#366: Avlok Kohli on AngelList Rolling Funds

What's up everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off. Avlok Kohli is the CEO at AngelList Venture. This includes the syndicates, funds, and capital products. He previously built and sold two companies, including an exit to Square pre-IPO. In this conversation, we discuss the AngelList Ventures platform, how it aligns incentives for founders, investors, and LPs, what a rolling fund is, why the rolling fund has structural advantages, and where the venture capital industry is moving towards. I really enjoyed this conversation with Avlok Kohli, and I hope you do as well. But before we get into this episode, I want to quickly talk about our sponsors. The first up is Athletic Brewing. These guys are all about reimagining beer for the modern adult. They've got great tasting beer that happens to have no alcohol and be a mere fraction of the calories of even the lightest beers. In today's modern, mindful, performance-driven world, there's just no time for hangovers. With Athletic beers, you can have the full relaxing ritual of drinking a great beer to wind down the day with your dinner or day drinking without dealing the rest of your day or week. So if you're looking for a great beer for Sunday through Thursday nights, Athletic's got you covered. Their beers have won awards on multiple continents, including the World Beer Awards Best Non-Alcoholic Beer multiple times. They've even won awards versus full-strength beers. Go check out Athletic Brewing so you can give them a try and get 25% off your first order. I don't even know how these people are making money by giving 25% off the first order, but you can go to athleticbrewing.com and use code POMP25. Again, athleticbrewing.com, use code POMP25, and you will get 25% off your first order. So go do it. Next up is Unstoppable Domains. Coinbase wallets are now adding support for .crypto or .zil domains through their partnership with Unstoppable Domains. Each one of you has tried to send Bitcoin or a cryptocurrency to an address, and there's a long string of letters and numbers. Your heart is beating, you're sweating. It's like that Eminem song where literally anything is keeping you awake and on edge. But now with Unstoppable Domains, you can solve that problem. They put your mind at ease because now you can just send cryptocurrency and Bitcoin to something like pomp.crypto. That is literally a wallet address that I have. Do not send any currency there because it's not hooked up to a wallet, but pomp.crypto can be a wallet address and therefore somebody can go and buy any .crypto name that they want. But it works just like URLs in the traditional world. Once somebody buys the name, you can't get it. So literally first come, first served. So go to unstoppabledomains.com again. Unstoppabledomains.com in the DApp browser, and you can register, purchase, and manage your domains there. Once somebody buys your domain, it's gone. So go get it at unstoppabledomains.com. Lastly, don't forget that I write a daily letter to over 50,000 investors about business, technology, and finance. I break down complex topics into easy-to-understand language while sharing my personal opinion on various aspects of each industry. You can subscribe at pomplletter.com. Again, pomplletter.com. All right, let's get in this episode with Avlok Kohli. I hope you guys enjoy this one. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. All right, guys. Bang bang! I have a, uh, a very awesome guest today who, uh, is one of the people behind, I think, what is probably one of the most exciting products right now, uh, definitely in venture, but they're probably in, uh, in finance, uh, more generally. So thanks so much for doing this, sir.

Yep, excited to be here.

Absolutely. Uh, let's just go through your background real quick for those that don't know you before you got to AngelList and the venture business there. Um, kind of where'd you grow up and, uh, and what'd you do before AngelList?

Yeah, so I'll do a really quick summary. So born in the Middle East, son of two immigrants. I really grew up in the Middle East, India, and then Canada. We sort of moved around. There were certain world events like the Gulf War and things like that that caused us to move around. And moved to San Francisco in 2008, so it was right in the financial crisis. I still distinctly remember the Sequoia memo I didn't quite know, I didn't really quite feel it then because I hadn't really participated in the internet economy yet, but I still distinctly remember that moment. And then through the years, I first worked as a software engineer for several different companies. One of them is now the world's largest doctors' network, another one was acquired by StubHub, and then I really caught the bug and started working on a few companies. So In total, I've started 3 companies. I've sold 2 of them. One of them was to Square, where I was a director there for 2.5 years, was with them through the IPO. And then the second one, I just wrapped up the acquisition of it in January of 2019. Around that time, I decided to take a step back. I've been operating pretty aggressively for a decade, and I had started angel investing. Around that time, Naval, who'd been an investor in my previous companies, approached me to consider stepping into a CEO role at AngelList, specifically the venture business. At the time, I didn't really have too much context on venture. I was an angel investor, and of course, as a founder, I'd raised capital. So I spent the next 6 months really doing a deep dive with Naval and venture, and also what AngelList had built in the venture business, because for a while, for at least majority of the world, it wasn't very clear that AngelList had a large and sizable venture platform. And yeah, the more I dug into it, the more excited I got, and I officially accepted the role mid-July last year, so I've been in the role for about a year, year and a month now.

That's awesome. You have now work at or worked at two of the most exciting companies, I think, in finance and fintech. Let's start with Square first. You were there for 2.5 years.

Yeah.

Went through the IPO as you described. Kind of what were your takeaways from working at that business?

