AngelList Venture’s Avlok Kohli on rolling funds and the busy state of VC

Few companies have deeper insights into the day-by-day state of venture capital than AngelList. According to the company’s data, over 51% of the “top tier U.S. VC deals” involve their platform and tools, giving them a remarkably expansive view of everything going on.

AngelList Venture CEO Avlok Kohli joined us at TechCrunch Early Stage to discuss topics ranging from the state of the market to his thoughts on why there’s suddenly so much money flooding into VC (sending valuations to the sky), and where AngelList could go from here. We started with a presentation wrapping together everything Kohli is seeing in the industry right now, followed up by a largely audience-driven Q&A.

I’ve embedded the full interview at the bottom of this post, but here are some highlights:

AngelList’s growing focus on founders

Kohli says he never expected to end up in the venture industry, but the potential for AngelList to grow into something entirely new drew him in:

I definitely did not think of venture as the industry I would be in. What actually attracted me to it wasn’t necessarily venture, it was actually the makings of a financial platform and being able to build tools and products that eventually extend to founders. When I stepped in, a lot of our tools were built for GPs and LPs — really the funder side — and how you’d reduce the friction and get more people coming into venture. Really leaning into the solo capitalist movement, and having more LPs coming in.

Then there’s also this opportunity to start building founder products, which obviously is near and dear to my heart. I do think there are a lot of things we can do to improve not just the fundraising experience, but also the downstream products that they can use. All the way from banking, to spend management, to cap tables, the whole nine yards. I think there’s so much we can do there. (Timestamp: 10:11)

When I later asked him to elaborate on what those founder-focused products might look like, Kohli expanded:

I think the one part that’s never made sense to me is … when a founder goes to incorporate a company they have to stitch together all these service providers. Today you have to find something for legal, and then you have to also figure out all of these terms around, you know, number of authorized shares and all that. Why? It doesn’t make any sense. You don’t need to.

So what we’re going to do is we’re actually going to create a very simple experience where you tap a button and you get a venture-backable company, and we’ll bundle everything that you need to run a company. You can think of incorporation, you can think of fundraising tools, of course, launch roll-up vehicles which allow you to raise from many small checks and it doesn’t crowd your cap table — just a single line on your cap table.

We’re looking at a lot more innovations like that, to create a seamless process for a founder to go from incorporation, to raising a bit of capital, to raising more capital, into how they actually manage the capital. So the suite of tools that we’re building are all around that. How do they raise the capital, manage the capital, and then how they manage the owners and the ownership ledger. … We think there’s a lot more that can be done around that that’s much better all in one place versus all these disparate tools. (Timestamp: 23:10)

Starting a rolling fund? Keep your partners updated

We spent a solid few minutes in the back half of the interview (starting at around 27:10) talking about rolling funds — an investment concept that AngelList introduced last year that flips a bunch of traditional fund practices on their head to simplify and accelerate the process.

Kohli gives an outstanding overview of what a rolling fund is and how it differs from more traditional funds:

For the audience who doesn’t know the details of how traditional funds work: Basically, when you go to raise money from investors, [limited partners], to invest in startups, you go through this fundraise process. It’s very similar to what you do as a startup, except you’re going to a different set of investors, and you go to raise a fund.

When you do a traditional fund, you basically have to raise all of it up front. Let’s just say you’re raising $10 million, or $20 million … you have to first go find an anchor. Someone who’s going to put 40%-50% of the fund in. … Once you have an anchor, it creates momentum, and then you can close the rest of the investors in your venture fund. …

Sometimes it can take 12 to 18 months just to get that going. … The issue there is that there aren’t that many anchor investors when it comes to traditional venture funds. And so you’re basically going to the same group of people and pool of capital.

So we looked at that, and we asked “Why does it have to be that way? Why do you have to raise a whole bunch of capital upfront, and then shut down the fund for capital and then you get into the deployment phase? Why couldn’t you just leave the fund open?” If you leave the fund open, you can just continue taking in checks and you continue investing.

The reason you can’t leave it open is because of one limitation with a traditional fund. The limitation is that when you go to take in the next check, that [limited partner] gets exposure to all the investments in that fund. There’s a bit of a fairness issue there.

With the rolling fund, what we did was we saw there was a better way to create an always-open fund that never shuts down for capital. Every LP that comes in just doesn’t get exposure to past investments. As long as you do that, then this can actually work, and the economics of everything works.

That’s what a rolling fund is: It’s an always-open venture fund, where you can just keep accepting new capital. It just keeps growing as you make investments and your portfolio is doing well. (Timestamp: 27:28)

I was curious: With a bit over a year of rolling fund data to glean information from, what were some of the most successful rolling funds doing right? Turns out the answer is simple: Keep those that invested in the fund informed.

The interesting thing is just … the GPs — the [general partners] who are actually running the funds — conducting quarterly calls, it turns out, is actually working very well. You’re just walking the [limited partners] through what is happening in the portfolio, and walking through how you’re thinking about investing. It turns out that actually gets people more comfortable.

And the cool thing is that they can just increase their check size, because the fund is not shut down! And if you can see that the portfolio is already doing well, of course an LP is going to want to invest more capital into the fund, because they believe that you are going to be a great steward of their capital. So we’re seeing that as being something that’s a very, very, very successful way to raise capital. (Timestamp: 30:21)

His advice for founders

Kohli is a repeat founder himself, having sold multiple companies prior to joining as AngelList Venture’s CEO. As our interview came to an end, I asked for his advice for anyone out there raising a round right now. In short? Founders can — and should — be picky right now.

It’s a founder’s market. For sure, it is. I joke around that when I raised for my first company, there were 20 people on the list [of potential investors.] I think I have that spreadsheet somewhere right now. Today, you probably have 1,000 people on that list.

I would highly recommend thinking about constructing the right round, bringing in the right investors. Think about the [ratio of] check size to size of fund, and check size to helpfulness. Be clear about what your expectations are of the investors, because you’re about to get into a likely multidecade-long journey building something you really want to see in the world. Take your time and pick who the investors are and really do your due diligence. (Timestamp: 38:50)

Find the entire transcript here.