Innovation Footprints

What if . . . ?

Commentary: Rolling Funds on AngelList Are The Best Way For Accredited Individual Investors to Start Investing in Venture Capital Funds

by

Brian’s Mechanical Pencils

About the Author

Mr. Aoaeh is a Cofounder and General Partner of REFASHIOND Ventures, an emerging venture capital fund manager that invests in early stage supply chain technology. He co-founded The Worldwide Supply Chain Federation, and is an Adjunct Professor of Supply Chain & Operations Management in the Department Technology Management & Innovation at the Tandon School of Engineering at New York University. He is a VC-in-Residence at Genius Guild Greenhouse Fund, and a Venture Partner at Newark Venture Partners.

About REFASHIOND Ventures

REFASHIOND Ventures is a Supply Chain Technology (#SupplyChainTech) venture capital fund that invests in early stage innovations that refashion global supply chains. The fund sources deals from The Worldwide Supply Chain Federation’s global membership, and the general partners’ wide network of professional relationships in technology, supply chain, operations, venture capital, media, professional services, academia, and the public sector while leveraging their operating experience, and strong connections with corporations around the world as both potential investors and market-validating customers for REFASHIOND Ventures’ portfolio companies. REFASHIOND Ventures manages REFASHIOND Ventures Seed Fund, LP (REFASHIOND Seed) – a rolling fund on AngelList.

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Summary: It is too soon to pass judgement on AngelList’s Rolling FundsTM because they are designed to solve a number of problems faced by a specific group of potential limited partners – the people who invest in funds, and general partners – the individuals who manage a fund on behalf of the limited partners. AngelList is striving to create more access for limited partners and general partners who ordinarily might have been locked out. Evidence suggests there’s growing appetite for products that achieve that goal, and the current macro environment in global affairs makes it likely that such products will gain traction over time as financial capital is transferred between generations.

Author’s Note #1: This article does not apply to subscription funds that are not managed in collaboration with AngelList Venture. It goes without saying that; This is not investment advice.

Author’s Note #2: No individual or group of individuals at AngelList has contributed to this article in any way, shape, or form. The opinions expressed in this article are mine alone. 

Contents

  • Introduction
  • Brief History of Rolling Funds: What is a Rolling Fund?
  • Why is there a need for Rolling Funds?
  • Main Critiques of Rolling Funds
  • Before You Take My Word at Face Value: A Summary of My Qualifications for Weighing-in On This Debate
  • The 8 Primary Criticisms of Rolling Funds
  • My Rebuttals of the Main Critiques of Rolling Funds
  • Advantages of Rolling Funds for Limited Partners, Fund Managers, and Entrepreneurs
  • Conclusion

Introduction

These are exciting times in venture capital.

The November 27th, 2021 edition of The Economist features venture capital and technology investing as its cover story, Adventure Capitalism, stating “Now capitalism’s dream machine is itself being scaled up and transformed, as an unprecedented $450bn of fresh cash floods into the VC scene. This turbocharging of the venture world brings significant risks, from egomaniacal founders torching cash to pension pots being squandered on overvalued startups.”

Writing for the Financial Times on November 25, in How Tiger Tore up the Rules of Venture Capitalism, John Thornhill observes, “For the moment, the macro trend is Tiger’s friend as institutional money increasingly shifts from public to private markets. In total, a record $158.2bn of VC money was invested in 9,363 deals in the third quarter, according to CB Insights.”

Anecdotally, venture capital investors comment that everyone seems to be launching a new venture capital firm. That observation is supported by another article in The Economist, The Bright New Age of Venture Capital, in which the authors state that “In 2002 84% of venture activity, in terms of value, took place in America. That share is now about 49%. China’s share grew from below 5% in the 2000s to 37% in 2018, before its tech crackdown brought it down to nearer 20%.”

Those articles, and many others like them focus on what’s happening at the institutional end of the venture capital market, the segment of the margaret dominated by multi-billion dollar foundations, endowments, pension funds, family offices, corporations, and other entities with large amounts of cash seeking to make limited partner commitments to funds like Tiger, LightSpeed, a16z, Bessemer Venture Partners and other funds deploying billions of dollars of assets under management.