Yeah, that's a great question. I would say two primary takeaways. One is financial services are basically an unbundling and rebundling of services. And the second one is reducing friction as much as possible for your core customer is super important. You can actually build a sizable business by just focusing on that one thing. And so if we actually take a look at what Square did, and you think about, you know, you download an app and you get to accept payments within seconds, a decade ago that was unthinkable, right? The process a decade ago was you have to call someone, talk to someone, fill out these paper forms just to get the ability to accept payments. Oh, and then by the way, you're going to pay an arm and a leg for that. Square came in and said, nope, this should be as simple as tapping a button,, and you get, uh, you actually get an account to start accepting payments. And from that, they had a giant multi-billion dollar business line that came out of it, uh, and a brand that people love. And they did the exact same thing again with Cash App, right? You— they reduced the friction, um, so you can literally tap a button and now you get a bank account, and then you get all of these other things along with it. Uh, so I'd say that was the other key takeaway for me.

Yeah, and as you were kind of, um, there, one of the things that, uh, really seems to stick out today is this focus on deposits, right? Once you get the deposits, you can kind of build all the services around it. I think kind of comparing that to AngelList, there's not necessarily deposits, but there's a similar mechanism of once you get, um, the marketplace set up, you can build all of these services around it. So maybe talk a little bit just about how the experience at Square either helped or prepared you for what you're doing now at AngelList?

Yeah, it's a really good question. So the framing that has helped me a lot and what's comparable between Square and AngelList Venture is once you're in the flow, so as you're building out a marketplace or a platform, once you're in the flow of a transaction, you are in a position to own everything downstream of that transaction. I'll use a real example. Square started off with just accepting payments. And it was interesting, for the longest time— and I was there when this was happening— for the longest time, there was this feeling that Square's margins are just going to get compressed because just accepting payments means it's low margin and you're going to compress because you get larger clients, they're going to negotiate their fees, et cetera, et cetera, et cetera. What that was missing though was the fact that Square was in a position where they were accepting payments, which means today those payments go to a bank account that the merchant or their customer may have somewhere else. But because they're in the flow of the payments, you can almost think of it as like a router. Sure, today it goes to the merchant's bank account, but what if tomorrow Square builds a better product and says, "Why don't you just keep it here?" It's easy. And the underlying principle there, it's the path of least resistance, right? Customers will always choose the path of least resistance when there is a ton of value also attached to it. So that, I carry that with me to this day with AngelList Venture, where the thing that struck me when I was originally looking at it was it's just massive platform, tons of LPs all over the world, tons of fund managers using it, tons of startups indirectly getting funded, of course, because of all these fund managers, We're really in the flow of all of that financial activity and you essentially own everything downstream of it. So it's just a function of time and it's a function of that rebundling process where you can own everything downstream of that.

So that's a great way to, I think, look at it. How do you choose where you insert yourself in the transaction initially? So obviously the kind of farther downstream you start, the less that there is to capture of value over time, unless you're somehow able to kind of move upstream. But if you pick the right spot, then there's a good place where you can provide value, do it cost-effectively, and then everything downstream is kind of your addressable market, if you will, from a product standpoint. How do you think about picking that spot to actually enter in that transaction?

Yeah, it's a great question. You always start with the customer first. Where is the point of highest friction? You look at that and you ask the question, are you uniquely suited to remove that friction? And when we think about friction, friction is basically a number of steps that someone has to go through. And if you can go from 10 steps to get something done to 5 steps to get something done, that's innovation, right? That actually is reducing friction. At its heart, that's what innovation is. You're essentially removing something that used to take longer and you're making it shorter and more pleasant. And so, uh, really you start with a customer first. You ask yourself, Is this the point of most friction for them? And then you simply ask, can you remove the number of steps in order to get there? And the really interesting part is when you remove the number of steps, what you're inherently doing is you're taking that complexity from the customer and you're taking it on as the business, right? And there's this really good concept by Jim McKelvey, who's one of the founders of Square, called the innovation stack. He actually wrote a whole book on it and I thought it was fascinating. And the innovation stack basically gets to the heart of this, which is as you're reducing friction for your customers, you as a company take on the complexity, but then what happens is you build a moat because you're building an innovation stack to actually create that frictionless experience. So it always starts with the customer first, then you ask, can you remove the number of steps? What would that look like? And then you add the strategic element around it, which is where in the process is it? If it's earlier in the process, then you get to own everything downstream of it. So it really is a framework that I really think about as I look at that.

Tell us a little bit more about AngelList Venture and kind of what you guys are building just from a theoretical standpoint, or kind of how do you think of maybe your mission as a business unit?

Yeah. So AngelList Venture, really started with a simple premise. It was serve the founder. It is in its ethos, right? It's just like it bleeds right through it. It's great. You know, if I just go back a decade, I actually remember my first office space that I actually got for my first startup was because of a post that Naval and Nivi wrote on, I think it was Venture Hacks, on the blog, right? So it's just, it's always been the ethos, serve the founder. And so that has carried, you know, we carry with us to this day. And our mission really is to increase the number of startups in the world, the number of successful startups in the world. We want to enable the founder. And really there's 3 pillars for AngelList Venture. One is increase the number of investors and VCs in the ecosystem, right? You add more, you have more capital, more capital is available, more founders can get funded. The second pillar for us is to increase the capital for these VCs. So we actually, we have a huge capital raising side of the business. It's massive. 40% of the capital flowing through AngelList Venture today are all AngelList-sourced LPs, right? They're LPs that we brought. By the way, it's all software. It's all— it's a platform, it's all software, all digital. It's beautiful. And then the third pillar for us is to make it really easy for startups to get founded and funded. We are excited to share something on that third one pretty soon. It's just a, you know, going back to the rebundling process, we are AngelList Venture is already at scale and we're in the process of rebundling across the ecosystem. And really the way to think about the, the entire business is that we are a financial platform for the venture industry, and we're effectively looking at who are all the players in the industry and how can we build something that stitches everything together so that the— ultimately the founder has an easier time building their company.

