Three Obscure Lessons from AngelList Rolling Funds

The Weekly Blip SPECIAL: May 5th

This week, I’m taking a break from sharing three links, to instead share three lessons I have learned from investing in an AngelList Rolling Fund.

I’m providing a rough sketch here of funds and rolling funds. The topic is deep and requires significant further diligence if you’re considering getting involved.

First, what is an angel fund?

An angel or VC fund is a pool of money that is invested in startups. The pool of money comes from individuals, pension funds, sovereign wealth funds and endowments - who are known as Limited Partners. The investment decisions are made by a person (or small group of people) known as a General Partner(s).

As compensation for making investment decisions, a general partner might get the following [Let’s assume the pool of money is $10M in size]:

• 2% annual fee = $200,000 per year - often over ten years. => $2M total.

• 20% of any profits. i.e. if $20M is returned to investors, the General Partner(s) would get 20% x ($20M - $10M) = $2M. This is called the “carry” and may date back to ship traders getting to keep a percentage of what they carry back on their ships.

This structure incentivises General Parters to raise larger and larger pools of funds so that they earn higher annual fees. With a larger pool of money it’s hard to find the same number of attractive opportunities, so performance of funds tends to lower over time.

Compared to Venture Capital funds, Angel funds are typically smaller in pool size, more informally run, and invest in earlier stage companies.

So, what is a Rolling Fund?

With traditional funds (as described above), the fund managers (general partners) have to periodically raise a new fund. They might go out and find investors for a $10M pool of money. Two years later, they might start to solicit interest for a new fund (say, now $20M) to start deploying in 2 more years. Roughly, the goal is to have a fresh pool of money every four years. It’s typical to take four years to invest a pool’s funds, and then there is a further six years where returns are harvested.

Ambitious fund managers aim to raise funds of increasing size every four or so years.

This is where Rolling Funds come in. Rather than fund managers having to raise large pools of money every four years, the investors instead commit to a regular quarterly commitment of funds for a fixed period of time. This has the benefit that the fund manager has a steady supply of funds to invest, rather than going through fund raising and then deployment cycles.

AngelList is a (now mature) startup that specialises in providing software and legal tooling to make it easy for fund managers to run a rolling fund - for a small fee.

What happens if the funds for a given quarter are not fully used by the manager, you ask?

That’s where the “rolling” comes in. Any uninvested funds from one quarter roll into the next quarter’s fund, and the investors earn their share of what is deployed in the next quarter pro rata to their share of that pool.

Which brings me to three nuanced lessons I’ve learned from investing in Sahil Lavignia’s rolling fund:

1. Non-linearities in Subscription Period

2. Terms like “waived”

3. Problems in a downmarket