Solo Fund Managers

Venture capital funds run by a solo fund manager are becoming popular. They often perform well. Still, many experienced Limited Partners (LPs) hold the common-sense opinion that funds run by GP teams are a better bet. They are not.

LPs imagine a solo manager dying and the uncertainty that would cause to their investment returns. Considering possible eventualities is useful only when also considering their likelihoods. A fund manager becoming incapacitated is quite rare.

GP teams breaking up is quite common. Losing a GP from a complementary team causes loss of specific skills and incentive misalignment. It can be nearly as disruptive to a fund’s strategy as incapacitation of a solo manager.

Human organizations almost universally operate with hierarchies of responsibility. Few companies have enduring success with co-CEOs. Funds are the same. GP teams are prone to interpersonal dynamics that can harm performance. These are often invisible to LPs. Solo managers don’t have such problems. They are solely responsible.

Groups are prone to consensus bias. They tend to talk themselves out of deals when somebody sees high risk. The more diverse the team, the more likely somebody will see such risk. Filtering out high-risk deals means (a) that funds with GP teams look at a smaller universe of possibilities, and (b) those possibilities exclude the outliers who will surprise the world.

Solo managers might have a higher failure rate per deal. However, venture returns are asymmetric. The maximum loss is 1x, while the potential gain is unlimited. A preference for GP teams optimizes for the small downside at the cost of the large upside. In the long run, risk is rewarded. LPs invest in venture capital to provide the high risk, high return portion of their portfolio. Solo managers are more likely to deliver that.

There is also a difference in incentives. A partner in a GP team “sells” a deal to the investment committee. This encourages the partner to avoid or counterargue flaws. A solo manager “buys” the deal. They must internalize the risk, as their personal reputation is at stake.

A solo manager can make fast decisions. Entrepreneurs like that. In competitive markets, speed determines access. Securing an allocation in the best companies is the primary variable for fund success. This might be the biggest reason solo fund managers can give better LP returns.