And so when you think through that today, maybe walk us through kind of the journey that a founder has with the product in terms of what's the most popular kind of entry point for them or first touchpoint, and then how does that evolve as they kind of scale their business and look for more capital over time?

Yeah, to clarify, the journey on AngelList Venture or the journey generally that a founder goes through?

On AngelList.

Yeah. So for, uh, on AngelList Venture today, the journey of a founder is really one of, as they're raising their pre-seed or seed, which is their first round of financing, uh, they're usually talking to a VC, uh, an investor that's actually holding, hosting their fund on AngelList Venture. So the interaction that they have with our platform is one of, once the capital has been invested, they're engaging with our platform to be able to get the capital. Then as the founder continues to raise additional rounds of capital, the earlier investors actually use the platform to be able to continue to invest in these founders. So there's this journey that actually lasts a decade sometimes. I mean, we have some companies that started, that raised capital through an investor on the platform 6 years ago that today, as they're becoming larger, they're going public, we're still involved there. We are, as we look forward, we're actually building out products that are going to include the founder as a core part of the journey. So we are actually in a very unique position to be able to build out a lot of very impactful tools to make it easier for founders to not just manage their fundraising, but then also really think about other forms of financing, right? Like if we, you know, take a step back, Equity financing is just one type of financing, and equity financing is really great for innovation, right? It's great for, hey, we have this product line that we're thinking about. We don't quite know where it's going to go. Great. We want to pour capital towards that, right? That's equity financing is amazing for that, but it's just one type of financing. Once you have a repeatable process, whether that's to grow your marketing funnel, or it's to— you already have capital coming in from your customers, but you just need additional cash flow, there are other types of financing that are easier. It's just harder to get to today for founders. So we actually view ourselves as a facilitator to bundle all of these types of financing and just give them as options to founders over time. So that's how we think about how the platform itself is going to grow, Equity financing is just one type, but there are many others that companies can use to grow. We're actually seeing this now. I think startups are, and founders are starting to wake up to it. There are all these different types of financing models now that are coming about. I think that's just a very net positive for the ecosystem.

You have a marketplace where you've got a relationship with the founders, and as you already stated, AngelList is there to serve the founder. But your relationship with the capital side of that marketplace and these LPs, for the most part, from using AngelList and seeing it, it's very, very software-driven, but there still is, if you're going to go and get somebody to put a really big check in or come onto the platform with some commitment in size, there's still some communication there and relationship. Talk a little bit about how you see that relationship between AngelList Venture and the capital base?

Yeah. So the capital base, we like to call them— they're LPs, limited partners. These are people who invest into venture funds, and venture funds are the folks who invest into founders and startups. So that's how the journey works. Now, the capital base itself and our relationship with them is actually a very useful relationship in that they come to us and they love AngelList Venture because they get to see all of the best fund managers in the world, right? Like there's just nowhere else in the world you can go to see all of them at once. And now with rolling funds, because they're publicly marketable SaaS-like funds, they can see all of them at all times and really get access to the best potential deal flow in the world. And at this point, we're seeing— we publicly stated this in 2019 that we're seeing 36% of all top-tier deal flow. We are much larger than that today. COVID actually interestingly accelerated our entire business because of one simple fact. LPs used to want to meet in person, and this is— by the way, VCs were the same and LPs are the same. If you're going to invest a large amount into someone, You don't want to meet them. It's really a trust thing, and you're going to want to look them in the eye and build a trust that, "Great, am I going to invest this large amount and have built a relationship with this person for the next few years?" What happened through COVID was that all of that just went out the door almost overnight. Everyone's sitting at home and everyone is— they still have to make the investments, they still have to engage with the venture funds, Overnight, what we found was the idea that you had to meet someone in person to make an investment basically just went out the door. All of a sudden, people are making commitments through Zoom, and we're seeing this en masse across the entire industry. Actually, the venture industry right now is so active. It's actually never been this active before. We're seeing this in our data. We are growing on almost every metric. And I thought about like why, and one of the reasons I think actually is this, is that people are now comfortable investing just through a Zoom call. And what that did for our business itself and how LPs now engage with the venture funds that we have on the platform is they'll engage, they'll join a Zoom webinar. Sahil of course did one of those. They'll get their questions answered, they'll build across, and then boom, they'll invest. So we are seeing COVID accelerate that entire behavior on the platform.

Got it. And what metrics can you share, or you guys have shared publicly, in terms of just how big, right? How many funds, how many types of deals have been done through the platform so far?

