The venture capital world has been buzzing lately regarding a new form of a venture fund (see: https://techcrunch.com/2020/08/05/gumroad-founder-sahil-lavingia-launches-new-seed-fund-in-collaboration-with-angellist). Angel List recently coined the term “Rolling Fund,” a catchy name. At its core, though, the concept of these new types of funds is pretty simple.
Rolling Funds are Subscription Funds
Rolling Funds can also be called subscription funds. They aim to make the venture fund asset class more accessible to both limited partners and venture fund managers.
The primary elements of a Rolling Fund are that it allows limited partners to commit to smaller check sizes, spread out over a given subscription period. For example, an LP might commit to funding 25k every quarter for 8 quarters, for a total investment commitment of $200k. These commitments can also be spread out over multiple funds.
Historically, the way venture funds have worked is — LPs commit to putting a total amount of some size in, say $250,000 — and the GP draws that money down by capital calls over the investment period. The investment period could be 5 or 6 years or a shorter time period. Typically, there are limitations on the total percent drawn down during any calendar year — say, no more than 30%. Also, usually, even after the investment period is over, there may be continuing capital contribution obligations to fund follow on rounds of portfolio companies, up to an LPs total capital contribution obligation.
This old-style approach and methodology has remained unchanged for a long time and serves as somewhat of a blocker for smaller investors to participate in the venture asset class (though things like “investment clubs” and the like have been used for years in an attempt to circumvent this). The reality is that smaller investors generally aren’t interested in more considerable venture funds due to restrictions on the number of LPs a fund can have (99 generally, though a special, lesser-used exemption exists, which allows funds to get up to 249).
Rolling funds, or subscription funds, provide previously unobtainable access to smaller limited partners and venture investors. While in turn, allowing for some exciting investment strategies for venture fund managers to try out, like predictable, recurring investment funds that can be applied across multiple funds at scale to a high volume of small-dollar figure revenue sharing agreements or other unique investment instruments. Also, many rolling funds can be structured as 506(c) offerings, meaning they can be generally advertised.
We recently created the subscription fund model for Earnest Capital (https://earnestcapital.com/) and continue to work with funds and founders to build new, innovative fund and investment structures. If you have any questions about rolling funds or subscription funds, we love discussing and brainstorming about these structures, so feel free to reach out.
By: Bryant Smick and Joe Wallin
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