Don’t Invest in Rolling Funds

Recently, rolling venture funds have become the next big thing™. (See an overview of them here). Their unique ability to fundraise in public, means that information about (and solicitations to invest in) them have blanketed Twitter and news sites.

They make for flashy pitches. This first wave have generally been started by individuals with large followings, and track records of angel investing into now unicorn-sized startups. The GPs of these funds talk about democratizing being an LP and strong financial returns. A Techcrunch article about Sahil Lavingia’s (one of the most prominent rolling fund creators) new fund mentions that rolling funds prevent “disproportionate benefits for those who already have their foot in the door.”

Rolling funds really do make it easier to be an LP. A first-time LP could find out about the fund on Twitter, click through to the one-page description on AngelList, and set up quarterly ACH payments to commit. The minimum commitments are (compared to traditional venture funds) small, spread out, and shorter.  These new benefits gloss over a more important question, “If you are a marginally-qualifying accredited investor, should you be an LP?”  If you couldn’t tell from this post’s title, the answer is no. Specifically, rolling funds will likely provide poor financial returns, without the side-benefits of direct angel investing.

Venture as a general category has poor returns.  Of 2,254 funds, 68.9% had returned less than 2x, after ten years! VC funds, much like the startups they invest in, are highly outlier-driven. Outside of the poor returns, LPs normally spend over a decade with no access to liquidity on their investment. For comparison, investing into the S&P 500 ten years ago, would have been a 2.85x return, and you can access liquidity at any time. Access to liquidity is greatly underrated. Shit happens, and if you suddenly need access to cash, investments in a rolling fund won’t help.

Angel investing is also a poor financial choice, for basically the same reasons. It is highly outlier driven, and as a non-famous angel, you are unlikely to have access to the (on paper) most desirable companies. All that said, if you can stomach the financial risk, direct angel investments have a lot of side benefits. You get to meet some great founders, learn about a range of industries and companies, and get the occasional warm, fuzzy feeling that you are helping some of those founders succeed. More over, you are building a track record. Putting your money on the line is a very concrete way to prove what companies you believe in, and that, sometimes, those beliefs are ahead of their time and right.

Funnily enough, it is this exact track record that enables rolling fund creators to raise money. Sahil regularly mentions his angel investments into Figma and HelloSign. Cindy Bi lists three unicorn investments in her twitter bio. If you invest in Cindy’s fund, and that fund invests in more unicorns, that doesn’t help your track record. You can’t list those investments, because you did not make them. Angel investing is not a good risk-adjusted way to invest money. Neither are NYC rent, craps, oyster happy hours, or many other things that I spend more than financially optimal. However, I still find angel investing to be worth it. It’s enjoyable and aligns long term with my personal goals and love for early stage companies.

I can’t see close to the same benefits — financially, personally, or professionally — in becoming a rolling fund LP. They combine the poor returns of venture, with the aloofness of investing in public equities. I have no doubt that they can make sense in a larger portfolio full of existing venture investments. However, rolling funds claim to be a great opportunity for a new class of people. That claim is, frankly, bullshit.