Rolling Funds and the Emerging Fund Manager

In the past few months, Rolling Funds by AngelList have been the talk of the town. Instead of having to raise a new fund every 2-3 years, fund managers can now continuously accept capital on a quarterly basis, where LPs (limited partners, like family offices or endowments or fund of funds (FoF)) typically invest with 1-2 year minimum commitments. Under the 506c designation, you can also publicly talk about your fundraise as a fund manager. Whereas the traditional Fund I typically took 11 months to fundraise for a single GP (general partner of a VC fund), 11.9 if multiple GPs, now with Rolling Funds, a fund manager can raise and invest out of a fund within a month – and as quick as starting with a tweet. AngelList will also:

• Help you set up a website,
• Verify accredited investors,
• Help set up the fund (reducing legal fees),
• And with rolling funds, you can invest as soon as the capital is committed per quarter, instead of waiting before a certain percentage of the whole fund is committed as per the usual 506b traditional funds.

Moreover, Rolling Funds, under the same 506c general solicitation rules, are built to scale. Both for the emerging fund manager playing the positive sum game of investing upstream as a participating investor, and for the experienced fund manager who’s leading Series A rounds. In the former example with the emerging fund manager, say a solo GP investing out of a $10M initial fund size, 20 checks of $250K, and 1:1 reserves. Or the latter, $50-100M/partner, writing $2-3M checks. Maybe up to $7-10M for a “hot deal“, which by its nature, are rare and few in between. In the words of Avlok Kohli, CEO of AngelList Venture, Rolling Funds are what funds would have looked like if they “were created in an age of software”.

I’m not gonna lie, Rolling Funds really are amazing. Given the bull case, what is the bear case? And how will that impact both emerging and experienced fund managers?

The bear case for Rolling Funds

While these points won’t be comprehensive, and I’m sure I’ll find more after I publish this post, the bear case boils down to three points:

1. Rolling Funds lower the barriers to entry.
2. The market will be less price sensitive.
3. VCs need to move more upstream to stay competitive.

1. Rolling Funds lower the barriers to entry.

You’re probably thinking that’s a good thing. And it is. There are also two sides to every coin. The flip side is that there’ll be more noise in the market. Founders will have to do extra diligence before bringing on a new investor to see if there truly is founder-investor fit, and if the investor can walk their talk.

Furthermore, as a GP of a rolling fund, because you can invest right away and LPs commit to X number of quarters (instead of the whole Fund [Roman numeral]), you, as the GP, will always be fundraising, as Mac Conwell of Rarebreed Ventures points out.

2. The market will be less price sensitive.

With more capital in the market, it also becomes more likely for startups to be overpriced. When founders have the option of picking which term sheet to take, everyone will be focused on taking the best terms – the scariest of which is the greatest valuation. Overpricing startups isn’t exactly a new phenomenon. Some might say startups who raise their round or are based in Silicon Valley have been more and more overpriced over the past decade or two. Pre-pandemic, startups were often valued 2-3x higher in the Bay than their counterparts who raised elsewhere. Of course, the pandemic has helped a bit in flattening the curve.

Rolling Funds will just democratize this phenomenon outside of over-concentrated metropolitan VC hubs. Just like the seed round is the Series A from a decade ago, we will see an institutionalization of the pre-seed. And maybe even a pre-pre-seed.

3. VCs need to move more upstream to stay competitive.

Moving upstream means taking on more risk. When you’re investing with less numbers to go by, there is exponentially less predictability and modeling possible for idea-stage or prototype-stage companies. While there are accelerators, incubators, fellowships, and even communities, like Pioneer Labs and Indie Hackers, who are playing the early game, the abundance of capital will force institutional players to move further away from their core game. Learn fast, or miss the opportunity. And as VCs start investing earlier, the initial velocity of the market may mean that some institutional players will be able to provide less value for founders and per founder in the upwards mobility.

Expectedly, and we see examples of it already, founders will squeeze VC initial check sizes, as well as pro-rata. In fact, pro rata may not be a given any more, but something to earn by a GP’s value-add both at the stage of investment and downstream.

So, what does that entail for the emerging fund manager?

The emerging fund manager (circa 2021)

To describe this new tool in the toolkit, it’s important to first take a step down memory lane. In 1978, a professor at University of New Hampshire and founder of UNH’s Center for Venture Research, William Wetzel, borrowed a term from Broadway to describe self-made individual investors with robust business experience and a net worth north of $1M. Four years later, he publishes a paper describing these private investors and the informal risk capital market – what we better know today as the seed capital market. A stark contrast between the FFF – “friends, family, and fools” – who invest at the inception of an idea, and institutional capital. The label he bestowed: Angels.

