Rolling Funds

Earlier this year AngelList introduced rolling funds. These allow accredited angel investors easier access to VC funds, on an ongoing basis, with smaller commitments. Here’s another useful FAQ from What If Ventures, a VC focused on the mental health space

A disclaimer first: none of the below should be taken in any way as investment or legal advice of any sorts. I’m but a humble individual investor, sharing my personal views and thoughts, nothing more. 

A typical minimum investment in a VC fund would be $100k. The minimum for a rolling fund would be around $10k, potentially lower for early investors. Needless to say, these being quarterly investments means that it doesn’t take too long to reach the same $100k exposure.

Carry – rolling funds vs syndicates

For angel investors, the main upside is the fact that carry isn’t paid until 100% of your commitments over the previous years have been paid back. The links above contain specifics, but what it means is that you don’t pay the VC fund for performance (profits from exits) until you’ve got your money back from across the multiple individual investments.

And this is where the main difference lies with individual investments through AngelList syndicates. In the latter, you pay carry over each individual deal, rather than aggregating them. Is this a big deal? It definitely can be!

With individual investments through a syndicate, you pay (typically 20% of the profit) each time you make a successful bet. And this isn’t offset by your losses. As we all know, start-up investing is incredibly risky, the majority of startups are expected to fail, and your returns are expected to come from a small handful of investments. Start-up investing follows a power law, with a long tail of losses and your profits coming from those companies that returned 50-100x.

Paying 20% of those big profits adds up. In a fund, your other commitments offset those profits, meaning you pay out significantly less.

Impact from rolling funds on syndicates and deal flow

So, rolling funds seem like a great alternative or middle ground. And they definitely provide a great addition to the available options for individuals and a next step in the democratization of the VC/start-up ecosystem.

As always, there is of course a downside too. If, like me, you enjoy evaluating investments on a deal by deal basis then you might end up losing out. Personally, the appeal of start-up investing is as much an intellectual/educational one, as much as a financial one. Simply handing over money to a fund carries far less appeal and almost defeats the purpose.

And funds, including rolling funds, take precedent on deal flow over syndicates. The result is that the syndicate might end up with the lower quality end of the deal flow.

Confidence in the opportunities that are presented to syndicates is key to a platform like AngelList. Individual investors often have little insight into whether the set of deals they are presented with is of high quality or not, especially when starting out. This is a longer discussion, for another time. But it’s obvious that there is a significant risk of deal flow deterioration to syndicates if rolling funds become the norm for syndicate leads.

The bottom line

Rolling funds provide a great new addition to the growing staple of investment opportunities for individual angel investors. AngelList continues to lead the way in the democratization of the VC world, which until recently was off limits for the majority of individual investors. As always though, there are downsides. Hopefully this won’t lead to a deterioration of deal flow to those who prefer to make their own deal by deal decisions.

For more resources

I’ve written a few posts about further resources, such as blogs, podcasts, and newsletters. Hopefully you’ll find them useful.