American Mercury and star founder Sahil Lavingia talked about a new form of fund in a podcast , called rolling fund. Let’s talk about Sahil first. He dropped out of school when he was 18, started a business with the founder of Pinterest, and became the second employee of Pinterest. One weekend at the age of 19, Sahil suddenly came up with an idea: People need a platform where people can buy and sell items only through social media. So he immediately resigned and founded Gumroad on his own. A few months later, he received 8.1 million US dollars in financing.
Just as Pinterest gave Sahil the inspiration for Gumroad, Gumroad also let Sahil create a rolling fund. Because many users of Gumroad are very powerful creators, they have built their own company, and Sahil wants to invest directly in them, but now the fund cycle is too long and the whole process is also very cumbersome. what to do? He asked AngeList to make a rolling fund. This new fund structure no longer requires a full period of fundraising, and then locks it in his hands for three years. It only takes one quarter to collect three projects and 10 LPs. It’s about to start. If you want to redeem it, just use the company or your own cash to redeem it.
This matter has caused a lot of controversy in Silicon Valley . Can you do it well when you are a founder and an investor? In fact, China’s vitality forest and challenger capital are like this. When investment is fully mastered as a technical means, the definition of VC funds will be further reconstructed. There are methods for playing large funds, and there are also methods for playing micro funds such as rolling fund.
In the past, a veteran GP said with emotion that 10 years ago, we would give 25-year-old founders a $10 million fund to let them do something big; now we are giving 25-year-old founders a $10 million fund. The fund let them do things, give them another $10 million fund, and then tell them, invest in the ruthless characters around you, we don’t understand it anymore.
What does this reflect? The new generation of entrepreneurs has a new look, and the organization and scale of startup companies in the venture capital circle have also changed. In addition, investment in technology as an art means, with like AngeList and Carta such companies appear, the threshold has been significantly reduced, the expertise is becoming more and more readily available, talents all walks of life now are likely to become new VC.
What we will see next is that diverse investors will continue to emerge, who can bring new perspectives to investment and discover new areas, founders or business models that have been neglected. LP will have more choices, and GP will find more novel competitors. Be prepared. This is the future that is bound to come.
Mercury: What is a rolling fund?
Sahil: Funding has always been an inherent process. GP must raise a sum of money first, and then deploy the money. If you want to raise more money, you have to set up a new fund, so it is generally necessary to have the first fund and then the second fund.
But with the rolling fund, these can all be carried out at the same time. After GP raises funds, funds can be deployed every quarter. The whole process is very smooth and quick, just as you turn on the automatic scrolling mode when you are viewing a web page.
The structure of the rolling fund is a series of limited partnerships: at the end of each quarterly investment period, as long as the rolling fund continues to operate, new funds will be provided on basically the same terms. Under this fund structure, rolling funds can be publicly sold in the United States (a structure of less than US$5 million is permitted by law) and is open to new investors, so it is called “rolling.”
In general, rolling fund has the following 3 characteristics:
(1) The operation process is not as cumbersome as traditional funds, and the fundraising, investment management and withdrawal are more flexible.
(2) The founder is a GP, so that more knowledgeable people can help LP invest.
(3) Efficiently fund startup companies that are just starting out , and quickly bring good ideas to reality.
Mercury: Is rolling fund a brand new thing?
Sahil: Rolling fund is a very new thing. With it, GP can say to LP more directly and conveniently, “Hey, I have a fund, and I am raising funds.” This was not possible before, because it is necessary to protect those LPs with little experience. Make the process of setting up a fund too simple. Of course, the rolling fund also has to pass some certifications, and the necessary thresholds still exist.
Not long ago, making early-stage investments was very different from now, and making a deal would cost $30,000. Later, various software made investment so simple that a deal can be made in less than two minutes. It is of great significance to reduce the blockage in the process, because it can effectively expand the scale of investment by lowering the threshold for GP to become a new fund.
Mercury: You said before that you would not be a VC, but you now manage a large fund. What is your transformation and thinking process?
Sahil: I don’t want to be a VC because, when someone said VC before, a picture appeared in my mind, that is, the very traditional and complicated fundraising process, and I met all kinds of people I don’t know. These traditional LPs are generally American university endowments, family offices, and pension funds. Cooperating with them requires contacting various contacts, which can take 6 to 18 months. If you are in charge of a company, it will be quite difficult for you to work hard to do these things.
But with rolling fund and 506(C) (Section 506 c of Regulation D of the U.S. Securities Act, the promotion of new securities through magazines, newspapers, radio, Internet and social media is allowed, which opens up more ways to raise funds and make Investors can participate), I can invest on a large scale, and save a lot of trouble, because after I post on Twitter, there will be a lot of LPs asking .