Yeah, so we've done almost 5,000 syndicates and funds, so we're hosting all of these funds. $1.5 billion deployed through the platform, and we're well north of $2 billion in assets under management right now. We have 47 unicorns in our portfolio. That number is going up. It's going up pretty quickly. And yeah, and then rolling funds itself is actually crushing all those numbers very, very quickly. So yeah, it's very exciting.

And so today, um, when you look at it from the product suite, if you will, uh, the, um, uh, AngelList Syndicate has been a product that's been around for a long time. Uh, maybe talk a little bit about what exactly that is, and then we'll get to Rolling Funds in a second. But I think the Syndicate was kind of like the initial product that people said, oh wait, there's something more here than just like a startup directory.

Yeah, exactly. Yeah, I can, uh, I'll provide a little bit of, um, uh, context there. So the way venture funds usually work is that you have a GP who's a general partner in the fund. They go raise a venture fund, meaning they go raise money from a bunch of people, then they start making investments. So usually invest in 20 companies, 30 companies in a fund. And then they'll wait 5, 10 years until the liquidity events and then they'll distribute money to the LPs. In 2013, AngelList launched syndicates, and what syndicates were were effectively single investment funds, meaning rather than raising a venture fund to go invest in 20 or 30 companies, you raise a single investment fund to invest in one company. And for the first time, that actually reduced the friction, kind of going back to our theme again of reducing friction, We reduced the friction for who can participate as an investor in the venture industry, in the tech economy. And when that launched, that just started growing very, very quickly because for the first time you could actually— you could have an allocation in a company as an investor and then say, "Hey, I'm investing $100,000 in this company. Who else wants to join me?" But look, the founder isn't going to have time to meet all of you, Hey, why don't you just join my syndicate and then I'll invest in the company as one lump sum. And so that is the concept of a syndicate. It's a single investment fund.

And as this got launched, obviously one, it reduced a bunch of friction, but also what it did that was very interesting to me was it now gave a subset of the population access to capital to monetize their access or their relationships, right? And so maybe talk a little bit about the impact you guys saw, not only on allowing the capital base to now get access to these deals, but actually the new capital allocator, right? People who previously didn't have a fund in kind of the dedicated traditional sense, uh, and also weren't independently wealthy writing, you know, these large angel, uh, checks, kind of how has that, um, product kind of opened up that opportunity for, for really thousands of people?

Yeah, so the way it ended up opening up the opportunity is that you didn't have to go down the previously well-trodden path of how you become a venture investor. Before syndicates, and really if you just kind of go back like a decade, the path to becoming a venture investor usually was you either sell a company, you start your own like large fund, right, so you need a very large LP, or you operate for a long time at a company and then you join a venture fund. And really there was this hazing ritual of you join a venture fund and then maybe eventually you make it to partner, and then from there now you're investing in startups, right? So it was just like long, multi-year, sometimes decade journey to then eventually be in a position where you're writing checks. Because most people in a venture fund don't write checks, right? It's only the GPs, people who actually have check-writing authority, that can actually invest in companies. So with syndicates, what ended up happening was for the first time, people could choose their own path, right? They could say, "You know what? I don't want to head down that path," or, "Hey, I still have a company," or, "Hey, I'm still, you know, I founded a company or operating a company, but I have access, right? My friends are starting these companies. I know they're great and I have access to these companies. Hey, great. Who else wants to join me to invest in it?" And what we found over the years was that new venture fund managers, people who became great VCs came out of this. I could literally rhyme off a ton right now, folks who started with syndicates, they ended up building a track record pretty quickly, and then based on the track record, they ended up raising larger and larger slugs of capital to the point where they're leading Series A, leading Series B deals. And so we saw that become the journey of some of these early fund managers, people who had access but didn't have the means before and didn't want to go through the path of the hazing ritual to then become a venture— to become a VC over time. They were just able to start a syndicate, build a track record, and then continue to evolve on their journey.

So that went incredible for you guys from the outside looking in, and lots of people used it, companies found it valuable, kind of the capital allocator, the new VC found it valuable, and then capital partners found it valuable. At what point did you say, "Wait, maybe we should actually kind of innovate on this model and go after the rolling funds product"?

