How Rolling Funds Will Impact Fundraising
Rolling funds are all the rage these days. While there’s quite a bit of content out there about what these new funds are and how they work, we intend to…
Rolling funds are all the rage these days. While there’s quite a bit of content out there about what these new funds are and how they work, we intend to explain how these new VC structures will impact founders and the fundraising process. For more information on what rolling funds are and how they work, check out our list of resources at the bottom of this article.
What are Rolling Funds?
Pioneered by Angelist, a rolling fund is a new VC fund structure that allows funds to raise money on a continuous basis – creating a new fund structure as quickly as every quarter. These funds can also be publicly marketed under Rule 506(c).
Why are Rolling Funds Disruptive?
Rolling funds allow VC’s to continue to raise money from limited partners on a regular basis, essentially turning the process of LP investing into a quarterly subscription-based model. If an LP decides that they don’t want to continue backing an investor, they can stop allocating resources to them immediately. On the other hand, if they see that a given investor is making good bets, they can invest more money in them very quickly. This is especially useful for VC’s who would like to fundraise opportunistically in the case of portfolio markups.
This new structure will shorten feedback loops for venture capitalists. Startups take a long time get to full maturity, but they still have clear milestones throughout their journey. If an investor has several companies in their portfolio that succeed in securing future funding or obtaining product market fit, they can be rewarded instantly by raising more money during the next quarter. This is good for LP’s too, as they can make small, periodic investments in rolling funds based on the real time performance of the investor. This is quite different from having to write very large checks every 10 years. It opens up LP investing to smaller funds and individuals – rather than just institutions.
These funds also lower the barrier of entry into VC for aspiring investors by allowing them to get started with less up front capital. Angelist can manage most of the legal and administrative aspects of rolling funds too, further lowering the overall amount of knowledge and capital needed to get started. Because of this, rolling funds may create many new types of investors.
The Rise of Part-Time Investors
As we mentioned, rolling funds will allow more people to become VC’s. Because companies like Angelist will allow these small investors to outsource many fund management responsibilities, more people with A+ networks and good judgement can get into the game.
For example, a star employee at Stripe or AirBnB might have access to many startup deals and the judgement needed to allocate capital effectively. Traditionally, if they wanted to get into VC, they would have needed to slowly work their way into an established fund or quit their job to start their own. If they didn’t want to do this, then they could angel invest, but then may not have hit the threshold needed to be an accredited investor (and even then they were confined to only investing their own money). Rolling funds allow them to start investing part time, and without needing to hit accredited investor requirements (although LP’s do need to be accredited). These new operator investors will be able to attract LP investment from many different sources, such as their managers, successful friends, and others who are impressed by their network and experience.
Maybe you, a current founder, have always thought that you’d be a good VC and wish you could allocate capital into your other founder friends’ deals. With rolling funds, you can start a fund as a side hustle. This enables you to capitalize on your access and judgement by investing in other founders.
The rolling fund structure opens up VC investing to many people who would have otherwise had a difficult time getting started. For example, imagine a fund built entirely around an independent media creator with a strong brand. High quality tech bloggers or university professors with a deep understanding of startups and a large audience can raise funding quickly on top of their brand and expertise. It could create an additional income stream for these individuals and allow them to build wealth through venture investing.
A common thread is that rolling funds will open up the opportunity to create a VC fund to anyone with a great network, access to deals, and good judgement around startups. Whether it’s an elite tech blogger, current founder looking to invest on the side, or startup executive who wants to benefit from their understanding and access to early stage companies – there will be new players in the VC game that might be different than the typical venture investor.
How Rolling Funds Could Impact Fundraising
Rolling funds will lead to an increase in the total number of VC’s. More entrants into the VC business will lead to pressure on the traditional players in the ecosystem and more competition for deals. This competition will lead to better prices for founders raising capital. Would you rather take money from your long time friend’s rolling fund or a Sand Hill Road VC during your Seed round? These options may be real in the next 5-10 years.
At first, rolling funds will primarily impact early stage investing. Most of these new funds have raised relatively modest amounts of money compared to large VC’s. Due to the large amounts of capital needed to play at later stage investing, rolling funds might not have an impact there just yet. However, due to the nature of compounding, some rolling funds might grow much larger than expected. VC is dominated by power laws, and the most successful rolling funds might find themselves with LP’s begging to get into future rounds. A rolling fund with a few smash hit successes can instantly raise additional LP capital. Traditional VC’s would have to wait longer to do so. One can even expect large VC’s to adopt the rolling fund model in the future.
A final way that rolling funds will help founders is by easing exit pressure. All VC investors (including those who run rolling funds), will want your company to swing for the fences and seek to be a massive outlier. Traditional VC funds, however, need to show returns to LP’s on a roughly 10 year time horizon so that they have the momentum necessary to raise additional funding. This sometimes gives VC’s an incentive to push your company to exit or IPO within a specific time frame. LP’s want to see returns on set schedules. If your company’s exit would help show better returns, your VC’s might pressure you into selling your company prematurely. With rolling funds, this is not as much of an issue, as they can raise funding from LP’s on a continuous basis, vs having to raise a giant new fund every 10 years.
Other Rolling Fund Resources
Angelist explains their new Rolling Funds product in detail on their site: Introducing Rolling Funds.
A Substack newsletter dedicated to Rolling Fund News provides an in-depth FAQ on how Rolling Funds work.
What If Ventures, a new venture fund dedicated to investing in mental health companies, provides another helpful FAQ and puts it in the context of their fund.
A Tech Crunch primer on Rolling Funds & how Angelist went about launching them.
Sahil Lavingia’s rolling fund has been one of the most well known examples to date. He describes his thoughts on this new model & his own fund here.