Next, let’s consider some of the challenges and concerns with Rolling Funds, and see how they compare to angel groups.
- General solicitation: Rolling Funds are publicly solicited, which comes with some implications. The first is that an investor must prove he or she is accredited. Self-certifying that you fit the required net worth or income thresholds is not enough: it must be verified by the fund manager.
Fortunately, AngelList does all this work, which makes Rolling Funds feasible. What about angel groups and funds? Angel groups can publicly advertise their existence, but cannot advertise selling securities or talk about specific investment opportunities. VentureSouth can tweet all day (and we do). On the other hand, angel groups do not subject their members to invasive accreditation verification, as members “self-certify” their accreditation, and as long as we don’t have reason to believe the investor is lying we do not have to review personal financial statements, tax returns, brokerage statements to verify.
Angel funds have a harder time but we couldn’t mention the VentureSouth Angel Fund IV (our prior committed capital fund) before it was raised.
Until AngelList solved the problem of accreditation verification at scale, angel groups were definitely easier. Now, both have their advantages.
- Investing focus. One prominent GP raising money through a rolling fund noted that ”Fundraising can be very distracting from building and operating, so I don’t know if any founders would enjoy a rolling financing, unless they have a dedicated team member to do that but then, founders know the companies the best so investors would want to talk to founders.”
She was discussing operating businesses, but it seems just as true about Rolling Funds. Rolling Funds require constant marketing, for the entire life of the fund, to bring in the next cohort of investors to replace the investors that stop their subscriptions next quarter.
It’s hard to make good early-stage investments. It’s hard to operate effective marketing for any subscription business. Combining them makes no small challenge. As an investor, do you want your investment managers spending much of their time marketing to new investors?
That criticism applies to angel groups too, of course. We spend time recruiting new members, not just finding and diligence new investments or helping our portfolio companies. Different angel groups solve this in different ways, but primarily the problem is solved by its members: most new members come from referrals from existing members, who are in part, the group’s marketing arm; and a significant part of the due diligence work comes from our members who collectively pool brainpower and resources. A single-investor “micro-GP” Rolling Venture Fund manager simply cannot do all this on their own.
And so because VentureSouth does all this work already, layering in RollingSouth does not stretch our team operationally or distract us from trying to make good investments – we do all this every day.
- Costs. All investing comes with costs. Rolling Funds all have different costs. One prominent Rolling Fund example outlines her fees in her deck (previously available here):
- 2.5% (or committed capital) per annum over each fund’s 10 year life payable quarterly over the first four years – so 25% of the fund is paid out in fees and not invested
- 20% carry increasing to 25% after a 3x return
These are not trivial fees. Early-stage investing is hard enough without stacking the odds against an investor with so many costs.
OK, let’s compare that to angel groups and funds. For VentureSouth, we broke out our costs in detail on our blow, but to summarize:
- for group members: a $2,500 year membership fee, a single-charge 4% additional contribution, and a 10% carried interest
- for fund investors (like in VSAFIV): a 2% annual management fee on committed capital initially and invested capital once the fund is deployed, and a 10-15% carried interest (lower for members)
Similar ideas, but much lower fees across the board.
So how have we adjusted RollingSouth’s fees so that they are not more onerous that what VS members pay? First, we halve the management fee – to 1% – substantially cut the carry – to 15% instead of 20%.