Yeah. So after syndicates, there was actually another moment where we launched traditional funds. That's a traditional venture fund. But the real innovation there was actually the innovation to make a venture fund as small as possible. So usually venture funds, when you start a venture fund, there are all of these legal costs, back office costs, accounting costs, everything that's needed to run a venture fund. It used to be very expensive. It literally used to be $100,000 a year, $200,000 a year just to start a fund. And by the way, that's charged across 10 years. So you actually talk about $1 million at least to get a fund off the ground. Which means your target size of a fund ends up being very large. And as soon as it's that large, you have to have relationships, right? So in a way, it kind of restricts access to the industry because of that. So the innovation going from syndicate to traditional fund was, how do we compress the cost of what it takes to run a fund? So AngelList managed to— we managed to compress the cost by an order of magnitude. And again, it had the same impact. It was like, great, you were able to now bring in a lot more folks into the industry because guess what? You don't need to go raise a $50 million fund just to get started. You can actually raise a $1 million fund. And so we found that to be very powerful and effectively it kind of took the person on the journey, right? You start off with syndicates, you build a track record, a reputation, and then you evolve and you go into a traditional fund. And so we kept— we actually stayed with them along that journey, and then with the traditional fund, they would start one, deploy the capital, then go raise the next one, fund number 2, 3, et cetera. So that was the second innovation that AngelList Venture did, and this was in 2016. And so from there, you know, we've now supported hundreds and hundreds of these traditional funds, right? So we have, over time, we actually built a ton of infrastructure all the way from banking infrastructure to accounting infrastructure to all of the software accreditation checks, everything. And from there, we still noticed, kind of going back to again the theme of how do you reduce friction, right? How do you remove the steps? We still notice that the biggest friction point for anyone raising capital is the process of raising capital. It's that when you go to raise a venture fund, the way— the traditional venture fund, the way it works is you basically set aside 6 months, 12 months, 18 months sometimes to just go raise the capital, and then you're just heads down raising capital, taking all of these meetings, all warm intros. You can't talk about it publicly because it's illegal to talk about it publicly, and then once you raise the capital, you lock down the fund and then you can't raise capital again into it for the next 2, 3, 4 years. And we found that there was still a friction point on the fundraising side. Meaning you still have to put in a ton of your time, ton of your energy. And one, for people who don't have the access, meaning they don't have the network of LPs to talk to, or two, people who have access but like they're just too busy, right? Like if you're running a company, like you're not going to go through that 6-month, 12-month process just to go raise capital. And so what we noticed was We actually just looked at the core of that whole thing and went, why is the structure this way? Why do you raise capital and then lock down the fund? Because it doesn't actually make sense. Your best time to raise capital is when one of your investments has a markup and there's so much excitement around it. And so we were sitting there and it actually came through the jam session with Naval, And Naval is great at that stuff, by the way. He's probably one of the best strategic thinkers I've met. And we were just jamming on this and he's like, "Yeah, I've had this idea in the past and question like, why is this traditional fund structured this way? Why can't you just keep raising capital?" And so we kept thinking about it and we're like, it's interesting. The traditional venture fund structure was built in a world where the assumption was that people would be doing all of the legal back office accounting work. It was built in a world before software. Rolling funds are a venture fund structure built in a world post-software. So our view is that rolling funds are actually a superior structure to a traditional venture fund, meaning if software existed when the venture fund structure was originally built, it would be a rolling fund. And a rolling fund, if you want, you can actually apply constraints and build a traditional fund out of it. So it actually is just a structure that is— it's a venture fund structure that's built through software that essentially has many more features, and you can choose the features and mix and match the features however you want. But it really, at its core, it's just a venture fund built through software Because of that, you don't need all these constraints of, oh, we need to go lock the fund down and then go deploy and then raise again, go through this big bang fundraising. You can just always keep it open for capital. So that was the real breakthrough moment for us. And from there, because we had all this infrastructure that we built up over time, we were able to go from idea to initial launch very quickly. And some of the early data that we saw was was very, very promising for us. And yeah, we just haven't looked back since. We've just been more than thrilled by how— by not just emerging managers loving the product, but also established managers. We're seeing people coming from the VC industry like, "Wow, this is great. I don't need to go through the 12, 18-month fundraising process. I could just set this thing up." So yeah, it's been great.

Maybe talk about an example or two in terms of somebody who's set one of these up. When you say successful, what does that look like in terms of capital committed and kind of how that plays out, just so people can tangibly understand what some of these examples are?

Yeah, for sure. So when a traditional fund raises capital, they're usually raising capital to deploy over 2 to 4 years. So if you're going to raise $10 million, you're going to be deploying that capital over the 4 years. And so when we think about the rolling funds and the capital that a VC is raising in the rolling fund, we think about it in terms of subscriptions, right? It's every quarter, this flow of capital is just coming in and it's just increasing over time., and it's actually aggressively increasing over time. And how we look at it and how to think about it with a rolling fund is how much in yearly flow do you have, right? Ultimately, when you think about deploying into companies and startups, you think about on a yearly basis how much capital do you have to deploy into startups, and that way you can essentially manage how, you know, what your check size is, how many companies you need to invest in, and all of that. And so success and what we're seeing in our data is that the capital that these rolling fund managers are raising are increasing. It's increasing every quarter. I know that there was some chatter around, well, these LPs are not going to be as stable as a traditional fund. It turns out while some of them may drop, the fact that you can always accept new capital means that some of the LPs will actually increase their check size. And we're seeing this because what's happening is LPs are seeing the deal flow and they're like, "Oh, wow, you're making great investments. Great. I want to increase my check size." So we actually saw this through COVID, right? Post-stock market crash, when everyone was fleeing, that was probably the biggest test for us with the rolling fund. It's like, "Ooh," right? Because we're hearing in the industry like institutional LPs are delaying or even backing out of some of their commitments. I know of several funds where this happened. But with the rolling fund, we're like, okay, let's see what happens here. It turned out that the LP commitments increased during this because again, it was a lot more flexible. People are— they don't feel like they're getting locked in for 2 to 4 years. Now, a lot of the commitments that do come in are for a longer term. Again, rolling fund is a structure. You can set it up however you want. Sahil, for example, has his fund set up to get a minimum of a 1-year commit from LPs. So you actually have the ability to get this cash flow or the investments for a longer time period. And so we have it set up that way, where you can do just quarterly or a longer time period, and because of that, you end up getting a larger base of LPs that engage with it. And so as we think about success, we really look at What is the largest fund, equivalent fund, that we have on a rolling fund structure? And today it's a $100 million fund on a rolling fund structure. And by the way, it is still growing and it was raised in a fraction of the time because what's happening is your daily activities as a fund manager, as a VC, is doing your fundraising for you, right? Whenever you send out the LP updates every quarter, you can actually accept more capital. And the other great thing is because these are all publicly marketable funds, it's actually an SEC rule called 506. AngelList was actually involved in writing this in the JOBS Act in 2013. Because these are publicly marketable, you can also just every quarter talk to your LPs, share the update, but you can also share it with other folks. You can do a webinar,, and you can accept capital anytime. So we're seeing that— like those characteristics are having this compounding impact on the amount of capital that rolling fund GPs are managing to raise. And it's interesting because Sahil— he's publicly said this, I'm not saying anything that's confidential— Sahil had started with a $100K target, $100K per quarter. He crushed that. If I remember correctly, it was literally 3 weeks or 4 weeks, absolutely crushed it. And he crushed his next target again, and he's still crushing it. It is because it's so flexible that LPs now are able to engage with it however they want. They want to commit for a longer timeframe, great, they can. They want to just commit for a quarter, that's fine, they can. They want to just wait and see and maybe come in the next quarter, totally good, because the fund's not going to lock down. It's not closed down. And the other interesting thing is this is their only fund, meaning because the rolling fund is the last one you'll ever raise, you know you're getting access to all of their deal flow, right? So if I want confidence that I'm going to get access to all of Sahil's deal flow, I'll just invest in the rolling fund and I'll just keep investing in it. And so those are all the characteristics why we're seeing such very, very strong success with it across the industry.