Then a decade ago, a new phenomenon caught traction – super angels. In sum, angel investors who decided to raise their own venture funds, like:

Angel Investor	Venture Fund	Fund Size
Chris Sacca	Lowercase Capital	$28M+ (Fund I: $8.4M, ~250x MOIC)
Aydin Senkut	Felicis Ventures	$40M
Mike Maples Jr.	Floodgate	$70M+
Ron Conway	SV Angel	$20M+
Joshua Kushner	Thrive Capital	$10M

… just to name a few.

Predictably so, then came the solo capitalists. In contrast to super angels, solo capitalists have the ability to lead rounds, not just participate in them. The funds they raise allow them to write larger checks and compete and lead in later rounds than their super angel counterparts, like Lachy Groom’s $100M Fund II or Josh Buckley’s $150M fund. Another characteristic of solo capitalists, as is implied by the first word “solo”, is that they’re the sole GP investing out of the fund, meaning faster decisions. I’m going to borrow Nikhil Basu Trivedi’s table here in a macroscopic view of the pros and cons, in comparison to traditional venture funds.

With a completely different fund strategy compared to super angels, solo capitalists need a vehicle that can scale with their ambitions. But whether it’s the super angels or the solo GPs, there are and will be many first-time fund managers on the horizon.

So, what do LPs look for in emerging fund managers?

Now, I won’t and can’t claim to know everything. I’m neither an LP or do I spend as much time studying and learning to be an LP versus a VC. So for this question, I had to ask a couple friends who were (e.g. those who worked at family offices, endowments, FoFs, and LP-GPs), as well as emerging fund managers who tracked their Docsend stats.

1. Network – Where does your deal flow come from? Is it sustainable?
   • E.g. Stanford alumni network, Xooglers, Ex-Stripe employees
   • For that matter ex-[insert unicorn/public company name] employees, with specific attention around companies that have (re)defined a category. Think Shopify or Amazon for e-commerce. Square for merchant transactions. Airbnb for hospitality. And the list goes on.
2. Value-add – What is your unique skill set? And is it repeatable? Why do/will founders pick you?
   • E.g. go-to-market strategy, sales pipeline, network to world-class hires (engineering, executive, product, etc.), CEO coaching
   • Specifically on value-add, LPs are gonna be doing their diligence, aka founder reference calls. And they’re gonna ask questions like these.
   • Possibly also evaluating you on the CS:H ratio (check size: helpfulness). I write more about it here.
3. Portfolio construction – There are a million and one things that can go wrong in Fund I. LPs get it. It’s part of the job description. But that doesn’t mean you should leave the few things you reasonably can predict, up to chance.
   • Here’s Eniac Ventures‘ amazing portfolio construction model, as reference. More context here.
4. Thesis – This is the culmination of the above three points. How will you recognize and pick world-class founders?
   • What are the tells of an amazing investment, on the parameters of:
     • Founder/team
     • Product/market
     • Traction
     • Revenue model
   • What parts of your thesis are required vs ideal?

Some nice-to-haves:

• Operating/founding experience – Not only does it translate to being a great coach for checking founders’ blind sides, but also makes you an empathetic investor.
• Track record – Either via angel investments, SPVs (even better if you led these), or advisorship

In closing

I’m long on the future of venture capital. Rolling Funds, in conjunction with other funding mechanisms (e.g. equity crowdfunding, accelerators/incubators, startup studios, SPVs/syndicates, etc.) are going to help introduce more of that capital to the market. More capital floating around means more founders will enter the market.

At the same time, that also means it’ll only get harder to discern the signal from the noise. In the past decade, public market investors have moved upstream to diversify their portfolio. And venture capital has been a lucrative asset class. Moreover, companies are staying private longer. After all, there’s no reason to IPO if you can raise $100M+ from private market investors, where over a decade ago, you could only do that in the public markets. As companies are staying private longer, the term “unicorn” (valuation: $1B+) has given way to “decacorn” (valuation: $10B+). And on exit, the public markets have minted more “overnight” tech employee millionaires. And they’ve gone upstream again to either start their own company and/or to angel invest.

It’s a good problem to have. Capital is getting recycled into the market. While I don’t believe Rolling Funds will ever replace traditional funds, it is a step in the right direction to introduce more diversity and innovation among checkwriters, especially so for emerging fund managers rather than experienced managers. Turning angels into super angels. Next step, which AngelList, First Round, On Deck, Y Combinator, just to name a few are already on, is educating the market. And I’m excited to say I’m looking forward to them all!

Disclaimer: None of this is investment advice. This content is for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Please consult your own adviser before making any investments.

Photo by Giammarco Boscaro on Unsplash

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