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An increasing number of wealthy tech execs, like Facebook alum Dave Morin and Gumroad CEO Sahil Lavingia, are starting so-called "rolling funds," a new type of venture fund pioneered by AngelList that allows investors to "subscribe" on a quarterly basis.
Some are attracted to the user-friendliness of the model's style and ability to publicly solicit investors, which might otherwise be illegal.
Others see it as way to increase accountability for venture capital partners, who often make money on management fees whether the startups they fund succeed or not.
By having to please investors on a quarter-by-quarter basis so they continue to contribute, rolling funds puts more pressure on fund operators.
Still others see rolling funds as a way to bring more diversity into the notorious homogeneity of Silicon Valley.
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More and more wealthy tech execs in Silicon Valley are starting or participating in so called "rolling funds." That's a new type of fund introduced by AngelList that allows investors to subscribe on a quarterly basis, with the option to cancel and not contribute any more to it if they're dissatisfied.
News leaked in July that early Facebook employee Dave Morin was starting a rolling fund called Offline Ventures. Gumroad CEO Sahil Lavingia announced in August he was starting a rolling fund while keeping his day job. And Ryan Hoover of Product Hunt told Business Insider he was "looking seriously" at starting a rolling fund next year.
They're joined by a small flood of tech figures starting their own rolling funds, including venture capitalist Cindy Bi, ex-Runkeeper CEO Jason Jacobs, and venture capitalist Tyler Tringas, among others.
Why tech figures are attracted to these funds varies, but a common thread running through their motivations is a desire to bypass traditional venture capital.
Easy to use, open to more investors
The user-friendliness of AngelList's platform drew Lavingia to the rolling fund model.
"Visit a page, enter subscription amount, verify identity and setup funding source," Lavingia told Business Insider, describing the process of signing up as a new fund investor, known as limited partners (LPs). "That's it! Self-serve."
AngelList handles the regulatory busywork for a fee for the funds that use it, but there are other rolling funds operating independently of AngelList willing to take on that burden themselves. For instance, Tringas said his Earnest Capital rolling fund is independent.
The cost of investing in a rolling fund can be set low, opening up the fund to a broader pool of investors. For instance, Lavingia set his minimum to join the fund at $6,250 a quarter and he raised $5 million in about a month.
It helped that he was able to take the unusual step of advertising his fund to his sizable Twitter following, something that might otherwise be illegal under SEC rules. That's because rolling funds operate under SEC Rule 506(c). Lavingia can publicize his fund provided he only takes on "accredited investors" which are people or business entities with high enough incomes or net worth that they won't endure serious financial damage if their rolling-fund investment doesn't work out.
"It's very much crowdfunding for techies with capital," a fund manager who had explored starting a rolling fund told Business Insider.
Another person involved in a prominent rolling fund said their past as a partner at a major VC firm left them with the belief that partners often collect fees and become rich regardless of their performance.
"I find it hard to believe that you can be connected to the entrepreneurial heartbeat collecting that many fees," this person told Business Insider, requesting anonymity to avoid drawing attention to their fund. "I personally feel that the closer you are to what it feels like to be an entrepreneur, the more hungry you are and the better you are."
The risk, though, is that the rolling fund manager may be forced into perpetually raising funds.
"The argument you would make against this is that there's potentially more work for us if we can't establish a consistent long-term LP base," the former VC partner said. And rolling fund managers may not know exactly how much capital they will have to invest as they scout out startups to back.
"Also you could argue that it creates more short-term thinking by our LPs, who are looking not at a 10 year horizon ... they're thinking about a much shorter-term horizon," this person said.
Most traditional VC funds operate on a 10-year cycle where they raise a fund then find startups to invest in and the LPs don't expect their returns until the end.
But the added pressure to perform is part of the appeal for both the LP investor and the rolling fund manager.
"You as an LP can cancel any quarter," the former VC partner said, meaning the LP doesn't have to continue paying in every quarter. "So it actually forces us to work harder. To communicate with our LPs, prove our track record."