What's, what's interesting is, um, I think there's a lot of products that, um, would serve, uh, one side of this marketplace, right? So you can make it better for founders, you can make it better for investors, um, and there's a lot of value that can be created and captured by doing that. The rolling fund seems to actually be one of those rare cases where you get kind of a win-win-win alignment of an improvement for the founders, right? Because there's more capital in the marketplace, there's people who can make decisions much faster. You get the investor themselves now can raise capital much easier, right? Focus on investing, be a better investor. And then on the LP side, now I've got kind of more choice and also more flexibility in terms of my relationship. And so when you get that rare situation where you kind of get, you know, wins that align these incentives, they tend to be really, really big products.

Right.

I think that's what kind of what you're alluding to here is you're already seeing in the data like, hey, this has a massive addressable market. That you guys can go after because you're really just making the entire stack much more efficient and more valuable for people.

Yep, that's exactly it. This product ends up being a better product for everyone involved. That is why we think it's actually striking a chord so deeply. It net is just very positive because usually most financial products, especially if it's a platform, there's always someone losing a little bit. It's like a trade-off and you're like, all right, well, okay, fine. You find that those products can't really— I mean, they'll grow, but then because as it grows, there's an anchor of like, oh, the incentives aren't quite aligned. This product is one where as it's growing, because all the incentives are aligned, we're now seeing everyone talk about it because they're like, yeah, this is so exciting. This is great for us.

This is so exciting.

This is great for us. And that is very important in building an enduring financial company and an enduring financial platform. And what matters most is customers love it, and we are, again, going back to our mission, we're helping increase the number of startups in the world. So yeah, you hit the nail on the head. The incentives are aligned across all actors.

From an advantage standpoint, there was a tweet that Naval had where he responded to somebody, and it was basically in only the way Naval knows how to do, a single tweet that really highlighted, "Look, this is a SaaS-based fund structure," whatever. When you guys talk about it internally, I don't know if that's kind of a mantra for you guys, that one sentence that he used, or if it's just something that you guys have thought through in terms of what those advantages are. How do you describe it to people who are considering rolling fund versus traditional fund?

Yeah, good question. I will say, Naval is very, very good at compressing complex concepts into tweet form. So it's always great to see that. As we think about it internally, the discussions are definitely— there are layers to it in terms of how we think about why this is great for different types of managers. One thing that is pretty clear is it is a It's a clear product. It's a product that adds value for every single type of manager. Now in terms of why we see an emerging manager, that's someone who's just starting Fund 1, maybe on Fund 2, is using it, for them, what we're noticing is they can effectively raise any time. They can start small. They can raise $100K and then start making investments. Publicly share them, assuming of course the founder is, you know, the startup has publicly shared it, and then raise more capital in Q2 or Q3, Q4, and they keep raising more capital over time. So we're seeing this resonate with them because they're able to get started small and then scale up with it. And our pricing structure actually is like, we made a very thoughtful decision to make sure that we set up everything in a way that allows for that to happen. So even for the smallest rolling funds, we want to make it accessible for everyone. We're not trying to shut anyone out. It's like, "Great, come here. If you want to become a VC, you can come here, you can get started small, and then we'll grow up with you." For the established manager, and the definition here is anyone who's on fund 2, 3, 4, or they've worked at a large venture fund and they have a network, what's resonating there is the fact that they don't need to go spend 12 to 18 months of their lives every few years fundraising. And all they need to do is get the fund started today, get the capital in, start deploying, and then it'll just keep growing over time. And so the key piece that's actually resonating with them is never raise another fund again. This is your last fund. You're all set. And by the way, we'll do everything that a traditional fund does. You know, like I mentioned earlier, A rolling fund is a venture fund structure that would have been built in the age of software. We're in the age of software, so we built it. So you can create a traditional fund out of it if you want, add constraints and parameters, but you don't need to. And so we're seeing that resonate with the established managers, which is just never worry about raising another fund again. This is your last fund. It's going to be your great fund, and that's it. And for emerging managers, it's the get started very, very quickly.

