Latest / The Series A Show with Fexingo: Early-Stage Funding, Pitch Decks, and Startup Milestones / Why Startups Are Using Rolling Funds to Close Rounds Faster
Transcript
- Lucas: If these conversations are useful for what you're building or running, there's a simple way to keep them going ad-free. We deliberately don't run ads on these episodes, so if you want to support that choice, it's buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small gesture that makes a big difference for us. And now back to the numbers. Lucas: Let's talk about rolling funds. We've covered rolling notes and rolling SAFEs in past episodes, but the fund structure itself is gaining traction in a way that's worth unpacking. Luna: Right, because a rolling fund is different from a traditional venture fund. It's more like a monthly subscription for investors. Lucas: Exactly. Instead of raising a fixed pool of capital upfront and deploying it over a set period, a rolling fund allows investors to commit on a month to month basis. The fund manager can accept new capital each month and invest it immediately. Luna: So it's like a continuous fundraising mechanism. That seems especially attractive when markets are volatile and investors are hesitant to lock up capital for ten years. Lucas: And we're seeing that volatility right now. Just this week, Roblox is up nearly 25% in five days, Coinbase up over 11%, Tesla up 13%. But those swings cut both ways. Rolling funds give investors flexibility to scale in or out quickly. Luna: But for startups, is that flexibility a good thing? If an investor can pull out after a bad month, it creates uncertainty. Lucas: That's the trade-off. With a traditional fund, once the capital is committed, it's locked. With a rolling fund, investors can reduce or stop their contributions. But the flip side is that startups can access capital faster and more frequently. They don't have to wait for a traditional fund's deployment cycle. Luna: And the fund manager benefits too. They get a steady stream of management fees, which can make the economics more predictable. Lucas: Right. The standard model is a 2% management fee on committed capital and 20% carried interest. But because the capital base is dynamic, the fund can grow or shrink based on demand. It's a more liquid structure for venture capital. Luna: Who's using rolling funds right now? Is it mostly micro-funds or are established firms jumping in? Lucas: It started with micro-funds and solo GPs, but we're seeing larger firms experiment with it. For example, some early-stage funds now offer a rolling fund option alongside their traditional flagship fund. It's a way to attract smaller investors who might not meet the typical minimum commitment. Luna: So it's democratizing access to venture capital on the investor side. But what about the startup side? Does it change the kind of companies that get funded? Lucas: It might. Because rolling funds tend to have shorter investment horizons, fund managers may favor startups with faster revenue growth or clearer exit paths. Deep-tech or biotech companies that require long development cycles might not be as attractive. Luna: That aligns with what we're seeing in the public markets. Bending Spoons went public this week and surged 40% on its first day. That's a company that grew fast with a clear product-market fit. Lucas: Exactly. Bending Spoons raised an $18 billion IPO, and their founder talked about minimizing luck through process. That kind of disciplined execution is exactly what a rolling fund manager would look for. Luna: But let's get back to the mechanics. How does a rolling fund actually work in practice? Lucas: The fund is set up as a limited partnership or a series LLC. Investors sign a subscription agreement that allows them to contribute capital on a monthly basis. The fund then invests that capital into startups over the course of the month. Luna: And the startups get the money right away? No waiting for the fund to close? Lucas: That's the idea. The fund can issue a SAFE or a priced round immediately. For a startup that needs to close a round quickly, that speed is a huge advantage. Luna: But there's a downside: the startup doesn't know how much total capital it will receive from that fund. It could be $50,000 one month and zero the next. Lucas: That uncertainty can be problematic, especially for startups that are planning their burn rate. Some funds mitigate this by setting a minimum commitment period, like six months. Luna: So it's not a free-for-all. There are guardrails. Lucas: Right. The SEC has rules about how rolling funds can operate, especially regarding the solicitation of investors. Most are structured under Regulation D, which limits who can invest. Luna: And what about the fees? Is a 2% management fee on a rolling fund fair given the lower commitment? Lucas: It's a point of debate. Some argue that since the fund is smaller and more liquid, the fee should be lower. But others say the administrative burden of managing monthly contributions justifies the fee. Luna: I've seen some funds charging 1% management fee and 15% carried interest for rolling funds. It's really a negotiation point. Lucas: And the carried interest is typically calculated on a per-investor basis, not on the fund as a whole. That's another difference. Luna: So if an investor joins for only three months, they only pay carry on gains from companies invested during those three months? Lucas: Exactly. It's a more transparent structure. But it also means the fund manager has to track performance at a granular level. Luna: Let's talk about the impact on startups. If a startup takes money from a rolling fund, does that affect their ability to raise from traditional VCs later? Lucas: It shouldn't, as long as the terms are clean. Rolling funds typically invest on standard SAFE or priced round terms. But some traditional VCs might view a rolling fund as a less committed investor, which could be a signal. Luna: So it's a double-edged sword. Speed and flexibility versus potential perception issues. Lucas: Exactly. And that's why we're seeing rolling funds used more at the pre-seed and seed stage, where speed is critical and the amounts are smaller. By the time a startup is raising a Series A, they usually want a more committed capital base. Luna: But with the current market environment, where companies like Roblox and Coinbase are surging, maybe rolling funds become more attractive for growth-stage too? Lucas: It's possible. If the market stays volatile, investors may prefer the flexibility of rolling funds. And startups that need capital quickly to capture a market opportunity might find them appealing. Luna: What about regulatory risks? Could the SEC crack down on rolling funds the way they've looked at some other structures? Lucas: It's a risk. The SEC has been focused on investor protection, and rolling funds blur the line between private and public offerings. If the SEC decides they're too similar to mutual funds, they could impose additional regulations. Luna: That's a key point. Rolling funds are still relatively new, so the regulatory landscape could shift. Lucas: For now, they're a tool in the toolkit. And like any tool, they're useful in the right circumstances. Founders should understand the trade-offs before jumping in. Luna: So what's the bottom line? Should a startup consider a rolling fund for their next round? Lucas: It depends on their timeline and capital needs. If they need to close a round quickly and are comfortable with the uncertainty, it's worth exploring. But if they want a stable, committed investor base, a traditional fund might be better. Luna: And for investors, rolling funds offer a way to dip their toes into venture capital without a long-term lockup. Lucas: Exactly. It's a more accessible entry point. And with the right fund manager, it can be a win-win. Luna: Alright, Lucas. I think we've covered the key angles. Rolling funds are here to stay, at least for now. Lucas: Absolutely. And as always, we'll keep an eye on how these structures evolve. Thanks for listening, and if you want to support ad-free episodes, you know where to find us.