So many LPs came to me because I posted a project on twitter, and doing so has gradually expanded my investment scale. This is actually a recognition known friction rub, that is to say, “Oh, I can do start with $ 100,000 per quarter, and a quarterly deal”, this way of thinking makes me slowly over the scale of investment My ability.
Investing has not changed the way I do business now, and I think I am a better CEO. In the past nine years, the worst time I have been a CEO has been the days when I was immersed in work at Gumroad. It’s basically like this: I have done a good job, and the results have been remarkable, but I still have a lot of time, and I want to do something for Gumroad. At this time, it is actually useless to do it anymore, so I’m just pestering others to do unnecessary things. At that time, I should say to myself: “Very good, I will get off work now and come back tomorrow. You have done enough.”
There are also debates on Twitter about whether the CEO should be a fund, but it is already a fact that the CEO is an investor . Rolling fund is to turn what has happened into a formal process.
Compared with other CEOs, the thing I did differently was to test the waters. My investors may not be satisfied with the results, but I am frank, many of them are LPs of my fund. I would say, “Look, this is what I’m doing.” I don’t have to pretend, CEOs have been doing this like me for a long time. This is how the fund world works now: the founder wants his investor to be a founder.
Mercury: Why do founders hope their investors are also founders? what is the benefit?
Sahil: The first benefit is that founders understand what entrepreneurs are doing better than anyone. It’s not that it’s not good not to be the founder, but if you want someone who understands your experience, the founder can empathize with another founder more than anyone else. If I had not started a company, I would not be able to understand the pain points of many founders. For example, hiring people may be the most difficult hurdle to overcome when starting a company.
Mercury: For founders, is there any difference between being funded by GPs from rolling fund and being funded by ordinary angel investors or seed round venture capital institutions?
Sahil: It might be no different. The founders care about who will go hand in hand with them, who will help them overcome difficulties, and the specific structure of the fund is not important.
The important thing is, can I tell a founder “this is the risk exposure of my deal”, can I write a check for $100,000 from my fund, and it turns into 35%, which is quite I personally invested about 35,000 US dollars-by the way, I can’t do it, I don’t have that much money.
In the future, the field of venture capital will become more and more transparent, but this has nothing to do with rolling fund. Traditional venture capital funds can also do this.
Mercury: From the perspective of LP, what is the difference between ordinary venture capital funds and rolling funds?
Sahil: The biggest difference is that LP can adjust the deployment. If LP wants to join GP’s deal flow, or think a GP is very good, they can vote for me as long as they want to participate. It can be 25,000 US dollars a year, 50,000 US dollars a year, or 100,000 US dollars a year. The rolling fund is a flexible and evergreen fund deployment.
If you want to treat the rolling fund as a traditional fund, you can do the same: divide the $100,000 into eight quarters, just like the traditional fund usually does, then don’t invest, someone else will do it for you. This is a conceptual change and a new model. People who accept this model will say: “Yes, that’s how I speculate in stocks. That’s how I look at my mortgage assets.” Put a lot of money. It is common for everyone to vote in several periods.
Mercury: What qualifications do you need to be a rolling fund?
Sahil: Anyone who thinks they should be a rolling fund should try it. You don’t need a huge check to vote for someone you believe. It’s 5,000 dollars, 10,000 dollars, or even less. This is just to build a mental model, just like putting on a skin in a game, and let the LP know that you can do a good job. This deal. You will learn more from this investment, more than any other experience. If you have made some angel investments with a rolling fund, you will have a track record and it will take time to build your portfolio.
One of my advantages is that my LP knows what I have gained on Twitter, because I post too many things on the Internet, leaving a clear footprint, and LP can find me by searching and searching. . LP’s focus on GP is the same as GP’s focus on founders. The same question they will ask is, is this person’s business legal? Is it a liar?
Most LPs know that I will carry out this investment race to the end, 20, 30, 40 years. I always hope that people see investment as a long-term thing. It is a good thing for GP to prove such a long-term willingness to LP, as is the founder.
Your early supporters are generally those who know you, believe in you, and have worked with you. Whether you launched a Kickstarter activity (an American company dedicated to creative solutions for financing the crowdfunding network station platform), or started a company, always the case. They helped you get started, and when your career slowly grows up, you can also use this to prove: “These industry giants have voted for me, and they are very experienced and knowledgeable.”
Mercury: Did twitter play a role?
Sahil: Twitter is really helpful, but it is not that useful. In the final analysis, I think I can add value to the founder, I can do it without twitter. My unique value is the experience of working at Gumroad, and all other experiences. I think these can be converted into the twitter one tweet insightful article, then they will spread.