Trey Lockerbie: I just love the idea that it's so flexible and so kind of compartmentalized in terms of the different features and parameters so that you can make it identical to a traditional fund or you can make it something that you deem is more beneficial, right? And so that flexibility, I think, is a key piece. Everyone's excited, but what are the disadvantages? When you look at it, you say, "Obviously, you're gaining a lot here. What is the trade-off or what are you losing by using a fund versus a traditional fund?" Yeah, it's a really good question.

The number one question I think about every day. I would say some of this is actually changing very quickly. It's improving very quickly. The biggest trade-off is it's a new structure. So if you're an LP, because it's a new structure, it's just new information to take in. But what we found is once the LP knows how it all works, it's very, very quick. Some of this is changing so quickly, even as recent as a few weeks ago, where now the community is writing up all these amazing posts. I'm reading some of these and I'm like, this is amazing. I will actually send some of that collateral over to LPs or even GPs. And I would say that is the biggest trade-off today is that it is a new structure. There are additional questions that will come up.. But our solution to that, one, it's already happening, which is the community now, it's in the broader ecosystem now, people know about it. And every day, more and more people are knowing about it. So we think it's actually getting solved pretty quickly. And the other thing that we do to help in that is we'll hop on a call with anyone, any LP, we're here, we'll provide all the collateral, and we're able to share that. So yeah, I would say that if I was to be— if I'm going to be If I was to really pick one, that would be one.

And then how do the fees work in terms of on a deal basis and then also for kind of the owner or manager of the rolling fund?

Yeah. So we simplified the fees as much as possible, right? We really do believe in a simple model, so there's not a lot of fine print and asterisks and all of that. The fees are basically 0.15% annually of the commitments coming in. And what the fund manager, the VC, will usually charge, a 2% management fee annually and a 20% carry. Now again, the management fee and carry, configurable. We do see some folks charge no management fee and a carry or a lower management fee and carry. So it's completely dependent on the GP and what they want to do. But our fees are just a simple 0.15%. So for an LP, all they need to think about is whatever the GP is charging, just add 0.15% to it and that's what we're charging. So we've made it very, very, very slim because again, we want to make sure we bring on as many of these GPs as possible, simple pricing, and we're just going to grow with them. Got it.

And then one of the things that I've heard a lot of investors ask, and I actually don't know the answer to this, is let's say that you've got a rolling fund, uh, you make a couple of investments in 2020, they end up being, you know, the best investments of 2020, right? And so now all of a sudden, in, uh, by the way that the world's moving, by 2021 they're now all unicorns.

And, uh, I mean, you mean decacorns, right?

But I'm sitting there, I'm saying, wow, like, I would love to invest in this rolling fund Can I invest and get exposure to basically the deals that you previously have done, or do I basically get to bet on the manager and hope that they go find more deals like that?

Ian Formigle: Yeah. It's the latter. And it's the latter because that ends up being a lot fairer to the earlier LPs because if you allow for an LP to invest after investments have been made and the companies are growing, that new LP basically has an information advantage that the earlier LPs didn't have, and then it would be unfair to them. In traditional funds, it's actually written into the contract sometimes, which is also interestingly why it gets so stressful, right? Because in a traditional fund, what happens is you can do something called a first close. You get the initial capital in, so you can start deploying, you continue the fundraising, and you'll have maybe a couple more closes and then you lock down the fund. And what happens is in the documents in a traditional fund, it's usually written in that when you reach these specific milestones, whether it's a date or something, you have to lock down the fund. Because what they're doing is protecting against the issue that if a later LP comes in, they don't want exposure to the earlier LP's investments, which is how it's structured today. In a rolling fund, the way we do it is as soon as an investor comes in, an LP comes in, they don't get exposed to anything before their investment, only to after. What's interesting is that in VC, when you're investing in a fund where someone has a track record and you want exposure to their future investments, that's actually still a very, very good sign. Because you have someone now who's built a brand, they've built a network, and they're most likely just going to get stronger and stronger over time. So we see this with some of the best venture funds in the world, Sequoia and Andreessen. They've built such a strong brand, founders are just attracted to it. So that was our thinking in terms of how we designed this product. Again, it goes back to what you astutely pointed out earlier, which is our incentives are aligned for all people involved. And so we thought deeply about that particular piece as well.

Yeah. And then rolling funds are obviously, um, growing, and, and it's very obvious, at least from my perspective, that this is just a better way to do it. How do you see the impact on kind of venture capital, uh, more broadly? Is every early-stage manager going to have a rolling fund? Um, do kind of the traditional fund structures disappear and AngelList runs the world, how do you just think about that impact and how the traditional world changes over time?

