Why Smart LPs Back Early-Stage Venture

In Brief:

Most institutional investors are missing venture capital's biggest returns by avoiding first-time fund managers, despite data showing emerging managers often outperform established ones over 42 years of fund data. The real risk isn't backing new managers—it's ignoring them completely in a market where 80% of returns come from just 20% of managers and missing the top three vintage years can reduce cumulative returns by 65%. Jamie Rhode, Partner at Screendoor, a venture fund-of-funds that exclusively backs institutional-grade emerging managers, joined Balentic CEO Kasper Wichmann on Balentic Edge to discuss why traditional LP thinking about early-stage venture is fundamentally flawed. Rhode brings over a decade of institutional experience from Bloomberg, private equity, and family office investing, now focused on bridging the gap between promising first-time fund managers and institutional capital that typically demands track records before investing.

Big Picture Drivers:

• Structural Mismatch: LPs want access to early-stage alpha but lack scalable models to invest in small fund sizes and emerging managers effectively

• Timing Misunderstanding: Venture capital's value comes from long-term compounding over 12-15 years, not early distributions like other asset classes

• Access Limitations: Early-stage venture requires relationship-driven deal flow and high-quality sourcing that most LPs cannot build independently

• Fee Structure Reality: Emerging managers rely heavily on carry rather than management fees, making incentives more aligned than established large funds

Key Insights:

• Venture Returns: Early-stage venture delivers 3.1x net returns over 42 years with an 18% IRR, but requires consistent vintage year exposure to capture 1,154x cumulative multiple versus 26x in real estate and 9x in buyout.

• Winner Concentration: In venture capital, 80% of returns come from just 20% of managers, and top Series A firms only have a 1-3% outlier capture rate, making diversification and access critical for success.

• Timing Impact: Missing just the three best vintage years in venture reduces cumulative returns by 65%, compared to only 6% in real estate and 4% in buyout, highlighting venture's extreme sensitivity to market timing.

• Operational Reality: Fund managers spend only about half their time investing, with the other half managing institutional requirements like reporting, audits, and portfolio tracking that many emerging managers underestimate.

• Fee Structure: For emerging managers with average fund sizes of $42 million, the 2% management fee provides minimal compensation, making them heavily dependent on carry and thus aligned with LP returns.

• Access Advantage: The smallest fund Screendoor has backed was $13 million, which structurally doesn't work for LPs with $10 million minimum check sizes, creating opportunities for specialized fund-of-funds platforms.

Memorable Quotes:

• "I get most excited when I talk to a GP that hasn't said the word AI or deep tech in the first five minutes of a conversation. Like, great, you were looking in another area of the market." - Jamie Rhode, when discussing what makes managers stand out in a crowded field

• "We'll never back a first-time investor, but we'll always back a first-time fund manager." - Jamie Rhode, explaining Screendoor's investment criteria and focus on proven investors launching new funds

• "Half the job is investing and half the job has nothing to do with investing." - Jamie Rhode, describing the operational complexity of running institutional venture funds that emerging managers often underestimate

• "If you look at the top series A firms, they have an average outlier capture rate of 1 to 3%. So the ones I trust the most are grounded enough to know the line between skill and luck is always a bit blurry." - Jamie Rhode, on the importance of humility in venture investing

• "The returns there I couldn't find anywhere else. And I'm interested in producing those returns not only for myself but for other LPs in the ecosystem." - Jamie Rhode, explaining her transition from family office investing to venture fund-of-funds

The Wrap:

The conversation reveals a fundamental disconnect between how institutional investors approach venture capital and what the asset class actually requires for success. While most LPs seek the safety of established managers with proven track records, the data suggests that emerging managers often provide superior returns—if investors can navigate the operational complexity and relationship requirements. Screendoor's model of combining institutional capital with seasoned GP mentorship represents a potential solution to this market inefficiency, though it requires LPs to embrace longer investment horizons and accept that the best venture returns come from betting on talent before it's fully proven. The discussion underscores that venture capital remains one of the few asset classes where active management and specialized access can generate meaningful alpha, but only for investors willing to build the infrastructure and patience required.