Venture capital is all about investing in innovation, so it should come as no surprise that once in a while the industry actually finds its own new and unique way to invest.
Last year, right before the pandemic struck the economy, AngelList introduced the rolling fund, a new way for VCs and investors to raise and deploy capital into startups. In rolling funds, those seeking to run the fund - whether it’s a formal VC or maybe an experienced member of the startup ecosystem - can raise new money periodically and then invest in a basket of startups.
The pandemic kind of overshadowed rolling funds initially, but then the concept really started to pick up steam toward the latter part of 2020. A recent count showed there were currently 51 rolling funds on AngelList, and other investors or organizations have launched them outside the platform as well.
With the idea gaining in popularity, here are five things to know about rolling funds.
A traditional VC fund will typically raise a lot of money at once in an effort that can be just as rigorous as a startup raising funding. According to a 2020 report from the fundraising platform DocSend, it can take VC funds an average of 31 weeks, or nearly eight months, to raise a traditional fund.
Once a traditional VC secures funding, it typically does not plan to raise again for another two to five years. On the other end of the spectrum, there are angel syndicates, another brainchild of AngelList, that enables a group of individual investors to pool money in order to invest in one company.
A rolling fund tends to fall somewhere in the middle. Typically once a quarter, the fund raises financing from accredited investors and charges a minimum subscription amount. The investors are basically viewed as limited partners and the person or team running the rolling fund can invest those funds quickly and in multiple startups.
There may be a minimum number of quarters an investor has to commit to (say two or three), but at the end of the commitment the investor does not have to re-up if they don’t want to. Meanwhile, the rolling fund can be adding new investors each quarter.
So, to review, why is the rolling fund more agile? Well, the funds are raised much more quickly than a traditional VC fund and therefore can be distributed quicker. They can also be used to invest in more than one startup so the fund managers can make multiple investments quicker than an angel syndicate because the funds are raised and all of the legal work is taken care of at one time.
As mentioned above, there is much less commitment to a rolling fund. Some funds only require investors to be in for a few quarters and I imagine others have a minimum of just one quarter. Investors can also leave and then come back.
This could be advantageous for many investors that like to have the flexibility to have capital available if new opportunities arise. An investor could commit to a rolling fund for a few quarters and then choose to not re-up one quarter if, say, there is an exciting real estate or stock market opportunity they need capital for.
Investors can very easily not invest in the rolling fund for a quarter or two, put their investing dollars elsewhere, and then rejoin the rolling fund a few quarters later. This takes some of the pressure off the investor, who might be nervous to tie up a large sum of capital for many years.
The flip side of this situation is that rolling funds can likely see more volatility than a traditional VC fund because there may be one quarter a lot of people don’t re-up and another quarter when they’ve got more capital than they can deploy.
When you think about who’s investing in venture capital, pension funds, financial institutions, and university endowments probably come to mind. And they are likely investing millions, tens of millions, or maybe even hundreds of millions. But the rolling fund really lowers the bar and makes it a lot easier to invest.
On AngelList, many rolling funds are allowing people to get in for $5,000 to $10,000 per quarter. Additionally, while rolling funds are still charging the standard 20% carried interest on the fund, some don’t charge fees or charge less than the standard 2%.
From a management perspective, the rolling fund also makes it easier for those in the startup ecosystem -- maybe a serial founder -- to set up a fund and try their hand in VC. AngelList only charges a 0.15% administration fee to fund managers, whereas there may be an admin fee of 1% at a more traditional VC fund.
Rolling funds are also a little less daunting because fund managers don’t have to raise the whole fund all at once through a lengthy process. Especially if it’s a serial entrepreneur or someone with connections in the startup ecosystem, the new fund manager can set up a rolling fund and start by raising funds from friends and family, one at a time, brick by brick.
Sure, they may start by writing smaller checks, but it’s a way for the new fund manager or team to see whether they like being in VC and how good they are at it without betting the house.
Diversification is an important way the rolling fund distinguishes itself from an angel syndicate. An angel syndicate pools investors to make a large investment in one company. If you are investing, you better do your homework because it’s just one company, so if it fails, which is typically more likely than not for a startup, then say adios to your money.
But a rolling fund may make multiple investments in one quarter, making the situation less risky because if just one company you invest in gets acquired or goes public, then it’s okay to miss on the others.
The rolling fund may also be preferred by investors that don’t have the time to spend analyzing companies or be involved in the process. If the investor likes the fund manager or team running the rolling fund, and believes in their investment thesis, they can be a little bit more passive knowing that they are getting exposure to a broader sector or group of startups.
We’ve already discussed that it’s easier to set up a rolling fund because all of the funds don’t have to be raised at once. A fund manager can start with a small group of friends and family that believe in them, and then build the fund through word of mouth.
Additionally, a fund manager can choose to set up the rolling fund through AngelList, which will handle most of the tedious legal work, making it easier to get started.