Less discussed is what is happening at the non-institutional end of the market, where individual investors seek to invest a few thousand dollars per year, perhaps as little as $1,000 to $5,000 per year in nascent funds that are being established to develop and execute novel investment theses. Many such fund managers – emerging managers as they are called in VC jargon, are raising their very first fund, and many of these emerging managers might have an AUM target as small as $10,000,000 for their very first vehicle, some might have a target significantly less than that.

The multi-billion dollar funds are grabbing the headlines. In my opinion the future of VC is being written by the emerging managers and the innovations that are emerging to enable small individual investors to invest in the venture capital asset class by committing capital to these emerging managers.

Brief History of Rolling Funds: What is a Rolling Fund?

On February 5, 2020, Avlok Kohli, CEO of AngelList Venture published a blog post on the company’s website, Introducing Rolling Funds: Always-Open Venture Funds. In that article he describes rolling funds as a product designed to solve the biggest points of pain and friction for managers establishing new funds. As you might imagine, with the COVID-19 Pandemic unfolding, this news went a bit unnoticed, even for many in the startup and venture ecosystem.

However, since then;

There are many others.

A rolling fund is simply a venture fund designed such that; First the investor in the venture fund, known as a limited partner or “LP”, commits to the fund in a series of regularly-timed, rolling subscriptions. Rolling funds on AngelList have a quarterly subscription timetable so that the capital limited partners committed to the fund is called in equal, quarterly installments. Second, in order to make the subscription feature work, AngelList has structured the rolling fund vehicle such that each quarter is actually its own unique fund, but one that is offered on the same terms as the fund for the preceding quarter. Third, rolling funds on AngelList allow managers to hold rolling closes, typically 3 each quarter, during which new investors in the fund are admitted into the fund and their capital closed by AngelList acting on behalf of the manager, with any limited partners admitted up to a month before the end of each quarter qualifying to participate in the quarter during which they first complete the subscription process and are accepted into the fund by the manager. Fourth, any capital left over in a preceding quarter is rolled over into the subsequent quarter.

This is a dramatically simplified description of the concept of a rolling fund. It highlights only the characteristics of a rolling fund that an accredited individual investor should be most concerned about, without delving into the confusing and arcane details about all the legal, technical, operational, and process innovations that had to happen behind the scenes for AngelList to be able to launch rolling funds in February 2020. 

Why is there a need for Rolling Funds?

Emerging fund managers face a number of challenges that make it extremely difficult to launch a brand new venture capital firm: First, typically a new manager must raise a significant amount of capital from limited partners before the manager can get going, say anywhere between $1,000,000 and $2,000,000 for a manager seeking to raise a $10,000,000 fund. Second, during the time the manager is gathering indications of interest for the initial pool of $1,000,000 or $2,000,000 the manager is unable to make investments if that manager isn’t independently wealthy enough to use personal funds to make the investments. Third, that manager needs to bear the cost of legal, administrative, accounting and tax services required to get the fund launched and ready to accept capital from limited partners. It is not uncommon for such costs to accumulate to a few hundred thousand dollars or more. While these costs will be recouped once the fund has been raised, fronting that amount of capital in order to embark on such an uncertain endeavour serves as a substantial deterrent to many potential fund managers.

Basically, from the managers’ perspective the financial burden of launching a new fund locks out many talented people who might otherwise have unique access to dealflow because they belong to a unique community, or who may have a differentiated investment thesis that reflects their unique combination of expertise, education, professional background, community membership, and lived experience, out of the venture capital and startup ecosystem. 

Before February 2020, most individual investors who satisfied the requirements of the United States’ Security and Exchange Commission’s accredited investor rules, but who at the same time did not have the financial wherewithal to commit a six-figure sum to a fund in one shot were locked out of investing in the venture capital asset class. Traditional venture funds usually call capital from their limited partners on an irregular schedule, for irregular portions of limited partners’ committed capital – this is driven by the pace and frequency at which a fund makes new and follow-on investments, something that can be highly irregular in timing. 

Irregular capital calls are not a significant problem for ultra high net worth individuals, people for whom money is no object. However, for most accredited investors who need to plan their financial lives it creates an unnecessary cognitive load which is difficult to justify for small investments, especially when the technology exists to fix that problem.

