On a routine due diligence call last week, the conversation, as it usually does with venture managers, turned to the concept of Power Law – the notion that venture capital distributions/returns are skewed by a few extreme events driving overall outcomes. This theory is one that VC managers have espoused through actual historical occurrences (track records) and aspirational marketing. My next question to the manager was intended to uncover the psychological effect of knowing (from history and the logic of risk) that 20% of investments will likely account for the fund’s overall returns. What does that do to one’s psyche when assessing a potential investment or when an already made investment starts to hit the skids? Does this make an investor quickly want to identify weak investments so they can be scrapped early, allowing them to concentrate on the 20% potential winners? Is this what failing fast means? The manager paused for a moment and said, “We don’t try to discard investments as quickly as possible because at the time of investment, we must be convinced that the company personifies what we believe can make it a top returner.” In other words, the manager was making the point that at the time of investment, all portfolio companies are believed to have the potential to be exemplary. He went on to say that when early-stage companies that are still seeking traction and market fit start to falter, the founder’s (or management team’s) confidence in their own product/service plays a significant role in how much additional effort and capital the fund will devote—a fascinating conversation. I am the first to admit that my due diligence style is prone to such digressions, but I also believe, without concrete proof—only a feeling—that investment managers enjoy these philosophical detours during due diligence meetings that can sometimes feel like a repetitive chore.
The manager then turned the tables on me and asked me a straightforward question – “Doesn’t a GP’s confidence in their own strategy affect your conviction in that manager?” Caught off guard, I reflexively said, “For sure.” However, this question took up unexpected space in my mind and, annoyingly, lingered (and still lingers) up until now. Although I still stand by my answer, I need to unpack the different ways analysts typically evaluate a GP’s confidence. I feel the need to stress that there are still too many managers (and, frankly, people) who cannot distinguish between arrogance and confidence. An easy rule of thumb for me is: “arrogance is obnoxious, and confidence is magnetic.”
- A GP’s confidence in its investment strategy:It makes sense that most managers think their investment strategy is awesome and unique in specific ways. However, besides the expectation that every GP will believe in the superiority of its approach, what usually inspires LP confidence in a manager is the level of its practical self-assessment. A manager who has thoughtfully evaluated their strategy, understands how their peers and competitors operate in the marketplace, and is acutely aware of how their edge can benefit their LPs, usually delivers memorable, confidence-boosting pitches.
- A GP’s confidence in its differentiation: Building on the previous point about a GP’s confidence in their strategy, a manager who can effectively and convincingly discuss the various approaches addressing a similar opportunity set—and then explain how their methods are likely to consistently deliver favorable results beyond peers, while honestly acknowledging potential shortfalls—can inspire skeptical investors to commit.
- A GP’s confidence in its processes: This is another point that is intermingled with all the other ones, but it deserves a standalone mention because institutional investors pay close attention to iterative processes within GPs that get honed over time. These processes also need to show some evidence of validation. LPs seek repeatability, but the prospect of repeatability is assessed within a dynamic framework that recognizes that market conditions, competitor capabilities, personnel, table-stakes attributes, alpha potential, etc., are constantly changing. Managers who can demonstrate a repeatable process infused with thoughtful downside shock absorbers, guardrails that are not overly restrictive, and a culture that embraces creative problem-solving will likely eventually garner supporters.
- A GP’s confidence in its sourcing and deal evaluation: As the private investing ecosystem continues to become more crowded, it is increasingly rare for any GP to secure LP commitments solely or predominantly because of its deal sourcing ability. The ubiquitous “proprietary sourcing” proclamation by GPs is, these days, the first to get chucked into LPs’ waste baskets of doubtful manager assertions. However, I have often been persuaded to take a closer look at a manager based on how confidently they explain their evaluation of sourced deals. A contrarian, unconventional, or relatively more meticulous approach to deal evaluation can help LPs build more conviction in a manager. This is a vital point, primarily when investing in illiquid assets, because errors here are more challenging to reverse.
- A GP’s confidence in its exit capabilities: Even the longest-term investors eventually want to get their capital back. GPs who can make a strong case—preferably supported by, but not limited to, historical precedence—that their deal structuring skills, extensive networks, and market insight give them an advantage over peers in harvesting capital when appropriate can build LP confidence.
- Skin in the game: This is an oldie but goodie that captures and also smooths the way for LPs’ understanding of a manager’s qualities that demonstrate confidence in their own strategy, and in turn inspires LP confidence in the manager. How else to show that you fully believe in what you are doing than to put your own money where your mouth is? When skin in the game is clearly displayed without being obscured by the misalignment of a large fee base, GP commitment fee offsets, LP unfriendly waterfalls, preferred liquidity terms, and so on, it is one of the most tried and true ways in which a GP can show confidence in its investment strategy. LPs pay very close attention to this.
Ultimately, a GP’s confidence is a multifaceted attribute that permeates every aspect of their investment philosophy, from strategy, differentiation, process, deal evaluation, and exit planning. This confidence, when grounded in thoughtful self-assessment and practical validation, can be magnetic for LPs and foster lasting conviction. However, genuine confidence must be distinguished from arrogance and supported by tangible actions such as meaningful “skin in the game.” In a competitive and ever-evolving investment landscape, managers who authentically demonstrate these qualities are most likely to inspire trust and secure investor commitments.
Anthony Kwesi Hagan
Founder and Head of Research, FreedomizationTM
December 7th, 2025
