Rolling Funds & the Rise of the Micro LPs

Also: My Second & Third VC Investments

My corner of Twitter has been absolutely dominated by talk of rolling funds lately.

I wrote briefly about rolling funds a few weeks ago in ‘My First VC Investment’. And Minal Hassan put out an excellent comprehensive post on them on her Substack a few days ago if you want to dive deeper.

Rolling funds are so hot right now even I can make tweets about them go viral.

It’s a strange feeling to bang out some quick thoughts while our three year old naps and then see that 374k people read said thoughts. ¯\_(ツ)_/¯

Why Rolling Funds Are Interesting

I love the concept of rolling funds as I think they will enable a new and more diverse set of venture capitalists (GPs). A more diverse group of GPs will result in a more diverse group of founders getting funded. That is a great thing for society.

Additionally, micro LPs like myself can start to play in the VC game. The capital from micro LPs will help give rise to even more GPs which will fund more founders. Also a good thing.

Let me briefly expand on these ideas:

Promotion allows a new wave of emerging GPs to go direct

506(c) is perhaps the linchpin of this whole operation as it enables public fundraising. Traditionally, VCs couldn’t solicit investment from the public. That has led to long and arduous periods of fund raising. Compare and contrast Elizabeth Yin’s 700 meeting journey to close a fund with Sahil’s notion memo and YouTube video journey:

I’ve read a ton of Elizabeth’s writing and she is phenomenal. But she had to walk a long road to raise Hustle Fund.

Now an aspiring GP can leverage her reputation and turn it into a fund. Sahil raised his fund in a matter of days. I suspect Sahil and his fellow early-adopters (Cindy, E, Ben, Tyler, Jason, Stephen and others) will be just the beginning and we’ll see a Cambrian explosion of new venture capital funds.

AngelList let’s GPs focus on what they do best

Another component enabling this innovation is the way AngelList takes care of all fund admin. This allows a new GP to get up and running quickly and focus on what is truly important: finding, funding, and helping great entrepreneurs.

From everything I’ve seen, the AngelList team has thoughtfully considered all facets of this process and built a great product. Kudos to Avlok, Sunil, Naval and the whole team for what they’ve built.

So to recap, we have a few important factors at play here:

  • The power of a large and engaged audience allows one optionality to do almost anything (including raising a VC fund)

  • 506(c) enables someone with an audience to publicly market a fund

  • AngelList has built an elegant solution to manage everything so the GP can focus on doing what he or she does best (find and support great founders)

The net result of all of these ingredients is that we should see a more diverse set of GPs emerge that will back a more diverse set of founders. The future should be better because the rolling fund innovation. It’s very cool!

The Rise of the Micro LP

The rise of emerging GPs and rolling funds will give rise to another group: micro LPs. There are literally millions of small LPs on the venture sidelines whose capital will begin finding it’s way into venture.

I see the LP impacts as follows:

  • Access: Due to Twitter/YouTube/506(c)/AngelList/etc, a small LP like myself can now more easily access the venture capital asset class. I LP’ed with Sahil after ‘getting to know him’ from reading his Twitter, checking out his Notion memo, and watching a YouTube video. One’s online reputation, social media, and the internet bridge the access gap between GPs and LPs. Podcasts will play a huge role too (Jason - would love to see a few rolling fund shows on TWIS!).

  • Scale & Opportunity: As Brandon Williams notes, there are 13 million accredited investors in the US with venture only having a 3% penetration rate. It’s hard to validate the true figures but it’s certain only a small percentage of investors are allocating to venture. There is a massive opportunity here for AngelList and venture as a whole to pull in a big chunk of these investors.

  • Re-thinking Asset Allocation: I plan to allocate 10% of our net worth to venture. Why? It’s a great way to gain diversification and place bets with uncapped asymmetric upside. I suspect many other investors will view the VC asset class similarly and want exposure. There’s also something I suspect many investors will find compelling about using one’s capital to fund start-ups versus plopping it in a boring index fund.

  • Minimums: Rolling funds are much more in reach than traditional VC funds. Sahil’s minimum was $6,250 a quarter and he inclusively flexed below for some LPs. Instead of a typical $100k one time check, lower minimums and predictable quarterly capital outflows will make micro LPs happy.

  • Indexing: The low minimums will allow an LP to invest across multiple GPs and get an almost index-like fund allocation to venture. If I LP in 10 funds I may have a slice of 300+ start-ups. This will be appealing to more traditional investors that are used to having a slice of 500+ companies in public markets. AngelList Access Funds is another solution here for investors that prefer a more passive approach.

The rise of the micro LP should result in the need for more GPs. And more GPs should mean more funding for entrepreneurs. It will create a virtuous cycle of sorts.

It will take awareness and education before serious dollars flow to venture but I suspect in 2030 the number of accredited investors with an allocation to venture will be far higher than 3%.

The next decade is sure to be an eventful one for founders, solo GPs, and micro LPs.

Check out my Twitter thread if interested in more thoughts on the impact to LPs.

P.S. Not sure if Soona coined the term “micro LP” but great name if you did!
P.P.S. “The Rise of the Micro LP” title was inspired by NBT’s excellent post.


My Second & Third VC Investments

It turns out that investing is addicting.

In addition to Sahil’s fund, I’m now a proud LP of Cindy Bi’s rolling fund. She has an awesome track record and hustles hard. She’s also very kind and helpful. Really excited to ride along with you Cindy!

I have another venture investment in the works but the docs are not yet final. It’s not a rolling fund either. More updates later on.

That’s all for now. These past few weeks have been an amazing learning experience. Thanks to everyone on Twitter who has engaged and helped me get immersed in this world. And as always, thanks for reading.

-Paul


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🧍 Who are you again? Hey my name is Paul. “The Curious Investor” is a newsletter where I write about investing, venture capital, and personal finance. In addition to investing, I spend a lot of time in the ecom world. I started and sold an ecom business and now help brands grow big on Amazon. Previously I was a CPA and spent a decade in corporate finance. Learn more about how I invest here. Nothing herein should be considered investment advice.