Main Critiques of Rolling Funds

Initial criticisms of rolling funds were intense – especially on Twitter where many prominent venture capitalists and institutional limited partners questioned the legality of the concept and offered anecdotes about some of the ridiculous terms that they had been offered by managers seeking to establish a rolling fund early on. 

Some of the more prominent and well-considered public opinions against rolling funds came from: Ali Hamed, partner at CoVenture here; and Cavan Klinsky, cofounder and chief technology officer at Healthie here; and Mac Conwell, founder and managing partner of RareBreed Ventures here; and Winter Mead, cofounder and chief executive officer of Oper8r here – admittedly the more evenhanded of this selection, but overall, obviously slanted against the concept of a rolling fund in general. 

These are people whose opinions and concerns I do not discount offhandedly. Mac is my friend, and I look forward to the day when REFASHIOND Ventures and RareBreed Venture Partners become coinvestors in several startups, hopefully for many years in the future. I am filled with admiration for the institution he’s building. Starting in 2014, Ali and his partners at CoVenture have developed an innovative approach to investing in startups. Winter is clearly very experienced on the topic of investing in venture funds as a limited partner; His book, How to Raise a Venture Capital Fund The Essential Guide on Fundraising and Understanding Limited Partners, is an excellent field guide for practitioners and anyone else who wants to understand what goes on behind the scenes as new venture capital firms go through the process of raising their first funds. I couldn’t recommend it more highly.

Other commentary on rolling funds sought to examine, explain, and understand the new structure from a more supportive perspective: Samir Kaji, founder and chief executive officer of Allocate shared his thinking on rolling funds here; Minal Hassan, founder and general partner of Cyphr shared her thoughts here; Chris Harvey of Harvey Esquire APC shared an extensive examination of rolling funds here; Rolling Fund News also published a relatively extensive guide for investors considering commitments to a rolling fund here; Sam Flamini, developer experience manager at Superfluid and account executive at Visible.VC here; Leo Polovets, cofounder and general partner at Susa Ventures, shared his enthusiasm for rolling funds in a thread on Twitter here; Finally, Anthony Pompliano explained why he’s a fan of the rolling fund as a concept in less than 2 minutes in this video published on Twitter by Bilal Zaidi who is the founder of Creator Lab, a Podcast and Digital Marketing Consultancy. 

Samir’s article is not so much a criticism as it is an effort to assess the potential impact rolling funds might have on the innovation economy; That makes sense given Samir’s background of more than 20 years as a pioneering venture capital and private equity banker, first at Silicon Valley Bank, and then later at First Republic Bank. The sum of that experience led him to launch Allocate in February 2021 to make it easier for investors of all types to find and invest in high quality emerging and established venture capital funds while making it easier for emerging managers to access the fragmented and opaque market for private capital. As you might surmise, Chris, Minal, Sam, and Leo are each experienced and accomplished participants in the innovation and venture capital community by their own right. 

What gives? Why are rolling funds the source of such a sharp divide between people one would otherwise expect to reach largely similar conclusions as to their being a net good or a net bad for the communities that they purportedly were invented to serve? 

Before You Take My Word at Face Value: A Summary of My Qualifications for Weighing-in On This Debate

The portion of my professional experience that has direct relevance to this debate starts in 2008. I spent the time between 2008 and 2018 at entities associated with Jeffrey Citron’s family office. That experience included: Managing two operating turnarounds simultaneously till mid-2012; Representing the family office in negotiations with venture funds, private equity funds, hedge funds, and real estate funds in which the family office sought to make an investment as a limited partner; Analyzing and making recommendations for public markets investments; Researching ideas that the family office might incubate and launch – one of which was a brand new investment product for which we sought IP protection and pitched to potential outside investors and other partners; From 2011, I was entirely focused on building a standalone institutional early-stage technology venture capital fund that started from the initial fulltime team of 2 people, but that had grown to a team of 9 people by 2018 when I left to start laying the groundwork for REFASHIOND Ventures.

Since rolling funds are a new investment product, a close examination of their merits and demerits are in order. I understand every objection that has been raised in the examples I have listed above, and others that I did not – including spirited discussions with potential individual and institutional investors in REFASHIOND Ventures. 

Important new ideas should always undergo close and critical scrutiny. 

