How Fund-of-Funds Programmes Underwrite Emerging Venture Managers?
NVCA's latest Yearbook shows that first-time venture-fund formation has tightened sharply from the 2021 peak. The supply of newly formed managers has contracted, making manager access and specialist selection more consequential. A fund-of-funds with real sourcing reach can build relationships before an emerging manager becomes widely allocated.
NVCA reported 101 first-time funds in 2025, down 77.9% from 457 in 2021.
Separate Investing Skill From Firm-Building Risk
A fund-of-funds can evaluate emerging venture managers by separating investment skill from firm-building needs. A new firm may have strong deal access and experienced investors while still developing reporting, finance, compliance, and fundraising operations. The fund-of-funds can add value through selection, portfolio sizing, operational review, and ongoing support. It should not treat every young manager as either a hidden gem or an avoidable risk.
| Area | Core question | Useful evidence |
|---|---|---|
| Investor skill | Who sourced, chose, and supported prior deals? | Company attribution and references |
| Strategy | Can the proposed fund size support the plan? | Cheques, ownership, reserves, and deal pace |
| Firm | Can the partners work and decide together? | Roles, economics, governance, and history |
| Operations | Can the manager serve LPs for a decade? | Administrator, audit, valuation, compliance, and reporting |
First-time fund formation also changes with the market cycle. That matters because the number of new firms available to review can expand quickly and then contract just as sharply.
The number of first-time US venture funds closed rose from 214 in 2016 to a peak of 477 in 2022, then fell to 101 in 2025.
First-Time US Venture Funds Closed
The pool of new venture firms changes dramatically by cycle, so specialist sourcing and manager selection cannot be treated as a static exercise.
View chart data and source
| Year | First-time funds closed |
|---|---|
| 2016 | 214 |
| 2017 | 265 |
| 2018 | 278 |
| 2019 | 220 |
| 2020 | 272 |
| 2021 | 457 |
| 2022 | 477 |
| 2023 | 388 |
| 2024 | 240 |
| 2025 | 101 |
The fall in fund formation does not mean investors should avoid new firms. It means fewer teams are reaching a close, and the surviving opportunities still need to be judged on their strategy, people, portfolio mathematics, and ability to serve LPs over time.
Portfolio Sizing Is Part of the Work
A promising manager may still receive a measured first commitment while the fund-of-funds learns how the team invests and operates. The size should be meaningful enough to build a relationship and small enough to preserve portfolio balance. Successor commitments can grow with evidence. This creates a path rather than forcing a yes-or-no view at Fund I.
A new firm may outsource administration, compliance, and finance. That can be sensible if ownership is clear and the providers are strong. The underwriter should test workflows, deadlines, data control, and how problems are escalated. Operations should not replace the investment case. A polished back office cannot repair weak access or poor selection.
- Reference depth: Speak with founders, co-investors, and former colleagues.
- Size emerging-manager exposure across several teams.
- Operational support: Help managers meet reporting and governance needs.
- Compare early evidence across vintages.
- Access for LPs: Aggregate commitments that may be too small individually.
The best underwriting finds managers with a real investment edge and gives that edge an operating structure that can support long-term LP capital.
Build a Planned Emerging-Manager Allocation
In a $100 million fund-of-funds, 10%, 25%, and 40% emerging-manager exposure equals $10 million, $25 million, and $40 million of capital respectively.
A $100 million emerging-manager allocation spread across 10 managers creates $10 million per emerging manager before follow-ons, reserves, or co-investments. That relationship-building matters in a market where NVCA reported only 101 first-time funds in 2025.
A specialist allocation only helps if it improves the blended result. If 40% of the fund-of-funds is in emerging managers and that allocation returns 2.5x while the rest returns 2.0x, the blended gross result is 2.2x before fund-of-funds fees and carry. A larger allocation therefore makes specialist selection more consequential.
article-visual:emerging-manager-exposure-fund-of-funds-risk-allocationOn a $100 million fund-of-funds, 10%, 25%, and 40% emerging manager exposure equals $10 million, $25 million, and $40 million.
Emerging-Manager Access Allocation
A larger allocation can turn specialist manager access into a real source of portfolio differentiation.
View emerging-manager data and assumptions
| Emerging-manager share | Dollars in $100M fund-of-funds | Portfolio implication |
|---|---|---|
| 10% | $10M | Initial institutional access. |
| 25% | $25M | Core specialist portfolio. |
| 40% | $40M | Carefully selected emerging-manager strategy. |
A New Firm Can Be Ready Before Its Track Record Is Long
An emerging manager may have years of investment experience even when the management company is new. The fund of funds should separate the record of the people from the readiness of the firm. Deal attribution, references, ownership history, and realized decisions test the investors. Reporting, finance, compliance, succession, and service providers test the platform. A smaller first commitment can give the new firm room to prove both. The fund of funds can set clear expectations for reporting, key-person coverage, portfolio pace, and the evidence needed for a larger re-up. This creates a path to growth instead of treating a first fund as permanently small.
The purpose is not to remove all firm-building risk. It is to size that risk sensibly while preserving access to managers whose strategy, network, or market may be difficult to reach once the franchise is established.
Frequently Asked Questions
Why use a fund-of-funds for emerging managers?
To institutionalize specialist access: A focused platform can source, diligence, negotiate, and monitor managers that a generalist LP may not cover efficiently.
Does a larger emerging-manager allocation automatically mean more risk?
No: The outcome depends on manager quality, diversification, terms, and the strength of the selection process. A larger allocation simply makes that process more important.
Related Reading
emerging manager diligence, emerging manager scorecard, and institutional LP questions.