Family offices are increasingly courted by emerging venture capital managers, drawn in by the promise of outsized returns and early access to the next generation of unicorns. The data does show that emerging managers can outperform established funds, but the reality is far more nuanced – and much riskier – than the industry hype suggests.

This article builds on Wamda’s ongoing exploration of the evolving role of family offices in MENA. In earlier pieces, we examined the role of advisors and the risks of direct startup investments. Here, we turn to the rise of emerging VC managers and the difficult choices family offices face in evaluating them.

The performance paradox: Higher upside, higher volatility

Multiple studies confirm that emerging VC managers – typically those raising their first or second funds— have historically delivered higher median IRRs than established peers. Their smaller fund sizes, sector focus, and hunger to prove themselves often translate into a more aggressive, hands-on approach.

As Christopher Aw notes, “Emerging managers often outperform established ones, but that’s just part of the story. While some deliver exceptional returns, many first-time funds fail, generating poor results.”

This is the paradox: the best emerging managers can deliver outsized performance, but the range of outcomes is much wider than with established funds. Survivorship bias adds another layer – success stories make headlines, but the many failures remain invisible.

Why emerging managers outperform – and why they’re hard to pick

Emerging managers often have more at stake, both personally and professionally. They are hungrier, more nimble, and more specialised, which can unlock a unique deal flow. Their smaller fund sizes mean that a single win can transform fund performance.

Chris explains, “The key reason some emerging managers succeed is fund size. With smaller funds, even a couple of wins can return the entire fund. Larger funds, especially at the early stage, need many more successes to break even.”

But there’s a catch. For family offices with significant capital, even a handful of small, successful funds may not meaningfully shift overall portfolio performance. And the inconsistency across emerging managers makes it difficult to build a reliable, needle-moving strategy.

The family office dilemma: Diversify or double down?

For family offices, the challenge is less about spotting the next breakout manager and more about managing risk. Chris advises caution: “Family offices should avoid first-time funds unless they’re building a diversified portfolio of them. If you’re backing one or two, make sure the manager has a track record – funding three or four is fine, but only if they’ve executed well in the past.”

The temptation to support a charismatic new manager is strong, especially in markets where family offices are key LPs. But the truth is sobering: most first-time funds do not deliver top-quartile returns, and a few unsuccessful bets can erode wealth quickly.

Direct deals vs. fund investments: The active involvement trap

Some family offices try to avoid fund risk by co-investing directly alongside emerging managers. But direct deals can be even more dangerous.

Chris cautions, “After an inheritance or liquidity event, families often invest larger amounts than their risk tolerance allows. Wealth can vanish from poorly executed direct deals. Direct investments aren’t passive – they require a lot of active involvement. Few people do it well.”

The more sustainable strategy, he argues, is building a broad, largely passive portfolio.

The bottom line: Proceed with eyes wide open

The hype around emerging VC managers isn’t baseless – data shows they can outperform. But family offices should tread carefully. Discipline, diversification, and sober risk management matter more than chasing the next hot manager.

As Chris sums up, “The families who win are those who ask numerous questions, surround themselves with experts, and stay honest about what they don’t know.”

____________________________________________________________________________________________________________________________

This article is part of an ongoing series exploring how family offices in the MENA region are navigating venture capital, private equity, and alternative investments. Stay tuned for more insights in the coming weeks.