Phil Nadel, Why Rolling Funds are Popular in VC Investing (#169)

Phil Nadel, Why Rolling Funds are Popular in VC Investing (#169)

Phil Nadel is the Co-Founder and Managing Director at Forefront Venture Partners, one of the largest and most successful AngelList syndicates. Barbara Corcoran, known for her role on Shark Tank is also a Co-Founder, and chose Phil because he helps companies achieve more growth than just about anyone she knows. What is a rolling fund for VC investing? A Rolling Fund gives venture capital investors the flexibility to fund a certain amount each quarter and stop whenever they want, essentially, each quarter is a new fund, although it is the same rolling fund. The benefits of a rolling fund to an investor are that you could invest as little as $10,000 for the quarter, and get exposure to all the deals that the rolling fund invests in during that quarter, and you can stop if you want to, or invest in more quarters. The difference between a rolling fund and a typical venture fund, is that a rolling fund gives investors much more flexibility, a lot lower investment minimums, and the ability to stop funding whenever you want. Whereas typical venture funds require a large capital commitment upfront, maybe $250,000 or much more than that, you are legally bound to those contributions, and the life of the fund is typically 10 years. Those are the primary distinctions between an typical venture fund and a rolling fund.

Advantages of a Rolling Fund Versus a Traditional Venture Fund for Investing

The additional advantages of having a rolling fund versus a traditional venture fund is that in a traditional fund, fund raising is much more difficult because the investor bar is quite high, and you have to have a very high level of investment, maybe $500,000 to a million dollars, or more. A Rolling fund makes the investment easier for people to invest. The difference between the rolling fund and the syndicate is that the rolling fund enables investors to get access to deals that investors can’t get access to in the syndicate. Some of the deals are closing to quickly, often takes two weeks with the syndicate, so the rolling fund enables for funding right away. Some companies depending on their round, require an exact dollar investment, which is impossible to do in the syndicate. But with the rolling fund, there can be a commitment to the exact dollar amount. Also many investors are very busy, and don’t always have time to be viewing all the syndicate investment opportunities, so the rolling fund makes participation much easier.

Interested in becoming an investor in the syndicate or rolling fund with Forefront Venture Partner? Contact Forefront here: https://www.forefrontvp.com/contact

Get more awesome Venture Capital insider details by listening to How’d It Happen Podcast episode 46, where Phil shares his Venture Capital Superpower.

And now here’s Phil Nadel.

Full Transcript Below

Phil Nadel and Barbara Corcoran on venture capital investing with Forefront Venture Partners – Learn Why Phil is MD for the Rolling Fund for VC Investing

Forefront Venture Partners rolling funds for VC investing invests in high-growth, revenue generating, early-start companies, led by amazing founders

Learn about rolling funds for VC investing with Forefront Venture Partners

Review the Rolling Fund for VC investing and the Syndicate – Browse the investment portfolio of companies within Forefront Venture Partners

Want to learn more about Phil Nadel, Managing Director and Co-Found of Forefront Venture Partners? Listen to Episode 46

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What is a Rolling Fund for Venture Capital Investing?

Mike Malatesta  0:42 

Hey Phil, welcome back to the podcast.

Phil Nadel  0:50 

I’m Mike great to be back. Thanks for having me.

Mike Malatesta  0:52 

Yeah, so this is, this is going be a little different podcast episode because we’ve already explored Phil’s HOW’D It  HAPPEN story and episode number 46, which you should check out because he’s got a fantastic backstory and story of success in his life, but today we’re going to talk about a new, new ish, I guess, investing, opportunity, called a rolling fund, and I, full disclosure I am a participant in Phil’s rolling fund which he’ll talk about. I’m technically a limited partner I guess is how those investors. I’ve been in a lot of different types of funds, but I’ve never been in a rolling fund and until Phil reached out about it. Probably, several months ago, while he was thinking about doing it I actually had never heard of a rolling fund and so I figured if I haven’t heard of it. Many of you may not have heard of it either. So, we’re going to learn all about rolling funds so Phil, why don’t we get started with just sort of a broad overview of what is a rolling fund and what makes it different than other kinds of funds that are out there.