More possibilities for diversity
To Kate Brodock and Allyson Kapin, founders of the The W Fund, a rolling fund that specifically looks to backs female founders and other underrepresented people in tech, the traditional VC model is well past due for an overhaul.
"The next Mark Zuckerberg is not going to be a white man," Brodock told Business Insider. "It's going to be a Black founder or a Latinx founder."
The VC world is known for the difficulties woman and people of color have when raising funds or becoming VC general partners [GPs]. A 2019 study found that just 1% of venture-capital-backed companies between 2014 and 2019 were founded by Black people, and another study from All Raise found that only 12% of U.S. venture firms and angel groups had women in "decision-making roles at the investment level" as of August 2019.
The speedy nature of rolling funds appealed to Brodock and Kapin because it allowed them to leapfrog past a protracted fundraising period— and quickly provide evidence against the extra scrutiny they expected to face as women.
"Because we can close every single quarter, we can be making investments while we continue to fundraise," Kapin said."We can turn around and show those investments, both to our LPs and to potential LPs."
Lavingia echoed those sentiments to Business Insider, saying he hoped rolling funds could lead to "More diverse LPs, more diverse GPs and more diverse founders eventually as well."
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London-based fintech unicorn Revolut tripled its revenues to £162.7 million ($213.1 million) in 2019 but also tripled its losses, compared with 2018.
The challenger bank saw rapid customer growth with 7 million new users added in 2019 and an additional 3 million in 2020 so far, taking the company to 13 million users overall.
"Despite the current economic challenges, we remain focused on our goal of moving towards profitability," Revolut CEO and cofounder Nik Storonsky said.
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London fintech challenger bank Revolut tripled its revenues to £162.7 million ($213.1 million) in 2019 but also saw losses triple to £107.4 million ($140.6 million), it said in its annual report published Tuesday.
The unicorn startup, one of Europe's most valuable startups, grew customer numbers from 3.5 million to 10 million during 2019. As of the end of July, it has 13 million users, it said. CEO Nik Storonsky has set a goal of reaching 100 million customers in the next five years and breaking into the North American and Pacific markets.
The startup allows users to spend money worldwide in 150 currencies at a real-time exchange rate, with no fees, through a debit card. It generates 99% of its revenues in the UK.
User deposits hit £2.2 billion ($2.88 billion) in 2019, up from £1 billion ($1.31 billion) at the end of 2018, it said.
Expenses at the company increased nearly fourfold to £92 million ($120.5 million), driven by increased staffing costs. The startup grew from 633 employees at the end of 2018 to 2,261 employees at the end of 2019.
In February, the company raised $500 million in Series D funding led by Technology Crossover Ventures (TCV). This round was extended in June to include an $80 million investment from TSG Consumer Partners, bringing the round's total investment to $580 million. Founded in 2015, Revolut is one of Europe's most valuable startups, with a $5.5 billion valuation from $917 million in total funding.
Like fellow challenger banks Monzo and Starling Bank, the company was hit by the coronavirus pandemic, but doesn't see the uncertainty hurting its business long-term.
"Due to COVID-19, Revolut experienced a decline in interchange revenue driven by fewer transactions and a high portion of low fee domestic transactions," the company said in its report. "As a result, while growth has slowed because of the pandemic, Revolut has, and will continue to have, a comfortable level of headroom above its regulatory capital and liquidity requirements."
The company will plough on with its international expansion plans through the rest of 2020 and beyond.
"While we still have some way to go, we are pleased with our progress in 2019," Revolut CEO and cofounder Nik Storonsky said. "We tripled our revenues, increased retail customers from 3.5 million to 10 million, increased daily active customers by 231% and the number of paying customers grew by 139%.
"Since the beginning of the year, we have focused on further developing innovative products for our customers, continuing to introduce Revolut to new markets, and increasing our revenue streams across the business, while reducing our operational costs," he added. "Despite the current economic challenges, we remain focused on our goal of moving towards profitability."SEE ALSO: UK fintech startup Starling Bank triples customer deposits in 9 months and plans to break even by 2021 despite COVID-19 pandemic
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