Leveraging Rolling Funds For Early-Stage Startup Funding – What You Need To Know

Rolling funds for early-stage startup funding have emerged as an interesting solution to meet small capital needs. AngelList first introduced rolling funds in 2020 as a venture capital version, but with features suitable for investors and founders. Currently, the platform has around 51 rolling funds.

The concept quickly gained traction in Q3 and Q4 of 2020, with the pandemic providing a boost. It is a valuable venture capital solution that provides opportunities to a much broader investor base looking for investment opportunities.

Investors interested in investing small amounts of capital regularly can leverage rolling funds. On the other hand, up-and-coming startups in need of timely, smaller amounts of funding can approach these funds. The terms and conditions are flexible while providing all the perks of traditional VCs.

The biggest advantage is that investors need not contribute or commit to contributing large chunks of capital all at once. Instead, they can invest predetermined amounts per quarter or once a year. Furthermore, traditional VC firms are capped at a maximum of 99 members per SEC regulations.

Rolling funds don’t have these kinds of restrictions. Anyone with extensive experience working as a venture capitalist or an accredited investor in the startup ecosystem can launch a fund. They can use their expertise to pool capital from several small investors and support early-stage startups.

These professionals act as general partners and invest in promising startups with the potential to earn profits. How do you leverage rolling funds for early-stage startup funding? Read ahead to understand how to take advantage of this funding channel for your company.

Advantages of Rolling Funds for Early-Stage Startup Funding

Quick Distribution of Capital

Establishing a traditional venture capital firm can take an average of 31 weeks or about 8 months. General Partners (GPs) must approach high-net-worth investors to entice them into investing significant amounts of capital.

Once the firm is established after securing the full capital, it won’t raise another round for two to five years. However, setting up a rolling fund on a platform like AngelList can take only a few weeks.

GPs spend most of this time compiling the necessary documentation and navigating the legal framework. They can start fundraising for the rolling fund immediately, even by publicly inviting investors to join.

Thus, the rolling fund is operational quickly and can start providing funding to startups. Accredited investors can pool small amounts each quarter while delegating screening and approvals to the fund manager. New investors can join every quarter, meaning the fund always has capital ready for investment.

Most importantly, GPs invest in a portfolio of small startups; yours could be one of them. You’ll need to research their terms and conditions and other approval criteria before submitting an application. Securing funds is also quicker since most legal requirements have already been addressed.

Early Growth Stage Funding

Traditional venture capital firms prefer to invest in later-stage companies that have a unique product and generate sales and revenues. Their objective is to identify established companies and offer funding for accelerated growth and expansion.

VCs approve companies with a significant market share, a strong leadership team, and a competitive advantage. In exchange, they expect a board seat, equity shares, and a clear exit strategy through an M&A or IPO.

Make no mistake, but rolling funds will also use similar criteria to evaluate your company as a funding candidate. They focus on a unique selling proposition (USP), competitive advantage, traction, a strong team, and revenues and profits.

The key difference is that rolling funds are open to backing early-stage startups needing consistent capital. You can get just the right amount to match your growing needs. Furthermore, you won’t have to give up board seats or decision-making rights, but offer convertible notes instead.

Rolling fund investors who want to exit their investment can sell their shares to secondary investors in the open market. However, this exit is subject to the fund’s regulations and the availability of interested buyers. Note that an investor exit will not impact your operations.

Access to a Larger Pool of Investors and Capital

Setting your sights on rolling funds for early-stage startup funding raises your chances of securing the capital you need. Traditional VC firm members include financial institutions, pension funds, venture capitalists, and universities offering significant endowments.

These investors are likely to pool tens of millions or even billions of dollars into the fund. However, rolling funds accept smaller investors who commit between $5K and $10K each quarter or year. Consequently, more members join rolling funds to benefit from their profit-earning potential.

From the entrepreneur perspective, this factor is a huge advantage. It opens up a whole new class of investors backing the startup ecosystem. Investors can start by writing small checks and contribute funds as and when they have them.

Entrepreneurs also need not raise large amounts of funding at one go either–a win-win all around. You won’t incur interest on capital sitting unused in the bank.

Higher Risk Diversification

Unlike traditional VC firms, rolling funds don’t restrict their investments to selected sectors. Instead, they are open to investing in multiple startups with innovative ideas regardless of their vertical. This factor works as an advantage because it helps in risk diversification.

Even if one or two startups fail, the rolling fund offsets the losses with profits from other investments. Risk diversification is also enhanced because they spread limited capital across multiple companies. As an entrepreneur, you need not approach industry-specific VCs; you can apply to several funds.

Understand that traditional VCs offer more than just funding. They select investments where they can provide additional value in other ways, such as expertise, mentorship, guidance, and access to networks. Furthermore, they invest large amounts of capital in a single company, which can increase risk exposure.

Venture capitalists participating in rolling funds for early-stage startup funding understand that your company is still nascent. You only need capital while the company is getting off the ground.

Quick Applications and Approvals

Applying for funding from a rolling fund and obtaining approval is much quicker than with traditional venture capital firms. A single application can be processed in just a few days or weeks. Since the fund consistently receives new capital, managers can review and deploy funds rapidly.