Phil Nadel  2:10 

Sure. Rolling funds are a new or relatively new, innovative product from Angel List. So, Angel List is the creator of this structure and positioning in the market. Typical venture funds, require a large capital commitment up front. And then, the life of the fund is generally like 10 years, and you’re, you’re in it for, for that long. With a rolling fund, it gives investors, the flexibility to fund a certain amount each quarter, and, and stop whenever they want. So, essentially, each quarter is a new fund, although they’re all within the same rolling fund. So, as an investor, you may say, I can invest as little as $10,000 for the quarter and get exposure to all of the deals that the rolling Fund invests in during that quarter, and then I can stop as I want to or commit to more quarters. So, the, the first part of the difference is that it gave us the investors a lot more flexibility, a lot lower, much, much lower investment minimums. And, the ability to stop funding, whenever they want. So those are the primary distinctions between a rolling fund and a typical venture fund.

Mike Malatesta  4:00 

Okay so a typical venture fund might require an investor to say have a minimum of $250,000 Let’s say and you, you’re committed to that amount, so whether they call it all at the beginning or whether they call it over time, you’re, you’re essentially, you know, legally bound, or you’re bound to make that those contributions right though.

Phil Nadel  4:28 

Absolutely right. Yeah, exactly and that’s a little overwhelming for some people, yeah to reach for others. And so, the flexibility you get with rolling funds is, is really a good fit for people.

Mike Malatesta  4:44 

Yeah, so, so from an investor standpoint, I think you explained it pretty well from your standpoint. As the general partner, you know the person in the firm running the fund, what are the advantages of having a rolling fund versus a committed fund or versus the syndicate where you’re raising money on a you know, a deal by deal basis?

Phil Nadel  5:10 

Right, so that’s a great question and so for us. I’ll do a comparison between both a traditional Fund, and the syndicate that we have. So, versus a traditional fund fundraising is, is, is much more difficult again because that, that investor bar is quite high. And you have to require very high level, minimum investment, which could be, you know, half a million dollars or a million dollars or more. So it’s much more challenging to attract a lot of investors who simply don’t want to commit that much.

So the rolling fund gives us the ability to make our fund available to many more people, especially to the many LPS we have in the syndicate. So this was an opportunity for us to share the fund investment with our syndicate investors. And the reason the comparison between the rolling Fund and the Syndicate is deeper than that. I guess I’ll start by saying that the reason we thought it was advantageous for us to have both the syndicate and the fund, we’re not getting rid of the syndicate. This is a compliment.

The rolling is a compliment to the syndicate but the reason it’s great to have both for us is that it enables our investors to get access to deals that we simply can’t make available to the Syndicate, and I’ll explain that. So, what I’ve noticed in in eight years of running the Syndicate, is that some deals are just closing too quickly. To enable us to syndicate them. The round is closing. Within a few days or a week and it often takes us two weeks, that’s the typical timeframe for a deal, syndicated, so we don’t have to wait. Then the rolling fund enables us to commit right away, not have to go out through the syndication process. Other times, we can’t get a large enough allocation for the syndicate.

And so, you know we need at least a half a million we prefer really a million dollar allocation to syndicate otherwise we have a lot of disappointed, investors because we have a large syndicate they all want to many point to invest in each deal and if we have a very small allocation, They’re going to be disappointed, but the fund invests smaller amounts into into those deals. And finally, I would say that some companies, depending on their round and their situation, require an exact dollar commitment in advance for our investment, and with the syndicate that’s impossible to do, because we never know exactly how much will be raised, we have an approximate range based on historical numbers, but we never know exactly, but with the fund, again we can commit to an exact dollar amount.

So those, that’s the reason why we, we thought it was advantageous for our investors to have access to a fund, as well as the syndicate. It also helps with some other things as well. A lot of folks like you are busy and don’t necessarily have the time to review every syndicate deal that we do, although I know you do a good job with that but other people, you know, they don’t have the time or the inclination, and this way this rolling fund will invest in all the syndicate deals as well as those other deals.

And so, investors will have exposure to those deals without having to worry about missing a deal or not having time to review it. So those are just some of the reasons.

Mike Malatesta  9:40 

Okay and when it comes to, you know, having to close on a tighter timeframe or something like that. One of the things that you sort of prided yourself on and, and one of the reasons that I follow and, and, and invest in almost every unless I miss it almost every one of the companies you bring to the Syndicate is because your due diligence is exceptional. And if, in cases where these companies needed to close more quickly, let’s say, or to get the allocation, you have to close more quickly, does that change the due diligence process on your end at all?

