Iron Man and Global Decarbonization
By: Todd Taylor and David Peteler
“Genius, billionaire, playboy, philanthropist.” – Tony Stark (Iron Man)
Now, add Venture Capitalist to the list of roles played by Iron Man Robert Downey Jr. According to this article “With the new rolling fund, managed through AngelList, Downey Jr.’s initiative sits at the intersection of two of the biggest ideas reshaping the world economy — the democratization of access to capital and investment vehicles and the $10 trillion opportunity to decarbonize global industry.”
Rolling Funds are a popular new vehicle for investment in start-up and early-stage companies. Rolling Funds provide a more flexible, generally lower cost, and “democratized” alternative to traditional Venture Capital funds.
How It Works
First, let’s discuss the traditional venture capital fund. A VC Fund is structured as a limited partnership, having a corporate General Partner, and Limited Partners. The General Partner organizes and manages the fund, and decides what companies to invest in. Good General Partners will sit on the boards of portfolio companies, provide advice and introductions or services. Limited Partners are the ones who invest the money into the fund.
AVC Fund usually has a 10-year life. It starts by raising the full amount of the fund before it can make an investment. This can take some time, and potentially means losing opportunities. VC Funds are generally closed-ended, meaning once the fund amount is raised, the fund stops taking investment.
The VC Fund usually makes investments in the first 2-4 years of its life. It may deploy most of the capital in early investments and save some for later-round investments in the portfolio companies. The rest of the life span is essentially passive, waiting for exits.
VC Funds are usually “stacked,” meaning that the General Partner will create a new fund every few years. The General Partner approaches the Limited Partners to invest in the new fund. The traditional problem is, the Limited Partners have no idea how the first fund is going to do until several years down the road, so it’s hard to decide if they want to commit to investing in a second fund.
VC Funds usually have a “2 and 20” fee structure. This means 2% of the fund is charged by the General Partner each year to cover expenses, and the General Partner gets 20% of the profits on exit. Mechanically, when there is an exit, 100% of the exit proceeds go to pay the Limited Partners, until they receive their invested capital back; and after that, 80% of the exit proceeds go to the Limited Partners, and 20% to the General Partner.
Don’t knock VC Funds. They’ve been the engines of tremendous entrepreneurial growth since the 1980s. But there is always room for improvement.
Enter the Rolling Fund. A Rolling Fund is a series of consecutively formed, privately offered investment partnerships, which is effectively an open-ended fund, meaning it continually accepts investment. The Rolling Fund is structured as a limited partnership, with a General Partner and Limited Partners. The roles are the same as in a VC Fund: the Limited Partners put up the money, and the General Partner manages the fund and directs the investments.
Rolling Fund economics are similar to a VC Fund, using the “2 and 20” model; but some Rolling Funds charge less than 2% per year for expenses. As in a VC Fund, when there is an exit, 100% goes to the Limited Partners until they receive their invested capital back, and then future exit proceeds are split 80%the Limited Partners, 20% to the General Partner.
Remember the idea that the VC Fund raises all of its fund at the beginning? A Rolling Fund is different. Instead of raising the full amount of the fund at the beginning, the Rolling Fund works on a quarterly subscription model, where it takes quarterly subscriptions from the Limited Partners. The Rolling Fund accepts the quarterly subscriptions and deploys the (smaller) amounts of capital more rapidly than a VC Fund generally can. This means the fund can raise a small amount to begin with, and scale up over time.
If a Rolling Fund doesn’t deploy all its capital in one quarter, it rolls the excess over into the next quarter.
This means the Limited Partners can:
- – commit to smaller amounts over a longer period of time;
- – see how the Rolling Fund is progressing before making additional quarterly subscriptions;
- – stop, start, increase or decrease their quarterly subscription as the fund progresses.
Some Rolling Funds advertise they are willing to accept quarterly subscriptions of $10,000, or possibly less. The philosophy is to build a pool of investors that stick around indefinitely and invest every quarter.
Results Will Tell
Are Rolling Funds as “good” as VC Funds? It’s too early to tell. And it’s hard to compare a large fund writing large checks into bigger raises, vs. a smaller, more nimble, fund writing smaller checks into smaller raises. The key is in the General Partner, their management skills and their choice of investments.
Rolling Funds also are a great tool for focusing on companies that might not otherwise be interesting to traditional VC Funds. Companies that focus on sustainability as much as traditional profit are really interesting to many non-traditional investors but VCs haven’t always been willing to risk sacrificing return for impact. While this is changing, and more and more companies focus on maximizing both, Rolling Funds and other democratized financing is having a real impact on these companies.
Bottom line, Rolling Funds provide an opportunity for smaller investors, who could not afford the minimum investment to get into a VC Fund, to participate in a fund investing in startups. Like the movement from the more traditional approach of a small number of large investments in companies, to the recent crowdfunding approach of lots of small investors making smaller investments in smaller companies, the Rolling Fund represents yet another step in the democratization of capital.