The traditional model of venture capital has seen many changes over the last few years, all with benefits to both sides of the table. More investors have been able to get into the game of private investment with a smaller amount of money, putting more capital into startup founders’ hands and allowing the ecosystem to grow.
As traditional investors have built larger funds and moved further down the line in a company’s fundraising, Micro VCs have filled in the gap. These firms can invite smaller partners to participate in a fund and invest in startups at a much earlier stage, opening up more entrepreneurs opportunities. Angel syndicates have also emerged, allowing individual angel investors to exchange deal flow and choose which startups to invest in, rather than participate in a venture fund to give up some control. Lastly, crowdfunding has probably been the most democratizing private investment vehicle of all, allowing almost anyone to invest in an early startup for incredibly low amounts of money.
Recently yet another funding innovation has emerged, the rolling fund. In a traditional VC fund, investments cannot start until VCs raise a target dollar amount. The rolling fund scraps that model, allowing limited partners to participate in a VC fund quarterly. Rather than committing a large amount of capital over a span of five years, partners can instead choose when and how much they want to participate. Some have dubbed this as a “Fund-as-a-Service” approach to investing, allowing more flexibility to partners. Like the models above, this new approach allows easier access to capital for startups and easier investors’ participation.
Solutions like these are critical for emerging markets, where access to capital is much more limited. Much of the money raised today by startups in these regions is still external money, often coming from the U.S. or the U.K., where the private capital structures are much more developed. On the investor side, the lack of internal capital means fewer individuals within these regions can participate in private investing and missing out on one of the most significant wealth growing tools there currently is. On the entrepreneur side, the difficulty it takes to find local funding means more companies fail, as more expectations come from a smaller amount of money raised. Often, founders also tend to leave the local ecosystem to grow their companies in a more developed nation, thus bringing all the benefits to Silicon Valley or another tech hub. The loss of this talent leaves a crater for the ecosystem back home.
Rolling funds can help solve some of these issues raised above by increasing the flexibility of capital commitment. This solution allows smaller local investors to choose when they want to participate, and the fund has no cap, which means it can continue to grow. Lastly, unlike traditional VC, fund managers are legally allowed to market their funds and bring more public investors.
There have already been a few success stories for rolling funds. In Africa, a single tweet helped raise the Nkali Fund. There’s also Diaspora Ventures, who raised a rolling fund focused on french entrepreneurs (albeit building in the U.S). These are early examples, and this model is still new, but it presents many possibilities for emerging ecosystems. There are a few nuances around the particulars of rolling funds, as there are any investment vehicles. If you are interested in learning more about these new tools, check out some of these resources highlighted here and here.