Solo Fund Managers

Venture funds managed by solo general partners are increasingly common. An impressive number of top performing funds are run by solo managers. Still, many experienced LPs hold the common sense opinion that funds run by GP teams are a better bet. They are not.

Tragedies

A common concern is the potential incapacity of the solo manager, which would have a high risk of the fund failing to carry out the strategy it promised to LPs. While it is worth considering possible eventualities when investing in a fund, it is also worth considering their likelihoods. Fund managers dying during the life of their fund is very rare. LP agreements for funds with solo managers have provisions for the best possible handling of such an eventuality.

On the other hand, GP teams breaking up is very common. Losing a GP can be nearly as disruptive to implementing a fund’s promised strategy as the disappearance of a solo manager. GP break-up causes incentive misalignment, loss of motivation, and loss of a skill set that LPs had factored into their investment decision.

Even without break-up, GP teams are prone to developing interpersonal dynamics that are unhealthy for fund performance and invisible to LPs. Solo manager funds have no such problems.

Bias

Groups are prone to consensus bias. They tend to pass when somebody sees a high risk of failure. The more diverse the team’s background, the more likely it is that somebody will see such risks and cause the group to pass.

Nobody in an investment committee meeting says, "There's not enough risk in that deal. We should pass." The result is that GP teams tend towards doing deals with lower risk and lower potential multiples. That causes the fund to regress towards mean performance.

Venture investing returns are asymmetric. You can only lose 1x your money on a deal but you can return the fund multiple times by getting into the right deal. A solo manager will probably make more stupid investments and have a higher failure rate per deal than a GP team. But, a solo manager is more likely to take a chance on the non-consensus deals that provide large returns and high alpha. An LP choosing a GP team over a solo manager optimizes for the small down side at the expense of the large up side. In the long run, risk is rewarded. LPs invest in venture capital to provide the high risk, high alpha portion of their portfolio. Solo managers are more likely to deliver that.

Expertise

A group is likely to trust its members' expertise when making decisions. It is impossible for the group to have the best available expertise to evaluate every deal.

A solo manager must rely on their Rolodex to call upon the best available experts. A good experienced manager has hundreds or thousands of technically knowledgeable experts to call upon. As a result, solo managers often make better-informed decisions than GP teams.

Cost structure

A fund needs to bring in sufficient fees to compensate GPs. To compensate the GPs, funds with teams must be larger than funds with a solo manager. Therefore, they have to deploy capital into more deals, bringing returns towards the mean, or later stage deals with lower multiples. A solo manager can run a fund that is better concentrated on the top deals within the thesis. Surplus fees can be used for the best available expert help, case by case, rather than on general purpose general partners.