OK I'll Bite, What's a Rolling Venture Fund?
Plus Four Boston Companies that Raised $63M+
What Are Rolling Venture Funds?
Outside the conversations about NYC and SF being doomed, Rolling Venture Funds are the new hot topic in the Twittersphere. They’re buzzy enough that someone already made a substack newsletter to curate rolling fund news and developments. So, what are they, and why should you care as a founder, investor, or LP? I’ve been trying to get a better understanding of them over the past week myself, and here’s the simplest explanation I could write up:
February: AngelList Introduces Rolling Funds
In February, AngelList introduced a new Rolling Venture Fund product, targeting emerging VC fund managers that want to quickly raise and deploy capital. What opportunity did they see in the market?
The Problem: Fundraising is Old Fashioned
Raising venture capital for a new fund is one of the more time-intensive processes as a fund manager. Plus, while GPs are out raising money for a new fund, they might be paying less attention to potential new deals on their desk or emerging issues with their current portfolio investments. The traditional VC fund structure might also limit the ability of partners to invest new LP money until the fund has officially closed. Lastly, there’s a short period when VCs aren’t fundraising and are heads down making investments, but a great LP might be out there looking to write a check. Why should they have to turn away good commitments? What if they could deploy that LPs money instantly?
“The cost of starting a company has declined dramatically in the last 20 years, and now it is time for the cost of deploying capital to decline as well.” — Stephan Hays
The Solution: A “Rolling Fund” Structure
The rolling fund structure enables a General Partner to take on new LP money on a rolling basis, as often as they’d like. With some nifty legal structuring, AngelList made it easy for LPs to subscribe to a venture fund at any time in its life cycle, making payments on a quarterly basis. LPs can invest in the fund and get returns on all investments made after the point they invested, but not before. Fund managers can immediately deploy capital that’s been raised without waiting for a fund to close. Paired with AngelList’s existing fund management solutions, it’s enabled them to offer a sort of “full-stack” VC-as-a-Service solution.
Under the rolling fund structure, fund managers raise a specific amount of capital, then set up quarterly LP commitments that roll in automatically. New LPs can join the fund at any time, and funds that haven’t been invested roll into the next quarter. Say my first and only LP invests $10K quarterly into my rolling fund. If I only make one $5K in a quarter, their remaining $5K commitment rolls into the next quarter.
AngelList takes a 1.5% fee on all committed funds (charged quarterly), and if you source an LP from the AngelList platform, they get 5% of that LP’s carry when any distributions are made. If you source the LP yourself, they take nothing. An additional benefit of the rolling fund is its legal classification. Using Rule 506(c) of Reg D, rolling fund managers can use general solicitation and advertising to find new LPs. Every LP still needs to be accredited, but this could make it much easier for an emerging manager to get their first few checks.
“AngelList’s bet is that smaller emerging investors will find more value in the ability to sign up more limited partners immediately after a high-profile exit or markup has them appearing to have a hot hand.” — Alex Konrad
August: “Solo Capitalists” Become Mainstream
Building off the tailwinds from Alex Danco’s idea of the Social Subsidy of Angel Investing, Nikhil Basu Trivedi wrote a fascinating piece on the Rise of the Solo Capitalist. These are individual investors who are using their personal brand and a compelling thesis on a market to raise funds that can compete head on with traditional venture investors. The GP is the brand of the fund. They might be superstar investors, serial entrepreneurs, or people with a truly unique view of a market opportunity that they’re ready to capitalize on in a way that few others can.
August was a big month for new rolling fund announcements from these sort of high-profile investors. Sahil Lavingia stole the spotlight when he announced SHL.vc. At around the same time, Cindy Bi started soliciting investors for her new fund, CapitalX. Other investors utilizing the rolling fund structure include Stephan Hays and Tyler Tringas.
It makes a lot of sense for big-name GPs to put money into these funds. Like Kate Clark wrote in February, partners at top tier firms like a16z are putting their personal money into microfunds to guarantee access to hyper-competitive deals.