However, on balance, rolling funds are a net good for the global venture capital, startup, and innovation ecosystem. That is why my partner and I decided to launch a rolling fund of our own after assessing the pros and cons, in the context of our unique circumstances.

Reaching that conclusion requires setting one’s personal biases and preferences aside, and considering the issue from the perspective of the two groups of users or customers that AngelList has specifically told us it created this product to serve; First, emerging venture fund managers for whom the traditional approach to fundraising – “Big Bang Fundraising” – in which the manager needs a significant commitment from LPs before the manager can start making investments is a substantial and often insurmountable obstacle to getting into business. Second, accredited individual investors for whom the minimum commitments usually required by most venture funds raising capital by the traditional approach presents an insurmountable barrier that keeps them locked out of early-stage technology venture capital as an asset class they can add to their personal investment portfolio.

The 8 Primary Criticisms of Rolling Funds

Here’s a distillation of what I consider to be the 8 main criticisms of rolling funds that seem to be common to most of the criticism one hears about rolling funds;

  • First; Starting a rolling fund is limited to accredited investors.
  • Second; The way returns are determined and apportioned in a rolling fund is unfair to some of the investors in the rolling fund. The argument here is that since each quarter represents a standalone fund, an investor who subscribes in one quarter but not in a subsequent quarter does not participate in the returns from the subsequent quarter which could be the quarter in which the most attractive investment occurs.
  • Third; Rolling funds cause the general partners and the limited partners in a fund to measure performance on a quarterly basis and this is diametrically opposed to the long term nature of venture capital investments and the amount of time it takes to build a successful company.
  • Fourth; Rolling funds potentially fail to account for the power laws that underlie early-stage venture fund returns and rolling funds ignore the primacy of portfolio construction in the success of a venture fund. (Author’s Note: Readers who are unfamiliar with the concept of power laws and how they manifest in early-stage venture capital investing should read this and this.)
  • Fifth; The way Carry is determined for rolling funds puts limited partners at a disadvantage relative to the rolling fund’s general partners.
  • Sixth; The way rolling fund manager’s make decisions about initial allocations, pro-rata allocations in prospective follow-on investments, and fund reporting will be incredibly messy and difficult to handle, more so than is the case for traditional funds.
  • Seventh; Rolling funds emphasize fundraising over and above the activities that will enhance returns for limited partners, and limited partners can end their subscriptions abruptly which could be disruptive to the rolling fund’s ability to continue investing.
  • Eighth; Rolling funds make venture capital a part-time activity as opposed to the full time responsibility that it should be and rolling fund managers are not likely to adopt the best practices that contribute to the success of venture capital firms. The likelihood of fraud and malpractice is high.

There are other criticisms that I will address later; Those criticisms that are less about the philosophical concept of rolling funds generally, but more about individual managers and also about the mechanical aspects of building and managing a software platform that makes an investment product like rolling funds feasible.

Let’s examine these 8 objections one by one.

My Rebuttals of the Main Critiques of Rolling Funds

First; The statement that only accredited investors can start a rolling fund is incorrect because SEC Guidelines allow an individual to be considered an accredited investor with reference to a fund by which they are employed. This means that while an individual rolling fund manager A may fail the accreditation tests for investing in another fund managed by fund manager B, with respect to the rolling fund managed by A, the SEC considers A to meet the accredited investor requirements.

Second; The way returns are treated in a rolling fund don’t differ fundamentally from the way they are apportioned in traditional fund structures. Because each quarter represents a standalone fund in the rolling fund structure, limited partners participate in the returns for every quarterly fund in which they are an investor. In the traditional fund structure it would be unusual for a limited partner to invest in Fund I and not Fund II, but to then expect to benefit from returns generated in Fund II. The limited partner who would like exposure to the returns for a subsequent quarter can subscribe for that quarter in the same way that the limited partner with an appetite for returns from Fund II could commit to investing in Fund II under the traditional scenario. Moreover, if the issue at hand is the size of the commitment, AngelList makes it frictionless to create custom subscriptions for some limited partners that adjust the commitment levels, the management fee percentage, the carry percentage, or the minimum subscription period.

