Good morning and welcome to the twenty-ninth edition of The Skeptic Investor!
In 2012, the Economic Times did a feature on a 19-year old called Sahil Lavingia. At the time, Sahil had just raised $1.1 million for his startup Gumroad. This was after he dropped out from the University of Southern California and became employee #2 at Pinterest. In the years since then, Gumroad has done well and is continuing to grow at a rapid pace with many high profile investors on board. In fact, 6 weeks ago it hit $10 million in annualized revenue.
As most successful Silicon Valley entrepreneurs tend to, Sahil started making angel investments and has a successful track record that includes startups like Lambda School, HelloSign, Clubhouse and many more. However, as a full-time entrepreneur, he didn’t really see himself managing a fund anytime soon. Today, in addition to Gumroad, he also runs a fund backed by Naval Ravikant, Josh Kopelman, and 160 others that invests $8 million a year. How you ask? Via a rolling fund.
In this issue, we delve deeper into understanding what a “rolling fund” is. We also try to figure out how IPL franchises make money, explore Max Weber’s take on power and politics (especially relevant given the saga that the US elections have been), and lots more!
Let's dive in!
Rolling Funds - New Age VC
If you’re on Twitter or active as an angel investor, you’ve probably heard a lot about “rolling funds” in the past year. You might have even started one yourself!
If you’re not so familiar with startup investing, you’re probably wondering - what the hell is a rolling fund?
Yes, this tweet is full of buzzwords — but don’t worry, we’ll break it down for you. Essentially, a rolling fund is a type of investment vehicle that allows its managers to share deal flow with the investors in a fund on a quarterly subscription basis. Similar to a traditional fund, the fund managers can earn carried interest over a multi-year period.
What’s The Need For Rolling Funds?
Venture Capital has traditionally been a very closed-door community, requiring any prospective fund manager to go through a long and arduous process lasting 6 to 18 months raising their fund all at once from multiple Limited Partners (LPs), such as high-net-worth-individuals, family offices, colleges, universities or even other investment firms. The entire process is essentially a black-box and usually too restrictive to “outsiders” of the VC community.
With the launch of rolling funds, AngelList has taken a giant leap towards the democratization of the startup and venture investing process for both the GPs or fund managers and LPs.
Earlier this year, Angel List released a blog post “Introducing Rolling Funds" where they explained why rolling funds are required. This is how they explained the need for rolling funds —
The benefits of rolling funds are multifold. For one, it opens and democratises the VC industry in a big way. It becomes much easier for someone to start a fund. As seen in this representation from AngelList, a fund manager would need to raise far less money to start investing as compared to a traditional VC fund.
It also makes it much easier to invest in a fund. The amounts that are required to be invested are completely at the discretion of the fund manager, but due to the nature of the fund, the minimum quarterly subscription can be as low as $1,000 per quarter for some funds.
In the age of subscriptions, rolling funds can allow better performance-based allocation of capital to early-stage investment vehicles and hence, a more open and diverse Venture Capital industry.
Deep-Dive Into The Rolling Fund Structure
A rolling fund itself is structured as a series of limited partnerships. Every 3 months, a “new fund” is opened and offered at the same terms. This essentially means that the fund is always open to new capital from new investors. It is also referred to as a “subscription fund” because the fund can accept new capital in the form of auto-renewing quarterly commitments. Most rolling funds do include a minimum subscription period as well. By way of example, an investor/LP might need to commit to a capital contribution every quarter for a year. Post that, they could choose to cancel or change the terms of their subscription.
Rolling funds can continuously raise capital, which means that they would have a much lower chance of missing out on a deal compared to traditional funds that raise all their money in one or two phases. Rather than raising multiple funds like traditional VCs, rolling funds can just raise one fund for as long as they want by constantly bringing in new investors and accepting new contributions. As the portfolio value continues to increase, the fund managers can leverage that to raise money at better terms.
Any LP can only participate in the investments undertaken during a quarter in which they contributed funds, implying that the investment participation of earlier LPs won’t be at risk of dilution by subsequent participation from newer LPs. If a fund fails to deploy all the capital raised during a quarter, the funds are carried over to the next quarter and the LP are automatically given participation in that quarter’s investments as well.
AngelList As A Platform For Rolling Funds
Raising any venture capital fund raises several back-office administrative challenges, that take up a lot of time and effort from any fund manager. These operational tasks include legal and regulatory filings, tax reporting, investor management and even portfolio tracking and performance reporting. In the case of a rolling fund, the task becomes exponentially more challenging as a fund manager would have to manage quarterly creation of new funds, investor management and investment allocations and then subsequently the differential distributions and fees that would be inherent in such an evolving fund.
AngelList Ventures, through its “Rolling Funds program,” provides a platform for fund managers to “host” their rolling funds by managing all these back-office tasks through its suite of tech offerings. In return, AngelList charges a flat 0.15% of contributed capital annually as admin fees.