But this is not so advantageous for the founders. Twitter is good for me because I can get deal flow. I might ask the founders to come to me first, because after they saw my twitter, they came up with the idea of cooperating with me. Now people talk about venture capital as a commodity, and it has become a game of marketing content. If this is the case, I can play this game.
Mercury: If you have $500,000 in investment this quarter, but $100,000 is not deployed, what will happen?
Sahil: The rolling fund is very flexible. Assuming that GP has deployed half of the funds, the remaining half will be transferred to the next quarter. In this respect, dealing with humans is not fun, and it can be dangerous because it involves some complicated audit work. One of the advantages of AngelList is that they will deal with all remaining configuration issues, and then correctly calculate all the distributions, as if the GP had just deployed funds in the next quarter, the LP that entered the market last quarter will only have the next quarter A little bit of risk exposure.
Mercury: What is syndicate? Does syndicate go hand in hand with rolling fund?
Sahil: Syndicate refers to the joint investment of several venture capital institutions in a certain project (enterprise). There are many ways of joint investment, mainly divided into lead investment and follow-up investment. The rolling fund is a syndicate divided by quarter. In the final analysis, as a founder, I don’t like to cooperate through syndicate. I hope that people who know the art can get started directly, get in touch directly, and invest directly in my company. Syndicate is done because these people do not have any personal funds to invest, so they have to use connections and networks.
A rolling fund is like a blind syndicate box. A group of knowledgeable people make investment together, which is a fast lane for GP and the founder.
Mercury: What is your investment philosophy?
Sahil: What I want to support are those topics that I would be proud to talk about. For example, I really believe that rolling fund is a great product, so I will often talk about rolling fund with others. In general, I like to use things that excite me and solve difficult problems elegantly.
This means that the founders are technical, and they don’t need to learn a particular profession, but they need to know how to build a new thing from scratch. I don’t care about things like pre-revenue and post-revenue. If the founder has various indicators, I can look at them, but they don’t necessarily need to.
What I have most is the idea, so I feel the suffering of thing is the idea, because to me that the idea into a prototype does not need the trouble. It would be great if a founder could answer the questions “Why hasn’t someone else done it yet? Why now? Why are you?”
Mercury: Which method do you think is better for an unfamiliar founder who recommends to you than a founder recommended by an acquaintance?
Sahil: Both will do. I won’t say that you don’t want a founder recommended by your acquaintances, but I don’t think it will be more advantageous. If a completely unfamiliar founder sends me an email, I will take it seriously, because this is my job as an investor: to find a few shining gold in the surging sand.
Mercury: Should LP cooperate with the GP with the least quarterly investment to make the portfolio more diversified?
Sahil: Long-term investment will bring a lot of value. If you only invest from 1999 to 2000, all the money in your pocket may have been lost. People want to expand their wealth into longer-term areas. Have you ever tried to choke time for this year’s stock market? If you do this, it may stir up even worse. So I always tell my LP, “It takes at least four quarters to make this investment, so I hope you invest at least one year, but you should invest longer than this.”
I think the rolling fund will actually motivate me to do better. Because I have it, I won’t make 30 deals during the demo day (investment and financing matchmaking meeting). I can only make a few deals because I am now There is a certain amount of funds to be deployed. It’s best to have a discipline like this: I can do x deals, or if I have so much money to spend in three years, you spend 18 months deploying all the money.
Mercury: Does the leader of the rolling fund have to be a qualified investor?
Sahil: I don’t think so. The GP of the rolling fund can be an investor who has no previous qualifications and can be recognized by doing a rolling fund.
Mercury: What does rolling fund mean for the future of angel investment?
Sahil: I guess AngelList will have competitors in the future. Of course they have had a very good start, but AngelList has been bound to early market networks, LPs, syndicates and startups for a long time in the future, probably 10 years or more. If this group of people is excellent, it will shine; if this group of people pull their hips, they will turn a lot. However , the beauty of rolling fund is that it is just a legal fund structure, plus various software and other auxiliary tools, GP can leave the market at any time.
The rolling fund will change the current rules of the game, because there is always a reason for the introduction of regulations. Just like Rule 506(c) was born because of the Internet, after a certain amount of new things accumulate, regulations will gradually support them, and more new cases will have a flywheel effect.
The rolling fund will give birth to all kinds of interesting new things, LPGP will have more liquidity, and then have the opportunity to build more things for this group of creators. The current restriction in the United States is that there can only be 99 LPs at most, but what if there are no more in the future? If I can have more than 99 LPs on Twitter, I will write an epic investment story with a fund of 10 million or 20 million US dollars per year. This is like starting from a deserted starting line, and sailing all the way. Trek, and finally have an almost one of the largest early funds on the planet, as well as an enviable diverse LP group.