Phil Nadel  10:24 

No, not at all. We will never compromise on due diligence, will never change that process, or, or compromise in any way, on an extensive due diligence that we do. But what I was referring to the time period was that, that period which is usually about two weeks. When, after, after we’ve made our commitment after the due diligence is done, and then we say okay we’re going to launch the Syndicate, so it takes about two weeks or so, for, for us to share the deal with our syndicate investors, for them to make their commitments for us to do the webinar for them, and then ultimately for them to fund their investments which trickle in over the course of, you know, three to seven days or so. So that whole process usually takes about two weeks, or sometimes longer. And, again, part of that is just that people don’t necessarily have the time to review the deal, they won. They may not review it for a few days or a week after we syndicated. So, so again that’s why the process takes a few weeks and oftentimes in deals, they don’t,  We don’t have the luxury of that of that time.

Mike Malatesta  11:43 

Yeah, Okay, I think I think you were intimating that you know some high quality investment rounds for companies, they have a lot of interest in them, and they can close them or get the commitments more quickly. So they may have a syndicate for them in an earlier round but now because of the attraction and their success that Syndicate, and the time frame required to get a syndicate investment and even the allocation just might not suit their needs, is that correct?

Phil Nadel  12:19 

I think you’re absolutely correct, but I would also add that. You know sometimes we, we always prefer to be the last money or close to the last money into a round. It’s always better for us to have the certainty that the company will be able to or has already raised the full amount of the round. We don’t like to commit when a large amount of the round is uncommitted and uncertain. So as a result, we’re often the last money into a round and the company is anxious to close quickly, they’re eager to get the round closed, and they don’t want our syndicate to hold it up any longer, as you said, if the company’s doing well, to bring in that last bit of money they might have a few different options and we’re just one of them. If other options don’t require a two or three week wait to syndicate then they won’t. They’ll choose the other option so. So the fund gives us that gives us that opportunity.

Mike Malatesta  13:32 

So, so let’s talk about the types of companies that you’re investing in, whether it be through the syndicate or through the, this, the rolling fund I mean how do these opportunities come your way? How do you, you know vet them? How do you make your decisions? You know, just give people an idea of how your process works.

Phil Nadel  14:02 

So in terms of deal sourcing how the deals come our way. It’s really from a variety of sources, we’ve built up a really good network. Over the years, so we have a lot of the deals are referred to us by the venture capital firms who are leading the round, and are looking to round up a little bit more money for the company to fill out the round. So they’re leading the round and they’ll come to us and say, Would you like to participate, but we also get direct inquiries from companies, we get referrals from CEOs of our portfolio companies. We get referrals from our syndicate members, And lots of other sources as well so we’ve built up a really nice network over the years. We, we invest only in post revenue companies, companies that are already generating revenue and have already shown some at least some early indications of product market fit that customers are willing to pay for the product and the product is helpful to them, and also some early indications that they’ve found efficient customer acquisition channels, efficient ways to acquire customers. So we look for those as early indicators we don’t invest in companies, unless they are capital efficient. So companies for example that are doing a lot of research and development like a biotech company. We’re not likely to invest in that kind of a company that’s not a capital efficient company, or a company that’s building out a lot of like brick and mortar restaurants or stores or something, again, not, not our kind of investment we’re looking for. We’re looking for tech enabled and capital efficient companies. So we do, as you know we do invest across a wide, wide span of industries and sectors. We have some that are b2b and some B to C and some involve products and some are just services so we do invest across a wide swath of types of companies, but we do focus on only post revenue, and capital efficient as two of our of hallmarks. And then, you know, as we get further and further into due diligence, there are lots of things that we look for. Number one of course is the founders, the quality of the team that they put together the founding team, the experience that they bring to bear the market knowledge, their skills, and the way that the team complements each other. It should be a well rounded group. So, the sense of the team obviously is critically important, especially at this early stage. But, but then we continue with lots of different due diligence, we really get into the financial projections, make sure that they’re somehow grounded in reality and we understand how they project scaling up the business over time. And, and we will get the competitive landscape and lots and lots of other things.

Mike Malatesta  17:24 

So, from just a macro sort of level, fill the, I think you mentioned that eight years, the syndicate’s been in existence for eight years. And so, angel list which is the platform that your syndicate forefront Venture Partners is on has really, I mean, just complete, in my view and you can disagree, tell me if I’m wrong has really, you know, they’ve disintermediated, they’ve really disrupted is such an overused term now, but it feels like that’s what they’ve done for investing in startups and early stage companies, where it was sort of a, you know, it was, it was tough to crack. Either both as an investor and as a company to you know to get funding they’ve sort of democratized that process, made it available to a lot more people. Well first of all, do you agree with that and if so what has is it done and what, what do you think the future is like with rolling funds and maybe other iterations coming you know post the original idea of the syndicate?

