In a gold rush, the biggest winners often aren’t the ones digging for gold, but those selling the picks, shovels… and even the jeans. During the California Gold Rush of 1849, legendary fortunes were made by individuals like Levi Strauss, who innovated durable denim pants for miners, rather than by most miners themselves. The modern “Data + AI gold rush” is proving similar: while billions of dollars are raised and consumed by headline-grabbing AI model companies (the proverbial gold mines), there’s higher leverage value in the “picks-and-shovels” – the vertical applications and services that will make data-driven innovation a reality. Small, nimble venture funds are particularly well-suited to profit from this dynamic. Here, we’ll discuss why emerging managers (newer, smaller venture funds) have an edge in a supercycle and how their agile approach aligns with selling shovels in a gold rush.
Why focus on emerging, small funds? It may seem counterintuitive – wouldn’t a large, established fund have more resources to capitalize on a tech wave? In reality, venture is one arena where bigger isn’t always better. In recent vintages, $1M-$10M VC funds tend to outperform $100M+ funds, according to Carta. Why? Consider these drivers:
- Startup Mentality: Emerging managers (often defined as funds I, II, or III of a firm, or AUM below a few hundred million) operate with a startup mentality themselves. They usually manage smaller pools of capital, which means two things: (a) They don’t rely on management fees (the fund is too small for 2% fees to move the needle), so the team’s payoff is overwhelmingly from carried interest. This aligns them tightly with LPs – they win only if investors win. (b) They have a fire in the belly – a need to prove themselves to survive and raise the next fund. The entrepreneurial drive of a new fund manager can mirror that of a startup founder – and that energy often yields superior results.
- Smaller Funds = Higher Flexibility: A mega-fund managing billions faces a unique constraint: it needs to deploy huge checks, which forces it into later-stage deals or very capital-intensive plays. A nimble $50M or $100M fund, on the other hand, can thrive by writing $1M checks into scrappy startups or by funding many early experiments. They can also exit more nimbly – a $500M exit is meaningful to a small fund (maybe a 1-2x fund returner), whereas a $500M exit hardly moves the needle for a multi-billion fund. Thus, small funds can profit from opportunities that big funds ignore. In a supercycle, many of the interesting businesses (tools, B2B services, niche applications) might have billion dollar exits but little chance of becoming the next trillion dollar company. Large funds might overlook these, but small funds feast on them, generating excellent multiples. In essence, small funds can fish in ponds too shallow for big funds, where competition is lower and bargains plentiful.
- Picks, Shovels (and Pants) Strategy: Small, nimble funds often employ a strategy analogous to selling shovels in a gold rush. Rather than shoveling more capital into the same set of AI giants, they invest in the ecosystem: the data tooling, the enterprise software adapting AI to industries, etc. For example, while big investors fight over who will fund the next frontier model with a $1B round, a nimble fund might back a startup making a critical data driven application for a highly regulated industry. These are lower-profile but potentially high-return plays. By funding many of these enabling players, small funds can capture the upside of the gold rush with potentially less risk than betting it all on striking a motherlode.
- Sector Focus and Expertise: We’ll talk more about this in our next post, but many emerging funds differentiate themselves by focusing on specific sectors or technologies – exactly like a specialist tool vendor in a gold rush. A new fund arises from partners with deep industry experience in a domain (CX, biotech, fintech, etc.). This specialist focus is a competitive advantage: it helps them pick winners in their niche and win deals thanks to credibility. Research by Commonfund shows that across PE funds with vintages from 2006-2020, sector specialists have outperformed their generalist counterparts, delivering a median TVPI of 1.81x relative to generalists’ median TVPI of 1.69x. This higher performance was seen across almost all metrics. The Data Supercycle in particular might favor specialists – the domain is complex, and investors who live and breathe data can better assess technical risks and identify truly promising innovations. A generalist mega-fund might miss nuanced opportunities or fall for hype, whereas a lean specialist fund can stay grounded and back real value. Moreover, specialists often outperform partly because they choose the right sub-sectors to begin with. In a supercycle, everyone knows the mega-trend – the specialist’s edge is in picking the sub-sector and approach that will thrive (e.g. deciding that cloud infrastructure or enterprise AI tools will monetize better than consumer AI apps, etc.).
- Collaboration and LP Access: Emerging funds often work more collaboratively with their limited partners (investors) and coinvestors. A family office investing in an emerging fund might gain closer access to the fund’s pipeline, the opportunity to co-invest in particularly attractive deals alongside the fund, and more transparency and learning. The emerging manager, eager to build their reputation, is typically more open to sharing insights and even tailoring opportunities for supportive LPs. This can be a boon for a family office that wants to be hands-on or at least ears-open in the investment process. In contrast, in a very large, established fund, an LP is one of hundreds and gets the standard quarterly letter.
All these factors contribute to why emerging managers frequently outperform. This outperformance isn’t guaranteed, of course – picking the right emerging manager is key, as the distribution of outcomes is wide – but as an LP, if you can identify a strong emerging fund with the right focus, your chances of superior returns are meaningful.
What about the advantages of large, established VC funds? Mega-VCs do bring strong networks, brand, and the ability to support companies with huge follow-on capital. However, in a frothy supercycle, those advantages can be neutralized by the commoditization of capital– startups can get money from anywhere. We’ve even seen some mega-funds stumble by writing enormous checks at the peak of valuations, leading to write-downs. Smaller funds, by necessity, avoid those late-stage frenzies and stick to fundamentals – find great teams early, help them grow, exit at a reasonable size, and return capital.
To continue the gold rush analogy: The big funds are like the ones trying to bankroll a massive mining operation (with risk of digging a dry hole), while the emerging funds are the sharp traders setting up a general store in the mining camp, selling tools, maps, and supplies to every prospector. Over time, the storekeepers often did better financially than any one prospector.
For family offices, allocating a portion of their venture program to emerging, nimble funds – especially those aligned with the Data Supercycle theme – can provide both diversification and enhanced return potential. It spreads bets across a portfolio of early opportunities and aligns with a “rise with the tide” approach: rather than swinging for one home-run, you’re backing a fleet of speedboats chasing the wave.
One concrete example in today’s context: instead of trying to pick one winner among AI foundation model startups (with huge capital needs and competition), an emerging fund might invest in a dozen startups building data-driven developer tools, data management solutions, or domain-specific Data + AI applications. If even a few of those become essential picks-and-shovels providers, the fund wins big. And if the hyped “gold mines” struggle (say one foundation model training run fails), the tool providers might still prosper by selling to other miners.
In conclusion, don’t equate size with strength in venture investing. In a dynamic supercycle, adaptability, focus, and alignment often trump sheer scale. As the Data Supercycle continues, family offices should consider forging relationships with the next generation of venture funds – those lean and mean teams that are investing with conviction in the tools and upstarts of the new era.
Next up, in our final post, we’ll talk about specialization in even sharper relief: the value of specialist funds focused on the Data Supercycle – effectively, those managers who say “this wave is our sole focus.” We’ll examine how such focus can de-risk investments and amplify returns, and why partnering with a specialist (perhaps even us, as this series humbly suggests) could be the wisest move of all for capturing the Data Supercycle’s full potential.