Will Rolling Funds Roll Over the Venture Capital Industry?
In the world of venture capital, the big news of the past two weeks has been AngelList’s “Rolling Venture Funds.” More than 15 funds have publicly launched on the platform since February, including those led by Sahil Lavingia, Allyson Kapin and Kate Brodock, Cindy Bi, Jason Jacobs, Ben Tossell, Inyinoluwa Aboyeji, Stephen Hays, and others. Tech Twitter has been ablaze with debates over the merits, drawbacks, and possibilities entailed with rolling funds. What do rolling funds mean for the future of the venture capital industry?
Rolling funds are unlikely to disrupt institutional venture funds investing in Series A onwards or the limited partners that back those funds. However, rolling funds may shift the early-stage investment landscape in the long-term. The AngelList rolling fund platform allows VCs to generally solicit or advertise their funds during the fundraising process. As a result, venture firms may be able to tap into entirely new pools of capital and the overall dollars into venture capital may increase. As part of this phenomenon, we may see the explosion of micro-VC funds. But with the proliferation of micro-VCs, we may see many more start-ups receive early-stage funding, which in turn will intensify competition for Series A funding.
With the explosion of micro-VCs, we may see three types of newly minted VCs emerge: the Branded VCs, the Niche or Specialist VCs, and the Operators VCs. There may be overlap across these three categories: you may have a Branded VC that is also an Operator VC, for instance. The Branded VCs are individuals with large social media following that will be able to leverage their platforms to fundraise from their followers and followers of their followers. The rise of the Niche or Specialist VCs, a trend that’s already kicking in, will continue. We will see funds run by specialists that will be dedicated to investments in that specialist’s area of expertise, such as a DTC branding expert that launches a fund to invest in DTC startups where he/she can also provide branding support or services. Due to the ease of the AngelList platform, Operator VCs will continue their full-time operator roles while running their rolling funds in parallel.
We may also see some shifts in the overall allocations of venture capital dollars across the startup landscape. We may see the further decentralization and fragmentation of the venture capital industry. Larger funds, especially those run by solo capitalists with limited staffing and operational support, may shift to the rolling fund platform. They will leverage portfolio markups to raise new capital on an ongoing basis and gradually grow their fund size. We may see VC associates at big firms who have strong personal brands accelerate their career paths by starting their own rolling funds. If there is an explosion in micro-VC funds due to rolling funds that over-saturates the early-stage venture market, institutional venture firms may get pushed downstream towards later-stage investing, where their deep pockets remain valuable. We may also see some traditional venture firms experiment with new structures, such as creating a parallel rolling fund dedicated to early-stage deal flow.
Technology will also play a big role in the potential impact of rolling funds. Venture capital is now an end-to-end software product accessible via an online platform. This may lead to the creation of an online marketplace of venture firms as well as an increase in remote fundraising. As a result, we may see a more globalized venture model with more venture firms based in emerging markets that are able to fundraise online, as well as limited partners from around the world. With the unlocking of general advertising in venture fundraising on a large scale, we may also see the introduction of advertising budgets and spend in venture firms.
We may see some unexpected and negative consequences of the rolling fund model as well. There are risks in having limited partners that you have never met or that are unsophisticated in buying venture capital as a product. Venture firms could implement policies regarding whom and where to accept money from to mitigate these risks. We may also see the introduction of less sophisticated GP entrants into the market. AngelList and other platforms that will ultimately compete with AngelList could consider introducing venture capital education products (seminars, reading materials) to educate the new GP and LP entrants into the venture capital industry.
Rolling funds may have a positive impact on diversity in venture capital. Women and people of color can fundraise by leveraging personal brands, following, and communities they have created. They may be able to raise money from non-traditional LPs that are not utilizing the same pattern recognition techniques, such as Ivy League pedigree, as the traditional gatekeepers. The transparency of fundraising via rolling funds creates opportunities for social media amplification and broad discoverability for women and people of color.
Rolling funds are very new and at this stage, everything is speculative and much of what I write here is aspirational. The jury is still out on rolling funds, but I am continuing to watch them with interest.
Want to read the long-form version of this post? Keep reading here.
It covers Rule 506(b) and Rule 506(c), the AngelList fund structure and mechanics, and the implications stated above in more detail.
Special thanks to Sunil Pai at AngelList, Soona Ahmaz at Volt Capital, and Neil Devani at Necessary Ventures for reading my rough draft.