Rolling funds are the new trend sweeping through the venture capital world. We want to breakdown how these funds operate and how Startups, Fund Managers and LPs experiences will change, or not, from the traditional venture capital fund structure.
First, let’s start with the founder and their startups. For the most part the experience should be too different for this party. Founders will still pitch fund managers from rolling funds and if the fund deems it a solid investment they will offer terms. One thing that will be interesting to watch is the ability for rolling funds to pitch their LPs on upping their commitments for quarters in which an investment will be ready for their next round so that fund can either lead or maintain pro rata rights in investments that performing well. This could give founders the ability to take subsequent rounds from funds that bet on them early and they have a strong positive relationship with.
Next, let’s examine the experience of the fund manager. The core role of the fund manager will remain unchanged, finding, vetting and supporting investments made through the fund. The obvious change for fund managers will be they no longer will need to be constantly fundraising from LPs themselves, with a subscription of committed capital they will be able to make ongoing investments. What will be interesting to see is that with the stable and rolling investments how it will impact the size (number of companies in the portfolio) and how much time fund managers spend sourcing deals and how much time they spend supporting active investments. If they are able to be more hands on, will we see more operationally focus partners in these funds?
Last, how will the experience change for LPs? Flexibility is the name of the game for LPs who choose to participate in rolling funds. Given that most rolling funds are Quarter-to-Quarter, LPs are enabled to “subscribe” a smaller capital number to a fund that renews on an evergreen basis until the LP chooses to cancel or up their investment. So instead of committing $10M upfront to a 8 year traditional fund, you can commit to $250K a quarter which you can change or cancel anytime. For LPs, your exposure to deals is locked into any deals that completed in the same quarter that your capital is committed, any un-invested capital is immediately rolled into the next months fund.
This is a high-level summary of how the experience in a rolling fund might differ, or not, for the three main parties involved (Startups, Fund Managers and LPs). There is still a lot of unknown given the relatively short-time that rolling funds have been deployed in practice and we are sure we will learn a lot about the pros and cons associated with them over the next few years. If you want to chat more about how Rolling Funds operate and function, shoot us an email and we would be happy to discuss more!