Third; It is only partly true that rolling funds focus on short term metrics at the expense of long-term investment horizons required for investments in early-stage technology startups; Each quarter represents a standalone fund, and so this means that the 10-year clock is reset for investments made in subsequent funds. 

What does this mean?

In a traditional fund, a startup that is added to the portfolio after the fund has been investing for 2 years actually has 8 years in which to build and reach liquidity before it bumps into the cold hard reality that the fund has a 10-year term, but did not invest in that startup till 2 years into the fund’s life – to simplify the conversation, we will ignore the fact that the fund manager can petition limited partners for 2 or 3 extensions of one year each after the initial term of 10 years. In this scenario, our startup that joins a traditional portfolio after 2 years is at a distinct disadvantage in comparison to the startups that were added to the portfolio in the first quarter.

In the rolling fund structure, a startup that the fund manager invests in during that manager’s 9th quarter of investing has the full 10 years, starting in that quarter, during which to build and reach liquidity. It should be obvious that, contrary to that criticism, rolling funds allow the fund manager and the startup founder to focus on long term outcomes for the cohort of investments in each quarter’s fund.

Fourth; There’s some merit to the concerns about power laws and rolling funds. Without going into a discussion that is well out of scope for the purpose of this discussion, the general concern is that it will be impossible for a fund manager to make a large enough number of investments in a single quarter to increase the odds of one very large outcome making up for the many losses that are characteristic of early-stage technology venture capital portfolios. However, there’s no structural reason that prevents a rolling fund’s manager from accounting for this when the manager is developing the investment terms.

For example, limited partners in REFASHIOND Seed have to commit for a minimum of 4 quarters. We recommend they commit for 8, but they are each required to commit for at least 4 quarters. Given we expect to make about 3 investments each quarter, this suggests that each LP will have a portfolio of at least 12, and perhaps 24 startups in their rolling fund portfolio. Ideally, it would be great if they had more investments in the portfolio – but assuming that a limited partner commits for 8 quarters, then the outcome is a portfolio that resembles a concentrated portfolio strategy executed by a traditional pre-seed or seed-stage fund.

In my opinion, 12 investments is too low to maximize the odds that a given limited partner will capture the power law effect. That is why we recommend an 8 quarter commitment, but we require 4 with the understanding and expectation that if we fulfill our expectations and if their personal financial positions remain strong enough, the majority of our limited partners will subscribe for a second 4-quarter term if they have not done so already. In the presentation that limited partners can review before they make an investment, we explain why it makes sense for limited partners to commit for 8 quarters, however we leave the final decision up to each individual investor to make for themselves in the context of their unique circumstances.

The concern about portfolio construction is no longer an issue. For example, my friend, Taylor Davidson, who manages the Possibilian Catalyst Fund, a rolling fund on AngelList, and Foresight, has published a portfolio construction model that works for traditional funds and rolling funds. He has also published a budget template for rolling fund managers. Those two models make it clear that managing a rolling fund and managing a traditional fund share more similarities than differences.

I have researched the issue of portfolio construction quite exhaustively, including input from other VCs in a discussion on Twitter here and distilled in a blog post NotesOnStrategy | Seed-stage Venture Capital Portfolio Construction. At REFASHIOND Seed we are adopting the same portfolio construction principles that any manager of a traditional fund would apply given the salient constraints we must take into consideration at this juncture. In other words, there’s no structural feature of rolling funds that make portfolio construction fundamentally different from what applies for traditional funds.

Fifth; I have less clarity around this. To maintain the independent nature of this article, I have not asked AngelList for an explanation since that would possibly entail a conversation about the rest of this article. I am comfortable with the risk that I will reveal total ignorance about how this works. This is my reading and interpretation of how carry is determined: Say a limited partner is subscribed for 4 quarters in a rolling fund. Then carry is calculated across the investments made in the 4 quarters for which the limited partner is a subscriber. This is true for subscriptions for up to as many as 8 successive quarters, and then the assessment starts all over again. This means that in our example; Carry would be determined for a portfolio representing as many as 8 quarters if our limited partner had subscribed for 8 quarters. After which, the determination would start again for the next 8 quarters of that limited partners subscription. This is my understanding of the brief exchange between Ali Hamed and Avlok Kohli on Twitter that can be found here.