Phil Nadel  18:38 

So I do agree with you about the effects that AngelList has had on this ecosystem. Now there are a few other platforms, that, that have done similar things but AngelList is by far the biggest and most profound impact. So, what changes will occur as a result or what additional innovations will they unveil? I think that, you know, if you look at what’s happened so far with syndicates and now the beginning of the rolling funds, companies are able to access capital, much, much more easily. Now, as you mentioned, it was an opaque difficult process, before, for companies to, you know, to have to pitch VCs, do so individually, one on one, and not have access to individual investors.

So early stage companies who aren’t raising a lot of money, don’t necessarily need to go to a venture capital firm, when they can raise a sufficient amount from individual investors like the ones on AngelList. And as a result of having these companies on the platform, a lot of Venture capitalists have taken an interest and have started to either form a syndicate or a rolling fund through AngelList so it’s kind of gone full cycle where now the supply of companies has driven the demand onto the platform as well. And so I think AngelList innovations in terms of being able to make, being able to simplify the fund process, the fund management process is attracting a lot of fund advisors and lead investors. So AngelList does all the back office work for a fund, they take care of entity management and governance and all that and make it much easier.

So people who are interested in starting a small fund, and maybe don’t have a lot of experience, AngelList will make that much easier for them – so they’re actually expanding, we’re helping to expand the pool of available capital for early stages as well as expanding the number of companies that have access to capital, so they’re really helping both sides of the platforms both supply and demand.

Mike Malatesta  21:29 

And you mentioned the supply of companies, what’s been the biggest driver of the supply of companies that are, you know, starting or early stage? What’s been the biggest driver of that? Is it is it just simply technology that’s been the biggest driver fill or computing power or what what’s or maybe a combination?

Phil Nadel  21:56 

I think I think you hit on the first thing is technology is that the cost of starting a company has dropped so dramatically over the past several years, because primarily due to new technology, and different, you know, different software modules and components that are available to companies to just plug and play, not have to reinvent themselves. So that’s a big part of it but also the access to capital.

So, if you’re a startup and you’re looking to raise capital, it’s much easier today than it was, although it is very competitive. The access is available. So more companies, there are companies on AngelList and other platforms competing for the capital, but at least the companies, the startups can have an opportunity to access individual investors to raise like that. So I think that it’s both, you know the cost of starting companies has decreased significantly, and access to capital has expanded.

Mike Malatesta  23:09 

I should have asked you this earlier but maybe you can get back to on a difference between syndicate and rolling fund? So in a syndicate, I as an investor and, I am investing a certain amount into a particular company. And so I’m a shareholder of that company in most cases. So, I get a K1 from them and get updates from them and I know I have X amount of money in this company. With the rolling fund where I’m making say a $10,000 quarterly contribution and the fund is investing, how how do you know what you’re invested in?

Phil Nadel  23:54 

It’s actually the exact same process for both. In the syndicate model. AngelList forms, a new entity. An SPV a single purpose vehicle for the purpose of investing in each company that we syndicate. So, as an individual investor, you’re investing, you’re buying a piece of that single purpose vehicle. And then that entity buys or invests in the company. And it’s the same thing for the rolling fund it’s done the exact same way. So it’s the company that the startup that we’re all investing in, has only one entity that’s being invested, you know that’s investing into it. And that’s the entity that angel list, sets up whether it be for the Syndicate, or for the rolling fund.

Mike Malatesta  24:50 

Yes. So every quarter, there’s an SPV for example, started for the rolling Fund, and the investments in that quarter, go to the LPs in that rolling fund on a pro  rata basis.

Phil Nadel  25:04 

Yeah, and more so the AngelList will actually still form a unique entity for each investment during that quarter, not just one.

Phil Nadel  25:16 

Oh okay, okay,

Phil Nadel  25:18 

So it’s really identical it’s really exactly the same as with the syndicate. And one other distinction to point out though in terms of from an investment standpoint, Is that the when you’re investing in with the syndicate you’re investing like you said on a deal by deal basis. And so, carry or carried interest is computed on a deal by deal basis. So if you make money on one deal, you pay a carried interest, a portion of the profit to us and to AngelList as our fee. And if you lose money on a deal, you don’t owe any carry, but, but those two things may or may not wash out, those two investments, but with the rolling fund, the carry is calculated based on your subscription period. So, like say per quarter, and your total investment is considered when calculating the carry not just a deal by deal basis.

Mike Malatesta  26:28 

Okay, got it.

Phil Nadel  26:31 

So that’s an advantage to the investors in the fund.

