you think emerging managers can do to effectively communicate their vision of the world ten years from now?
• 23:19 What do you mean by “the path of least action to trust”?
• 25:00 How do you square the obvious upside with reticence to invest in emerging managers?
• 28:35 Are there any other ways that people can get over the hump with LPs if they don’t have enough data in the beginning?
• 30:44 What advice would you give to a candidate interested in working at an emerging manager’s firm rather than an established VC fund?
• 33:16 What is your advice for folks who’ve worked in high-growth early stage startups who want to transition to working for a fund?
• 35:12 What do you look for when making pre-seed or seed stage investments? What information do you need to see for execution?
• 37:28 What about the startups that are making new markets? How do you get beyond financial value and see broader societal value?
• 40:43 As a Black female founder, it’s been difficult to find investors. What advice do you have for other founders in this situation?
• 43:31 I’m an emerging manager. How do I attract talent to work at my firm?
• 47:14 What deltas and macro-trends do you anticipate seeing between now and ten years from now?
• 50:37 How can associate-level individuals support emerging managers with LP fundraising?
• 51:45 Can you share one final piece of advice with the audience?
• 53:37 How can we support you?