Sixth; It is true that decisions about initial capital allocations to startups that a rolling fund’s manager wishes to invest in are not easy or straightforward, but that is no more so than for traditional funds; It is up to individual fund managers to each assess their fund’s unique circumstances and make a professional judgement about how to approach that issue. In theory, rolling funds are not set up to make follow-on pro-rata investments. In practice, a fund manager can choose to spin up a syndicate or special purpose vehicle on AngelList that is open only to limited partners in the corresponding quarterly fund that made the initial investment, with each limited partner having a right-of-first-refusal to invest in the syndicate or special purpose vehicle in equal proportion to their investment in the corresponding rolling fund fund that made the original investment. This is an occurrence that is common even for traditional funds. One difference in this case is that AngelList has created the software to make this a more seamless and streamlined process than one would otherwise expect.

As to the issue of fund reporting, AngelList says it has invested significant resources to develop software that enables it to fulfill any reporting obligations and responsibilities it owes investors in rolling funds. In a conversation my partner and I had with Xinran Xiao, head of product and engineering at AngelList, he pointed out that we ought to be thinking of AngelList as a software company developing software and other innovations to manage a full suite of products designed specifically to solve problems that have persisted in venture capital markets for sometime BUT NOT as a fund administrator trying to build software for managing funds and automating some aspects of fund administration.

The distinction matters, and I think AngelList deserves the benefit of the doubt.

Seventh; Every fund manager establishing a new fund spends an inordinate amount of time fundraising. This critique assumes that rolling fund managers do not place an upper limit on how big they want their funds to be, and so that they’ll perpetually be raising more capital. This may be true for some managers but it is by no means true for every rolling fund. For example, for REFASHIOND Seed we have decided that we will not raise more than $20 Million, and our initial target is $10 Million. We recognize it will take time to raise the capital we seek for the rolling fund, but this wouldn’t be different if we were raising a traditional fund. Moreover, how often do we see traditional funds raising ever bigger funds in very quick succession? Why is this a particular critique that is being levelled against rolling funds? 

The observation about abrupt withdrawals by limited partners is also somewhat incorrect; A limited partner can only cancel a subscription after the minimum required subscription period that has been set by the rolling fund’s general partner has been satisfied. A limited partner that cancels abruptly faces the same sanctions that a defaulting limited partner in a traditional fund would encounter. This is not an issue that is unique to rolling funds.

Eighth; As a charter-holding member of the CFA Institute, I am always concerned about my fiduciary duty to REFASHIOND Ventures’ limited partners. One particular area of weakness I have observed among most emerging managers is that of a near universal absence of adequate compliance checks and processes designed to protect limited partners. I was very happy to see that AngelList has thought about this. In order for the general partner of a rolling fund to make an investment, there’s relatively extensive compliance section of the investment submission form that each general partner must complete for each investment.

Limited partners who are worried about, or who should be concerned about compliance, can rest assured that the newly established rolling funds on AngelList each have a more robust, or equally robust, compliance framework relative to any new traditional funds of a similar size to which those limited partners may consider making a commitment. AngelList cannot eliminate the prospect of fraud and malpractice completely, but given what we know happened at Rothenberg Ventures (Techcrunch) and The Elusive $1 Billion Fund That’s Rattled Venture Capital, it is fair to say that by default rolling funds on AngelList offer their LPs a layer of protection and compliance supervision that makes it less likely for fraud, malpractice, and other compliance issues to occur. 

The point about rolling funds being relegated to the realm of part-time “distractions” is not entirely accurate either, and strikes me as more of a generalization than it is a critique grounded in substance. It ignores the fact that many established venture fund managers who are widely admired today started investing on a part-time basis with small funds that they raised from people within their network, while they proved their investment thesis enough to attract institutional limited partners. 

Perhaps the difference is that some of these managers did not need to earn a paycheck from elsewhere because they had experienced recent entrepreneurial success – but that is an issue that is separate from the commitment and time that rolling fund managers devote to making investments and doing the things that are correlated with the long term success of venture capital firms. We simply lack enough evidence to accept this as a legitimate reason for discounting rolling funds outright and questioning the general partners’ collective or individual commitment to satisfying their responsibility to put their best efforts towards generating attractive returns for the limited partners in their respective funds.