Mike Malatesta  26:35 

One of the things that surprised me or I wasn’t expecting was when I applied to be in the rolling fund, because I’d already been in your syndicate and several others, there was like an enhanced accreditation process to be in the rolling fund…

Phil Nadel  27:05 

They have since done away with that. So they don’t require enhanced or an extra step in terms of accreditation. They did that early on, then got rid of it.

Mike Malatesta  27:18 

So here’s my take on syndicates and rolling funds particularly Phil’s, so I love the AngelList platform and I invest across other platforms as well but I love the AngelList platform. And I love ForeFront Venture Partners because one, for me it’s an opportunity to support a lot of entrepreneurs like because you don’t have to. You don’t have to make huge capital commitments. But, you’re even at a low level of commitment you’re important to the success of potential success of that company and it feels really good to get access to what these, these minds and these people in these teams are thinking about and creating that, you know, is so far often outside of my day to day, awareness, that I feel like I’m super smart as a result of, of, of participating. Three when it comes to Phil’s syndicate and rolling fund in particular as he mentioned the due diligence and the amount of information that he provides makes me feel comfortable that regardless of how much I’m investing, I, I couldn’t do a better job, trying to figure out whether this company is potentially going to be successful or not than he does, so I trust him. I trust that he’s done the work. And then

Phil Nadel  28:57 

I appreciate that, and that’s the value that we bring. Yeah, that’s deal sourcing and the deal. Due Diligence that’s the value that we that we bring. Yeah. That’s why folks are investing with us. And we appreciate that. The confidence that you have in  us.

Mike Malatesta  29:11 

And finally, the process is so simple. Once you’re signed up, once you’re credited, investing in the rolling fund is very easy, like, five clicks. If you want to do it, and the K1 and all the tax management and all they do it all for you, like, it’s so much better.  For me, so much easier not better, but it’s so much easier than me investing in a private company on my own, having to do all the due diligence myself which I’m probably not equipped to do. And then, you know, get the K1 in the mail and then I got to scan it and do it anyway. Getting into the weeds here, my point is, you should check out, Phil, you should check out ForeFront Venture Partners, you should check out AngelList, and I’m very very happy to be associated with Phil, and thank you, Phil, thank you so much for coming on the show, and talking to us about rolling funds and all the other things it’s really, really educational.

Phil Nadel  30:24 

I’m happy to do it. I appreciate you inviting me, and any of your listeners who want to chat, please feel free to reach out to me. Our website is forefront vp.com, or they can also find me on LinkedIn or on AngelList. And, you know, always happy to chat and explain further about what we’re doing, and the types of companies we invest in. So I really want to thank you, Mike for all of your support over the years and, and just for including me on the show you today. It’s been a pleasure again.

Mike Malatesta  31:02 

My pleasure. I’m glad you could do it fell. Thank you.

Phil Nadel  31:05 

Alright, take care. Okay. Are we good

Mike Malatesta  31:11 

yeah that’s it yeah, that’s good.

Phil Nadel  31:14 

All right,

Mike Malatesta  31:15 

did we do okay. I thought I went okay. Did I did I hopefully I asked decent questions

Phil Nadel  31:22 

with the questions I mean that was perfect, but more my will, my answers okay.

Mike Malatesta  31:28 

Oh yeah, yeah, yeah, I thought, I mean they all made sense to me. So yeah,

Phil Nadel  31:34 

it’ll be interesting and informative to the folks listening.

Mike Malatesta  31:38 

Yeah, I want to I really want to get more people, you know, interested in and actually doing something to help these entrepreneurs and it’s set this, what you’ve set up and you know what AngelList, all these tips, make it so easy to do, it’s just, it’s,

Phil Nadel  31:56 

we’re trying to cultivate a community with forefront to help companies, they can get capital from other sources, the value add that we that we bring. It’s a little different, is the ability to help them with customer referrals with helping them acquire talent with some strategic guidance, those kinds of things that they can’t necessarily get elsewhere and we can do that because of a broad network of investors so that’s really worked out well.

Mike Malatesta  32:29 

Yeah, why not sure. Yeah, I like the community thing. Yeah, that works.

Phil Nadel  32:35 

We’re really focused on building.

Mike Malatesta  32:38 

Alright, Phil. Well, thank you again for the changing your schedule and making the time to do this is fun. and

Phil Nadel  32:44 

I really appreciate you having me on. Thank you so much, Mike.

Mike Malatesta  32:47 

All right, enjoy.

Phil Nadel  32:50 

Have a great weekend,

Mike Malatesta  32:50 

Okay, you too. Bye bye. Bye now.

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