A Rolling Venture Fund or “rolling fund” is a new type of investment vehicle offered by AngelList that allows emerging fund managers to advertise their offering on a quarterly subscription basis while netting carried interest over a multi-year period (e.g. two years).
A rolling fund is structured as a set of series limited partnerships: at the end of each quarterly investment period, a new fund is created. This process repeats each quarter for as long as the rolling fund is active. More on the legal structure below.
Rolling Venture Funds is one product that AngelList currently offers to fund managers:
- Rolling Venture Funds (2020)
- Traditional Venture Funds (2017)
- “Syndicates”—which are just SPVs (2013)
1. Economics and Fee Structure
For LPs, the key terms for rolling funds are as follows:
- AngelList Platform + Admin Fee: ~1.5% of total capital commitments, minimum of $20,000 per quarter, waived for the first two quarterly series
- Management fees: Up to the GP (generally around 2% per year over the life of the fund, calculated and charged quarterly)
- Carry: Up to the GP (generally around 20%, sometimes 25%+ after a performance hurdle of 1–3x invested capital is returned to LPs).
- Recycling fees: Sometimes a fund manager will reinvest a portion of the management fees back into their fund, which lowers the total effective cost.
- Minimum Term: 1 quarter to 4+ years, this is the active term of investment.
2. Key Differences
Each of the three product offerings referenced above operate under a similar legal structure. Rolling Funds can be setup to look like a Traditional Fund structure, but the reverse is not true. Rolling Funds are unique in that (1) fund managers (“GPs”) can accept capital anytime, (2) GPs can deploy capital immediately, (3) LPs can auto-subscribe to the fund like a SaaS product for as little as $1,000 per fiscal quarter (at the GP’s discretion):
3. Who’s This Product For?
Rolling Funds allow people to “turn their reputations into investing capital,” as Leo Polovets (@lpolovets) wrote on Twitter: “If have 10k+ Twitter followers, why wouldn’t you spin out to do a rolling fund? You can advertise your fund publicly, leverage your audience, and accelerate your career.“
AngelList uses a new type of entity structure in Delaware called the “Series Limited Partnership” (“Series LPs”). The Series LP works like Matryoshka dolls:
“Matryoshka” is a traditional set of Russian dolls. Hidden inside the largest doll is a smaller doll. And inside the smaller doll is another doll, and so on.
- The top Matryoshka doll is the Master Limited Partnership (“Master LP”). Underneath the Master LP are the sub-funds—Series LPs—that can be spun out of the Master LP. Funds can be created in a recursive, contractual loop without having to file new entity paperwork each time in Delaware (complications may arise—e.g., you may need to register the LP as a foreign entity in the manager’s home state):
- In other words, AngelList forms a new & distinct fund each quarter. The process is repeated for however long the GP is actively investing.
- Each Series LP has a lifespan of 10 years + 2 years, if the term is extended by the GP’s option.
- AngelList’s in-house legal team will make tweaks to the Limited Partnership Agreement (“LPA”) on a case-by-case basis. It will also help prepare the GP’s required Exempt Investment Adviser form.
Issues with the Rolling Model
As noted above, not everyone is convinced the Rolling Venture Funds model works. Some issues were raised by Ali Hamed on Medium and others users on Twitter:
1. General Solicitation
Under Rule 506(c), rolling funds are publicly marketable, which gives fund managers the freedom to advertise their offering on social media and publicly disclose they are raising. The caveat is the fund must take “reasonable steps to verify” each LP is an accredited investor. It should be noted that some states (such as New York) have additional disclosure laws and tax codes that may be necessary to comply with.
2. Carry Calculations
Carried interest, or “carry,” is the share of profits from a fund that’s paid out to its managers after all LPs are paid back their capital. A fund administration platform also charges carry as part of their fee structure for managing a fund’s operations.
For rolling funds, carried interest is cross-collateralized across two years of fund cycles (up to 8 separate vintages).
It’s uncertain as to how AngelList will accurately record fund metrics like IRR or address portfolio fund construction, but with the combination of risk exposures and different LPs stacked in the process, it will either make for a good or bad use case of the Series LP model.
Rolling Venture Funds are like Rollover Data plans with cell phone carriers. Any unused capital during the quarter will “rollover” to the next quarter. Capital commitments will continue to stack up until turned off by the LP or GP.
5. Pro Rata Decisions
Structural changes could be made in the LPA to add, for example, a right of refusal so that every LP can participate in the fund chain. This is a more complicated issue. Definitely something fund managers should consider before committing.
6. Key Person and Successors
What happens if the fund manager commits fraud or misappropriates funds during the investment period? What recourse do LPs have against the manager or AngelList? As referenced above, AngelList is an investment adviser to each fund. If a GP materially violates the LPA then AngelList has control rights. So there is some authority overlooking the fund managers.
7. No Getting Around the Law
To clarify, the Rolling Venture Funds is not a true “evergreen fund.” Rolling Venture Funds still need to comply with securities laws which prohibit venture capital funds from offering redemption rights to its LP base. The LPs’s interests are illiquid until the fund is terminated- often a decade or more after it was formed, unless there are “extraordinary circumstances” (e.g., a death or bankruptcy).
In addition, each fund must comply with the Investment Company Act which requires:
- Accredited Investors—Section 3(c)(1):
- $10M+ funds: No more than 100 holders of LP interests if there is a mix of accredited investors and are “qualified purchasers” (note: non-accredited investors cannot invest in funds)
- <$10M+ funds: No more than 250 holders of LP interests if <$10 million fund size.
- Qualified Purchasers + Parallel Fund Structure:
- Section 3(c)(1) + Section 3(c)(7): No more than 2,000 holders of LP interests, if a parallel fund structure is created with two funds: (1) Main fund consisting only of “Qualified Purchasers” ($5M in investments for individuals, $25M if an institutional LP); (2) Accredited Investor only fund, limited to 100 holders of LP interests.
AngelList recently wrote a letter to the Securities and Exchange Commission (“SEC”) advocating the removal of restrictions of secondary sales. AngelList wants the no-redemption rights lifted so that equity holders can liquidate their holdings in startups & funds.
In general, my thoughts echo what Leo Polovets, Sahil Lavingia and and Cindy Bi said about the Rolling Venture Funds model. There is no legal opinion that clearly authorizes these structures, and there may be complications that are not immediately apparent, but the same is true when anyone tries a new and interesting legal product.
As @Naval himself wrote:
“Everyone’s making it up as they go along. Figure it out yourself, and do it.“
And as for those who still dispute the legality of the Rolling Venture Funds model, @Naval has some choice words for you:
“Get new lawyers – it’s perfectly legal.”