I think of the criticisms of rolling funds in two broad categories: The first category of criticisms arise because the person making the critique has observed a small number of rolling fund managers from a distance and has jumped to conclusions based on that small sample. By now, I should have persuaded the reader to take such observations with a grain of salt, and to invest some time performing sufficient independent due diligence before investing in any rolling fund. 

For example, anyone considering an investment in REFASHIOND Seed has access to our data room which we have made open and available to the public since we are raising REFASHIOND Seed under the auspices of the United States’ Securities and Exchange Commission’s Regulation 506(c) which permits fundraising by general solicitation. 

It should be a red flag if a rolling fund manager does not seem willing to provide potential limited partners with sufficient information to perform due diligence prior to the limited partner committing to the fund and going through the onboarding flow on AngelList.

The second category of criticisms arise because, having spent a bit of time assessing rolling funds, the person offering the criticism focuses on the perceived structural advantages traditional funds have over rolling funds without considering that there are relatively straightforward ways to solve the perceived deficiencies of the rolling fund structure.

Advantages of Rolling Funds for Limited Partners, Fund Managers, and Entrepreneurs

As I have already stated, although rolling funds may not be perfect for every limited partner, they offer substantial benefits to a subset of investors seeking exposure to early-stage venture capital.

People who are new to investing in venture capital can rest assured that the funds they are committing to have a layer of supervision and compliance that is completely aligned with the limited partners’ interests; It is in AngelList’s interest to protect limited partners’ from bad behavior and fraud among rolling fund managers. The fact that rolling funds typically allow such new limited partners to commit smaller amounts of capital to the asset class is merely icing on the cake. To the extent possible, rolling funds make it a lot easier for limited partners to toggle their capital allocation in ways that reflect what is happening in other areas of limited partners’ lives.

Fund managers who might have struggled mightily to raise capital under the traditional approach but who have a network of people from whom they could raise a small amount of capital that gets them started can get going a whole lot faster, with less time spent coordinating between several different service providers. 

Moreover, AngelList offers rolling fund managers the opportunity to raise capital from limited partners on the platform. There’s no argument, that is a huge plus for managers who do not naturally have access to the social circles from which one might recruit individual or institutional limited partners. Similar to traditional funds, AngelList has made it easy and painless for rolling fund managers to make exceptions to the general terms of the fund for specific limited partners.

Early-stage startup founders developing cutting edge technologies that reflect the unique period of human history that we are living through now have another potential source of investors who may be developing investment theses and strategies that are better positioned to align with the needs of these startup founders. For example; As hard as it may be to believe, there’s insufficient capital dedicated to supply chain technology – the evidence for this is the number of startup founders we meet at REFASHIOND Seed who have quickly run out of investors that understand the significance of what they are creating such that they can raise a pre-seed or seed round before they have metrics that generalist investors who have an interest in supply chain technology, among many other areas, can understand. 

Working with our team at AngelList, REFASHIOND Seed has been able to close investments and wire funds in record time with a minimum amount of hassle – in as little as one day. From my perspective this has been the smoothest I have seen the closing process work, and I am delighted that the founders in whom we have invested do not have to spend any time chasing us down to close our investment thanks to the support from AngelList.

Given the supply chain crisis that the world has wrestled with during the COVID-19 pandemic, and the growing evidence that the climate crisis poses a growing, ongoing challenge for global supply chains, I for one hope many more managers launch rolling funds as a means to execute on a #SupplyChainTech thesis.

The team at GoingVC wrote and published 5 Things To Know About The Rolling Fund, and it is worth reading for another take on this.

Rolling funds can be designed to offer substantially the same advantages and characteristics of a traditional fund, in addition to the unique advantages of the rolling fund structure. Also, as Mac Conwell has demonstrated with RareBreed’s first fund, a standalone traditional fund can be designed to reflect some of the advantages that rolling fund’s offer, albeit without the great technological advantage that currently comes with the AngelList platform and the accompanying support and resources that AngelList has put around rolling funds.  

Conclusion

The Financial Times published Pension funds seek returns in private assets as public market outlook dims on November 30, 2021. The authors of that article observed that “Holdings of private assets — which includes private debt, private equity, real estate and infrastructure — are expected to rise 60 per cent between 2020 and 2025, to surpass $17tn in assets under management, according to data provider Preqin.”