I think it’s important to be weary of any new financial product. New things are always popping up that promise to “democratize X” or “disrupt Y.” Although the idea of being able to raise and deploy funds easier sounds objectively better than traditional VC, there are still some unknowns.
There are certainly still benefits to the traditional venture fund structure:
A big question on a founder’s mind when taking VC money might be, “Will they be able to invest in me again further down the line?” Raising millions of dollars as a VC signals to potential portfolio companies that you’ll have enough ammunition to fund them all the way to exit. A rolling fund can’t really tout big AUM numbers.
In a way, I think the cumbersome process of sourcing LPs could be a test for how the relationship will look long term. Lowering the amount of friction it takes to obtain LPs is of course useful — but my guess is some GPs and LPs might hold the opinion that the “dance” required to raise capital is good. It’s how you get to know the person you’re engaging in a long term relationship with.
There might also be some issues that arise directly from using this structure:
One potential issue might be accurately tracking returns. The money coming into the fund is entering in a staggered and sporadic way. How will this impact metrics like IRR?
Chris Harvey from Law of VC notes that although this structure isn’t illegal, there’s no legal opinion that clearly authorizes it — which may lead to difficulties down the line. I think this might cut off a good percent of potential LPs that simply aren’t willing to meddle in something that’s “technically legal.”
How will these rolling fund investors think about reserves? If they can’t anticipate how much capital they’ll have for the life of the fund, will they know if they can maintain their allocation? Naval Ravikant (founder of AngelList) thinks they shouldn’t care about them at all.
If you have a bunch of smaller and less vetted LPs, should you be concerned about their behavior in a downturn? According to AngelList, you can still impose similar commitments in an LPA as you would in a regular fund. Ex: “Must commit to at least ten quarters. But it’s certainly a different dynamic to not know what your investing partnership will look like in the long term.
So…who’s wants to start the first Rolling Fund of Funds?
Some Additional DD on the Topic:
Stuff I’m Reading:
Boston VC Financing Rounds:
Alcohol delivery delivery marketplace Drizly just announced a $50M Series C led by Avenir, with participation from Tiger Global. The eight-year-old company has now raised ~$120M from a handful of individual angels and VCs. Along with the Series C announcement, Drizly also disclosed that their sales have increased 400% YoY and they’ve reached sustained profitability. The investment will also support their foray into cannabis delivery through Lantern.
Four-year-old employee engagement and talent management platform HelloTeam raised $3.5M in a seed round led by Underscore VC, with participation from Osage Venture Partners, Bain Capital Ventures, VT Technology Ventures, and VentureForGood. See why Underscore invested here.
Founded by Tanya Bakalov, the company helps employees learn more about each other through an internal directory and activity feed. It’s a formal online medium for things like wishing happy birthday or congratulating others on promotions. It’s also an HR tool for managers to engage, survey, and set goals with employees.
I think integrating engagement and recognition into remote work will be a real challenge for many businesses, and companies like HelloTeam are well-positioned to alleviate this. Now that we all just talk on Zoom, Slack, and email, things can feel a bit transactional (or even hostile). It’s tough to see who your coworkers really are and how they’re progressing professionally.
Cambridge-based Tone, an SMS marketing platform out of Techstars, raised $1.3M out of a $2M round last week per a Form D. It’s a conversational AI product similar to Drift, but with a focus on engaging lost eCommerce customers via text message. When people close out of a web page with a loaded cart, a follow-up email is usually sent to their inbox. However, according to Tone, a follow-up text message can retrieve far more lost customers than follow-up emails.
Podimetrics, developer of a floor mat aimed at preventing diabetic foot ulcers through temperature monitoring, raised $8.6M in Series B2 funding from Polaris Partners, Rock Health, Norwich Ventures, and Scientific Health Development. I wrote about them back in December when they raised a $16.5M B1 round. The Podimetrics RTM system includes an IoT foot mat for scanning foot temperature paired with a web-based application for clinicians to analyze results. Diabetes is the leading cause of lower extremity amputations in the US and approximately 14-24% of those with diabetes who develop a foot ulcer will require amputation. With 30M+ diabetes patients in the US alone, that equates to 4-7M amputations.
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