You Keep Hearing About Rolling Funds And Syndicates — Here’s How They Work

Investing in startups is getting easier, thanks to relaxed regulations and new platforms. Rolling funds and syndicates in particular are two investment vehicles that have gained steam, with at least 51 listed on venture investing platform AngelList, and companies like dating app Snack launching their own syndicates.

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Since rolling funds and syndicates have grown in popularity over the past year, we thought we’d break them down and explain how each works, and how those looking to invest in startups can get involved.

Syndicates allow accredited investors to pool money through a special purpose vehicle and invest it in a single company, while rolling funds basically enable the fund manager or lead investor to launch multiple funds back-to-back, according to Ken Nguyen, CEO of New York-based investment platform Republic.

The societal trend toward expanding access, along with increased interest by retail investors is part of the reason for the rise of these new ways of investings, Nguyen said. 

“You should not have to be ultra high net worth to invest,” Nguyen said. “That notion is going to go further and that’s going to touch every asset class.”

Why are we seeing rolling funds and syndicates?

Last year, San Francisco-based AngelList launched a new form of investing called rolling funds, and Earnest Capital introduced a quarterly subscription to its funds. 

In traditional venture funds, only up to 99 limited partners can back the fund, per SEC guidelines. That puts smaller investors at a disadvantage, because a traditional venture fund looking to do big deals would be more inclined to take on limited partners who can commit more money, since they have a limited number of spots for LPs available, according to Bryant Smick, a corporate attorney focused on startups at the Seattle-based law firm Carney Badley Spellman

“It’s impossible for smaller investors, someone who barely meets the thresholds…they can’t write the check size the big funds need in order to do their deals,” Smick said.

But a rolling fund allows the fund manager to take an LP pool and spread it out over multiple funds, essentially working within the confines of the regulations to make it easier for a fund to take on smaller investors, according to Smick.

“It allows funds to spread these guys out to work around the LP number limitations, but also because the general partners spread it out more, it allows investors to commit less,” Smick said.

In other words, it makes investing more accessible. While you do have to be an accredited investor to back a rolling fund, you don’t have to be ultra-wealthy. 

Earnest Capital, a seed-stage investment firm, introduced its quarterly subscription to its fund after realizing that “the typical approach to capital commitments that larger funds use to work with institutional investors just isn’t well-aligned with individual angels, entrepreneurs, and single family offices that make up the majority of our Fund 1 and Fund 2 investors,” the firm wrote when it announced the new subscription product.

The subscription offering also helps new fund managers establish a track record, according to Republic’s Nguyen. When a new fund manager is just starting out, it would normally be difficult to get an LP to commit, say, $250,000 when the manager doesn’t have a track record of generating returns. 

“(AngelList) really makes it a lot easier for the next wave of venture capitalists to get that foothold and establish a track record,” Nguyen said.

Opening the door for more investors

A series of rule changes have made it easier for people to invest in startups. In the past, only people who earned more than $200,000 annually for the previous two years or more than $300,000 together with their spouse could qualify to be an accredited investor. People who also had an individual or combined net worth of $1 million (excluding their home’s value) could also qualify.

“The question at one point was, it made no sense that a nonaccredited person could spend $20,000 in Vegas and buy thousands of lottery tickets, but couldn’t invest in a startup,” Nguyen said.

The regulation crowdfunding provision under the JOBS Act, for example, made it such that if a company early-on went through the process of disclosing information and went through a platform like Republic, it could raise money from anyone. 

In 2016, companies couldn’t raise more than $1 million from regulation crowdfunding, but in March 2021 the cap was increased to $5 million, making regulation crowdfunding more attractive to later-stage companies, Nguyen said. And as of August 2020, people with certain professional knowledge, certifications, or experience can also qualify as accredited investors.

Syndicates are also only open to accredited investors. With a syndicate, a syndicate lead will have a number of backers. When the syndicate lead proposes a company to invest in, the backers can choose whether to also invest or not. 

If they choose to, the investors pool their money in a special purpose vehicle and invest in a single company as a unit. In that way, syndicates give investors more of a choice in where their money is being invested, Nguyen said. Some companies have launched their own syndicates, such as video dating app Snack, which launched a Gen Z-focused syndicate for accredited investors.

The genesis of these new ways of investing could be part of a shift to accessibility and questioning the traditional VC models, according to Smick.

“It’s easier to create funds now more than ever (before). A lot of capital in the market, people want to invest in the space, and they have the money to do it,” Smick said. “And the other piece is, there’s a lot of thinking of what do we want venture capital to be?”

Illustration: Li-Anne Dias

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