This isn’t advice on how to invest your money or someone else’s money. I’m sharing my experience so that it serves as an example to develop your own framework.

Dear Readers,

In 2021, following the recent acquisition of a startup co-founded, I made my first investment in an AngelList Rolling Fund. Over the period of 2021-2022 I saw the startup market surge, and then precipitously drop from late 2022 into 2023. I gained a new appreciation of the dynamics and pitfalls of the "Rolling Fund" type structure. This article, and accompanying YouTube video, explains that structure, including nuances I did not appreciate at the outset.

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The Lay of the Land: Traditional Fund Structures

Before we dive into the specifics of Rolling Funds, let’s set the stage with a quick overview of traditional fund structures: Special Purpose Vehicles (SPVs), and Angel or Venture Capital (VC) funds.

Special Purpose Vehicles (SPVs)

SPVs are typically one-off funds created for a specific investment. They allow investors to pool resources with others to make a more substantial single investment. SPVs often come with a 5% setup fee and a 20% profit share (or “carry”) to the fund manager.

Angel or VC Funds

In contrast, Angel or VC Funds spread their investments across multiple startups, offering diversification and delegating the selection process to (ideally seasoned and/or talented) fund managers. The cost of this managed diversification is often a 2% annual fee over 10 years and, similar to SPVs, a 20% share of profits (the "carry").

Introducing AngelList Rolling Funds

AngelList Rolling Funds can bring some of the benefits of VC funds to smaller investors. They operate on a subscription basis, where investors commit a fixed amount quarterly, creating a continuous investment cycle. This model smooths out the fundraising process, automates capital calls, and opens up VC-like investment opportunities to a broader range of investors.

The Strategic Playbook for Rolling Funds

Several strategic factors come into play with Rolling Funds:

• Deal Access: The quality of investments heavily relies on the fund manager’s ability to secure deals. The best deals often go to the most connected, skilful, or reputable investors - which are very typically successful startup founders (because other startups want their advice and seal of approval).
• Effective Fees: The actual cost of investing in Rolling Funds can vary based on how long you subscribe. Longer commitments can mitigate the impact of fees on your returns because there are more losses to offset against your gains.
• Adverse Selection: Rolling Funds might end up with the leftovers that more prominent investors passed on, especially during frothy market conditions.

Adverse Selection and Market Cycles

My experience has been that market highs and lows significantly affect how Rolling Funds operate. During boom times, funds are quickly deployed at high valuations. In downturns, capital tends to roll over as investment opportunities dry up. This cycle can also lead to adverse selection, where funds are invested more during peaks than troughs.

Wrapping Up: My Personal Take

AngelList Rolling Funds may give smaller investors the benefits offered by VC funds, namely, a) diversification and b) the ability to delegate investment selection to more talented managers than oneself. Certain successful founders offer rolling funds. They may have excellent networks in the startup community, and therefore access to the best startup deals.

At the same time, effective fees can be high. This is especially true if one subscribes only for short periods, because - for the purposes of calculating fees (profit share) - losses in one rolling fund cannot be offset against gains in another. Furthermore, there can be significant adverse selection in the selection of startups in which rolling funds invest - both at the deal level and through market cycles.

All the best, Ronan

Ronan McGovern, Managing Director, Arraig LTD

P.S. I (and Arraig LTD) don't run or manage any VC, Angel or Rolling Funds, but I do write about my approach to making private and public investments over at Arraig.com, where you can learn more.