AngelList also acts as an LP and investor platform, thus providing fund managers with access to a ready pool of LPs for their new funds. This can be a crucial feature for new and emerging fund managers, especially ones with limited existing networks in the investor community. Moreover, by facilitating increased due diligence of investors, AngelList has enabled rolling funds to be categorized under a specific SEC rule that allows a fund to publicly advertise. For its services in LP sourcing, AngelList charges a 5% carry on LPs engaged through its platform.
If rolling funds do end up being the future of early-stage venture capital, AngelList shall emerge as the major platform facilitating this form of investing. By acting as an intermediary between savers and investors of capital, the platform can play the crucial role of a gatekeeper of early-stage funding. However, given the lack of any apparent moats at this stage, the rolling fund platform space stands open to imitation and competition at the current juncture.
Looking Ahead
Most people predict that rolling funds will bring in an era of more diversified and merit-based culture in early-stage VC. Given the ease and flexibility of such funds, many operators and founders like Sahil Lavingia are starting their own rolling funds. Both investors and startups shall benefit from the deep operator experience of such a new class of investors.
There may also be an emergence of a larger crop of niche funds targeting specific segments like the gig economy, mental health, passion economy as their investment objectives. Such specialization would reflect the segment expertise of the fund managers and enable startups to reliably bank on the guidance of segment experts. Here’s how a mental health-focused fund manager describes his deal-sourcing capabilities: “If you go to Google and search “mental health VC,” then you’re going to see us first. This is great news because this means founders find us first too.”
With domain understanding and experience taking centre stage and thought leadership becoming essential in the new era of rolling funds, we believe early-stage investing may be heading to a much more open and dynamic future.
Thought Leaders Speak
COVID-19 vaccine development, manufacturing and delivery are monumental policy and coordination challenges at all levels of governance. The inner workings of Operation Warp Speed in the US offer an insightful peek into this crucial vaccine race. Read this brilliant piece: Inside Operation Warp Speed’s $18 Billion Sprint for a Vaccine
Through his analysis of the design language of iPhone 12, Om Malik raises interesting points on the enduring nature of great design language and the concept of “heritage” in design. Read his piece here: Why great design is timeless
What We're Listening To
The podcast “Talking Politics: History of Ideas” ranks amongst the top of our favourite podcasts for 2020. Hosted by David Runciman, it delves deep into some of the most important thinkers and their ideas, and how they continue to have an influence on our world today. He discusses a wide range of topics “from Hobbes to Gandhi, from democracy to patriarchy, from revolution to lock down. Plus, he talks about the crises — revolutions, wars, depressions, pandemics — that generated these new ways of political thinking.”
In this episode, he discusses Max Weber’s “The Profession and Vocation of Politics” from 1919 and explores Weber’s take on the perils and paradoxes of leadership in a modern state. Runciman also explores the impact of the text on the modern politician.
What We're Watching
Like everyone else, we’ve been switching between the real-life soap opera that the American elections have become and the playoffs of the IPL. Any predictions on who is going to win any of it?
As yet another intriguing season of the IPL comes to a close, we’re reaching the stage where we hear about how many viewers there were, how much money was made, how the sponsors benefited. Here’s a short video that explains the business side of it. Even better - it’s been made by CRED, one of the companies that has majorly benefited from its association with the IPL this year.
What We're Reading
In 2009, a mild-mannered graduate of the University of Pennsylvania's Wharton School of Business named Jho Low set in motion a fraud of unprecedented gall and magnitude. Over the next ten years, with the aid of Goldman Sachs and others, he siphoned billions of dollars from an investment fund - right under the nose of global financial industry watchdogs.
He used this money to finance elections, purchase luxury real estate, throw champagne-drenched parties, and even to finance Hollywood films like The Wolf of Wall Street.
By 2019, he was an international fugitive.
Company of the Week
Powered by Dine with Data
This week’s company is Copysmith.ai
Among the GPT-3 products flooding the market, Copysmith stands out for one simple reason. It allows the user to generate copy for exact marketing use-cases.
The tool just needs four pieces of information - Company name, company description, audience, and keywords to focus on.
As of now, the product hasn't disclosed any funding information. They crossed the 1000-user mark a week ago, and are still offering a brilliant free trial that gives you the full experience of the product.
Currently, you can generate Google & FB ads (and their previews), product descriptions and taglines. They're also building functionality for landing pages, Instagram Ads, and even entire blog posts!
We're still debating whether such products are a copywriter's friend or competition. Until then, we're eagerly waiting for India's take on GPT-3!
That's all for this first edition! We hope you liked it and would love to get any feedback you may have. This newsletter is written and curated by Mishaal Nathani and Ashutosh Gehlot.
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