Rollin' (ARR-paid vehicle)

2020-08-16 Alex Danco

The Bubble

  • Startups don’t reliably know the value of what they’re building and how much $ they need to get there.

  • Bubbles occur when the trajectory (not the absolute numbers) matters: up or down to zero.

  • Silicon Valley is naturally a land of bubbles coupled with a superego. This is unique on a global scale.

  • Good startups keep suspense about their ability to keep growing up. They can ride the FOMO wave not too fast to enjoy some breathing room for actually doing something.

Enter the Rolling Funds

  • The structure: the GP [general partner who runs the show] accepts commitments from LPs [limited partners who just provide the money] on a quarterly rolling basis.

  • Not a new structure, just all of a sudden useful for the reasons stated a bit further below.

  • No fund cap size, no expiration date.

  • Issues: the deal flow is not stable, so capital doesn’t get deployed smoothly; timing of investments also means that some LPs who come late to the party may miss out.

Enter the Status

  • Rolling funds lower the commitment barrier for prospective LPs. Say, $50k a year is what many tech people can afford.

  • Such small investments into a fund manager still count as investments into prospective startups —> status.

  • And (opposite to the common sense) it makes sense to join the rolling funds earlier so that the funds can make earlier investments [vs waiting for someone else to be the lead investor]. This buys the opportunity to have a foresight about a business.

  • Early entry creates a “fog of war” – who was that lucky LP who got a piece of a pie, or who got just the crumbs.

  • No social capital dilution, because it’s the money from the tech industry invested back into the tech industry. No outside money inflow.

  • Such social investment doesn’t get diluted the way equity does: you’re still an early investor in a cool startup even if it gets diluted to peanuts.