Why we chose this model and what are the advantages for investors.
Hello dear readers! As the world of technology races ahead at an unprecedented pace of change, the world of venture capital firms, the very investment firms that fund innovations from Tinder to the mRNA vaccines, has largely remained stagnant.
For nearly half a century, when investors formed VC funds, the process has been as follows:
- Decide exactly how much you want to invest for the next half decade upfront with a total fund life of 10+ years.
- Spend a quarter million dollars on legal, registration, and other fees
- Find Limited Partners (the investors who invest in VC firms) to commit to your strategy and fund you for that half decade+ on an annual basis into what is basically a blind pool of capital for you to disburse at your sole discretion.
- Spend 12–18 months fundraising for a first close for a third of your fund. Spend the next year getting the rest in place. If someone wants to come in after the final close, they need to wait for a few years until you launch a parallel fund post your investment period in the current fund.
If all of this sounds like an absurd way to do business, that’s because it is.
My partner Mohamed Hamdy and I are part of a new movement started by a company in the US called Angel List, to do for Venture Funds, what Y combinator SAFE notes did for startups. Our fund, Leyden.vc, is the first launched by MENA-based GPs using this new innovative model, called a Rolling Fund, to invest in early stage technology companies in developed markets.
Rolling Funds are a new fund structure that offers a number of advantages for investors:
- Commitments are quarterly. If our investment style is no longer interesting or your financial investment appetite changes, you can decrease or completely stop your commitment in the subsequent quarter. By the same token, if you like what we are doing you can increase your contribution on a forward looking basis without waiting for a next fund.
- Top tier capital administration with strong governance. We never touch your money. Because Rolling Fund GPs are ERA Registered Sub Advisors, investor funds are managed by the fund administrator and released only to investments that match the thesis that the investors subscribed to. There is no functional way for us to deploy capital into companies in “vice” industries or outside of parameters that we agree to when investors give us capital.
- Radical transparency. Rolling funds provide each investor a dashboard that allows them to know precisely how much of their contribution went to which investment and what we think that investment is valued at.
- Palatable minimums. Each quarter can have up to 99 investors with minimums determined by the GPs. Ours are $25k per quarter for 4 quarters.
- Standardized legal and onboarding. The process could not be simpler: Investors pick their subscription amount, create a username and password, e-sign the standard paperwork, upload their passport, and do a quick accreditation check. They are then given bank account details for their wire. The whole process takes under a minute and is managed entirely by Angel List on a page like this one: https://angel.co/v/back/leyden-ventures
These structural advantages and operational elegance are achieved by a remarkably sophisticated product which is a combination of both legal and software innovation.
Rolling funds are designated at 506(c) funds, allowing managers to generally solicit and easily onboard investors. This legal structure is made possible by the JOBS Act which was signed into law in 2012 and made material changes to how crowdfunding, securities marketing, accreditation, and reporting thresholds work.
Under this regulation, Angel List implemented a structure where every calendar quarter is its own free standing fund governed by a master agreement. Whatever is not invested in a particular quarter, is carried over to the next quarterly fund as investable capital.
As you can imagine, after (for example) 4 years of operation the complexity of managing 16 funds with overlapping investors and investments which all require separate filings is an extreme legal and administrative burden. Angel List automated all of this away, allowing us to focus on sourcing great deals and working with entrepreneurs to grow their businesses.
This automation not only allows us to offer the product, it also lets us pass the savings down to our investors. Our fee load ends up being significantly less than a traditional US based fund and an order of magnitude less than anything in regional financial offshore zones.
We hope that down the line Rolling Funds will create more funding options for entrepreneurs and create a new generation of investors with fresh perspectives that are free to focus on outcomes over administration.
We’d love to tell you more about what we are building! Feel free to reach out at leyden.vc/contact