Most rolling funds operate on accredited platforms like AngelList. By leveraging access to standardized procedures and tools, they conduct due diligence much more efficiently. As a result of these streamlined processes, applications are evaluated in record time.

In contrast, conventional venture capital firms usually take much longer to screen candidates and process applications. Approvals depend on the fund’s structure, internal investment criteria, and the complexity of the opportunity.

Due diligence is more comprehensive and takes longer because significant amounts of capital are involved. This is why entrepreneurs must anticipate and initiate their fundraising process much earlier than when they actually need the capital.

Moreover, you won’t have to delay strategic moves and decisions due to a lack of liquidity. Quick, timely decisions are sometimes crucial for capitalizing on time-sensitive opportunities. Rolling funds can ensure that you have access to capital exactly when you need it.

Most importantly, you can focus your time, bandwidth, and energy on building and scaling your company without the distraction of planning fundraising campaigns. Designing and running funding campaigns can consume much of an entrepreneur’s time, which could be used more productively.

Flexibility in Committing Capital

A key feature of rolling funds is the flexibility that investor members enjoy. They can commit to a specific amount of capital for a designated number of quarters or years. Afterwards, they can review the fund’s performance and decide whether they want to continue investing.

If investors are satisfied with their returns, they can stay with the fund and commit more capital. However, they also have the option to withdraw and return when they see more promising opportunities within the fund. Their investment decisions are made in real-time, based on the fund’s portfolio.

This factor undoubtedly adds volatility to the fund, but it serves as an advantage for emerging founders with new ideas. You can approach rolling funds for early-stage startup funding, confident that you will attract new investors. Incoming investors focused on innovation may find your products appealing and worth backing.

Keep in mind that storytelling is everything in fundraising. For a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend Peter Thiel (see it here), which I recently covered. Thiel was the first angel investor in Facebook, with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that founders worldwide are using to raise millions below.

A More Attractive Cap Table

As an entrepreneur structuring your company for long-term growth and success, the cap table is a primary concern. You’ll want to design it to attract bigger investors when the company is poised for accelerated growth and perhaps, an IPO.

Multiple small investors tend to clutter the cap table and raise red flags. Investors will be wary about who has voting rights and will be calling the shots–particularly when they intend to sink large chunks of capital into the company.

When refining the cap table, you’ll consolidate multiple small investors under a single manager or entity. You’ll assign a single vote to this accredited individual with the expertise to have a say in the company’s management.

Sourcing capital from a rolling fund resolves this issue at the very onset of your fundraising programs. While you will have multiple investors pooling capital into the company, the GP is your point of contact. Your interactions regarding capital management will be restricted to this individual.

Startups need funding all the time to cover cash flow shortfalls and maintain operations. You may explore different sources of financing like bridge loans. Revenue-based financing, loan extensions, and more. Relying on rolling funds allows you to alleviate the stress of managing shortfalls.

You can safely depend on the funds that offer complete flexibility and a quick and easy source of capital.

How to Approach Rolling Funds for Early-Stage Startup Funding

Before approaching a rolling fund, you’ll start by researching fund directories for detailed information. Explore the fund’s evaluation criteria and get an overview of the projects they’ve supported earlier. You might also want to connect with fund managers in informal settings to build relationships.

Although the rolling fund structure differs from traditional venture capital firms, the screening and evaluation criteria are similar. Your pitch deck should effectively address the question–why is your startup a viable investment opportunity? You’ll include all the essential elements of a great deck.

• Spotlight the brand’s value proposition, the problems you’ll solve, market size, and edge over the competition.
• Business plan with a well-defined strategy for rapid growth
• Strong, verifiable metrics that demonstrate traction, customer base, projected revenues, and profits
• Use of funds to outline how you plan on using the capital and the milestones you hope to achieve.
• Mention key performance indicators and inflection points
• Add detailed information about the team, their qualifications, and the skills they bring to the table. Also talk about their success track records and ability to execute growth.
• Offer access to the data room that is populated with key financial information, licenses, permits, IP titles, and legal documents.
• Outline potential risks and challenges and your strategies for overcoming them.

Talk about how the benefits the rolling fund will contribute to the company’s accelerated growth. Emphasize how the flexibility aligns with the company’s evolving needs. You’ll also include any other details that stress how your company and business model fit with the fund’s investment strategies.

While reading about rolling funds, you may have questions about the other types of investors you can approach. Check out this video in which I have provided detailed information. You’re sure to find it helpful.

The Road Ahead!

Experts anticipate that the rolling funds model in venture capital is poised to transform the startup ecosystem. More funds are arriving on the scene, with smaller investors offering pools of capital with flexible terms. These investors play it by the ear and make investment decisions in real time.

Startups now have the option to select from capital sources with the most favorable conditions. Most importantly, you need not worry about VCs making unexpected exits or withdrawing support. Since the rolling fund has consistent funding coming in, you can always rely on it for support.

Startups can secure the appropriate amount of capital without raising an entire round. Nor, do they need to worry about multiple investors complicating the cap table. Rolling funds for early-stage startup funding might just be the answer to their capital needs.

You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.