Will Rolling Funds Break Traditional Funding Cycles?

The latest trend to emerge in the private venture markets is a rise in the popularity of “Rolling” or subscription-based venture capital funds. The idea behind these funds is that Fund Managers will have access to constant and consistent deal flow for the foreseeable future so instead of locking themselves and LPs in to 5, 7, or 10-year cycles where investment opportunities can be missed simply because the fund has spent all of its available new deal capital, rolling funds will continually receive capital from LPs to invest in new and existing deals.

This certainly will provide a new sense of freedom for Funds and their LPs as the investment dollars will constantly flow into the fund and then into startups. And, like subscription models in startups, LPs can “up” their subscription and increase the amount of their rolling investment whenever they want if the fund starts to perform well and the Partners want access to more capital for more deals. While this new freedom certainly will help provide more access to capital for funds, will it have any impact on the ability for founders and startup to access capital on a more regular basis?

The short answer is it’s too early to tell. The long answer is we will have to wait and see. The VC cycle has been pretty consistent over the last two decades as most startups that begin fundraising do so on a two-ish year cycle. Investors fill a round and then the startup is expected to burn capital throughout the two-year cycle to build a product, acquire customers, and increase revenue (MRR/ARR), etc. This causes a mismatch in timing for a majority of startups. Once you raise you set an implied burn or rate at which you will use the investment capital over the two years to cover expenses until you get to your next round. Given the deferred nature of subscription revenue, most startups face a liquidity-funding-revenue mismatch in which growth opportunities are sometimes missed purely due to a lack of cash on hand.

It will be interesting to see if a new subscription funding model will allow investors to match the subscription growth of their portfolio companies and provide more rolling access to capital or if the function of venture equity investing will remain the same even in this new rolling model.

Originally published at https://talkinsaasy.com on August 11, 2020.