That article applies to institutional investors, specifically, pension plans. However, a similar trend is playing out among individual investors. For example, writing in Fortune on November 18 in Millennials and Gen Z are a growing force in investing. The market needs to catch up, Jean Case states “These investors are calling for the democratization of finance – not an evolution but a revolution that accelerates the plodding progress the sector has made on issues they care deeply about. They know that the world of finance is not inclusive, and they’ve felt the consequences.”

According to Wikipedia’s entry on index funds, John Bogle launched the First Index Investment Trust to unremitting ridicule with a meager $11 Million of assets under management on December 31, 1975. This January 7, 2020 article in the Financial Times reports that index funds crossed the $10 Trillion threshold of assets under management as more investors eschew actively managed funds. The First Index Investment Trust was renamed the Vanguard 500 Index Fund; It now boasts total net assets of $829 Billion as of October 31, 2021.  

Nathan Most invented the exchange traded fund with investors in mind. From an inauspicious launch in January 1993, with a $6.5 Million in assets managed in the SPDR S&P 500 (SPY), as of September 30, 2019, US-listed exchange traded funds represent more than $4 Trillion in assets, with 2,470+ distinct exchange traded funds available, according to this infographic published by Visual Capitalist: The 26-Year History of ETFs, in One Infographic.

In choosing these examples I have left myself open to accusations of confirmation bias AND survivorship bias. But my point is not that I am certain rolling funds will have the sort of success that index funds and exchange traded funds have enjoyed. Not at all. Instead, I want to point out that it is still too early to pass judgement on AngelList’s pioneering effort with rolling funds. With its focus on removing the frictions that keep many potential limited partners sitting on the sidelines in the context of the growing recognition that mankind needs to fund more bold innovators to develop solutions to big, complex, systemic problems, there’s a better than 0% probability that AngelList has hit on a product suited specifically for these times.

AngelList’s launch of rolling funds is not the only recent example of the push towards a more inclusive, more open and accessible innovation ecosystem; On June 8, 2021, Zell Capital announced that it had launched a venture capital fund that makes the asset class accessible to non-accredited investors after completing the registration process with the United States Securities and Exchange Commission to create a new class of funds known as Access Funds, stating that; “By registering under the 1940 Investment Company Act, Zell can offer an investment opportunity to all US citizens 18 and older. The minimum investment is $1,000 and investors can purchase shares directly through the company’s website at www.zellcapital.com. Shares will be offered at $20 per share during the Initial Offering Period.” The announcement goes on to state: “According to the SEC’s website, 87% of US Households do not qualify as accredited investors and have been restricted from investing in venture capital funds,” said Will Zell, Founder of Zell Capital. “Our mission was to create an investment opportunity that balances the risks of venture capital investing with appropriate disclosure and reporting to ensure investors are fully aware of the pros and cons of investing in this asset class.”

On July 27, TechCrunch reported that Stanford students are short-circuiting VC firms by investing in their peers, stating that; “The idea was spurred by six students, who after a year of working with Fenwick & West law firm to find a suitable legal structure landed on creating an investment club — multiple parties can invest together as long as they have some form of shared ties.” Evidence of the appetite that exists for alternatives to the traditional models that have existed can be found as the article points out that; “​​Stanford 2020 club members must put up a minimum of $3,000 to join the investment club, and any eventual returns will be distributed proportionally to the investment each makes. So far, (Steph) Mui tells TechCrunch that $1.5 million has been raised across 175 investors, with 50 investors willing to give $500,000 on the waitlist. In fact, the club is so “oversubscribed” that it is working to give money back.” According to the article, 40% of the class is participating in the class. 

As one of the fund managers who has been daring enough to launch a rolling fund, I grow more optimistic that as time unfolds and rolling fund managers begin generating and sharing sufficient performance data to enable observers to judge them against other investment vehicles on investment performance rather than on investment dogma, limited partners of all types and sizes will realize that rolling funds are an attractive addition to the early-stage technology and innovation economy and that they are designed to complement the vehicles and structures that already exist rather than to displace them. 

These are exciting times in venture capital. 

Further Reading