Yeah, it's a great question. My view is that the branded traditional funds are going to be here. They're going to stay, and I think that they will continue to stay. I just think that that's how Think about that as a Series A, branded Series A firm, Series B, Series C onwards. What will happen is over the next couple of years, because we're basically a leading indicator of this, we're seeing all of this happen, we're going to see the solo capitalist concept scale very quickly. And the solo capitalist, if you really break that down, It's basically one person with a brand that is leveraging their brand to raise capital, to get great deal flow, and to use their judgment and invest in great companies. And today, all of this is possible because AngelList Venture has the tools to make it very, very easy. You literally tap a button, you have a rolling fund. We'll handle everything for you. And they're then able to use their audience,— people that are interested in them to go raise capital into the fund and then start deploying. And what we're going to see is we are going to see a lot more competition coming into the space for pre-seed funds and seed funds from these solo capitalists, and we will see some portion of them scale their fund to start leading Series A deals. So there will be more competition that will start coming in across stages,, but I do think the branded firms, the ones who've built the brand over multiple decades, they will continue to endure because again, they have a track record. But we are going to see more competition, and I do think that even at the Series A stage, we're going to see more firms coming in, which by the way, I think is a huge net positive for startups because for the longest time, there was this choke point at Series A of the number of firms that are there writing Series A checks.. We think this is going to add a lot more people into the Series A stage and potentially even Series B over time. So I definitely don't hold the view it's going to be a, you know, this thing eats, you know, all of venture. I do think that there will be a coexistence for sure. And again, we have a very sizable traditional fund business. It is something we're actually sharing more and more, but it is very sizable. And so we do see that side of it as well. But yeah, I think rolling funds will be, from a percentage of number of funds and capital deployed into startups, it's gonna have an impact at pre-seed, seed, Series A, and Series B.

That's awesome.

And by the way, we're already seeing this. We're seeing some really fascinating stuff around very notable, influential early-stage managers are now banding together and raising an opportunity fund. To start participating in some of these later-stage deals. This is happening very, very quickly across multiple managers. And again, the common theme is it's so simple, right? We reduce the friction so that you can raise, and then you keep raising into the structure, and because of that, what's happening is you're bringing in all of these net new people as well into the industry that just didn't want to go through that long, painful fundraising process because maybe they're running a company or They're already making angel investments, they just want to go through that process, but this one, it's so easy. I personally actually rolled my angel investing into a rolling fund because I had some friends that just wanted to get exposure to my investing, and I don't have an intention to raise a large rolling fund, but for me personally, great, I'll just roll it into it and it's easy. It was just so easy. So I think that we're going to start seeing all sorts of different types of managers coming in. Yeah, I'm very excited to see how it's all going to unfold. I've been watching Sahil's— even his videos on how he's posting how he's making investments. It's just great. I think it's going to inspire a whole generation of new investors, and yeah, it's fascinating to see.

I think you're onto something for sure. I ask the same two questions to everybody before we wrap up. First is, what's the most important book that you've ever read?

Loonshots. It's especially important now. Loonshots, the thesis of the book is that as you're building a large organization, you want to have the team that is constantly tinkering with new products and the team that's scaling. They have to coexist. It's hard to coexist. It's actually brutal to coexist. But if they don't coexist, then you'll either have a company that can't scale or you have a company that can't innovate. But as a tech company, your job is to innovate. It's to release new products in the world. So I just love that book because it gave me a framework that I've carried with me for actually pretty much my entire career.

Yeah, that's a great one. The next one is a little bit more fun and then you'll get to ask me one question to finish up, which is aliens, believer or non-believer?

Believer? I'm a believer. I am a believer. I just don't think that they've reached Earth yet. But I just— I can't see a world where we're a unique, special snowflake and there's no one else in the world. I just don't see it. So I'm a believer, but I'm also a huge sci-fi geek.

So yeah, I, uh, I don't know. You got, uh, the UFOs, you got all these people who think they're here, so we'll, uh, we'll end up figuring that out. You could ask me one question to, uh, to finish up.

What, uh, what question you got for me? When are you starting your rolling fund?

I was worried that that was going to be your question. Uh, we'll talk.

We'll, we'll get it set up in 48 hours. So we will talk. All right, let's do it. Absolutely.

Now listen, I appreciate, uh, you taking the time to do this. I think that, um, you know, obviously you guys are at the bleeding edge of, uh, of innovation here and, um Anytime that you can have a big breakthrough, I think, just in the structure and, again, align those incentives, this is a no-brainer for a lot of people. Where can we send people to find you on the internet or find out more about AngelList and AngelList Ventures?

Yeah. To follow me, you can go to twitter.com/avlok, A-V-L-O-K. To find out more about AngelList Ventures, you can go to angel.co/venture.

Awesome. Well, listen, this was, uh, this was a lot of fun. Please, please, please keep doing what you guys are doing. Go faster if you can.

We're working on it.

Yeah, I am, I'm really impressed, and obviously I think that, uh, the impact here is not yet quite understood. It's gonna be fun to, uh, to watch, um, over time. But, uh, we'll have to do it in the future.

Definitely. Sounds great. Thanks for having me. Take care.