Managing a Rolling Fund isn’t all that different from operating a business. You provide a service (access to great deals) to customers (your investors) and charge money for it (with management fees and carried interest).
And just like running any other business, you need to budget in order to manage your money—and your LPs’ money—responsibly.
I’ve spent my career building financial models for startups. When I launched my Rolling Fund on AngelList, I created a budget to help forecast revenues and expenses for managing it. Here are some best practices I learned along the way.
Learn the Typical Rolling Fund Expenses
AngelList does most of the administrative legwork related to setting up and running a fund, including entity registration, regulatory filings, banking services, KYC checks, distribution processes, financial reporting, legal agreements, capital calls, capital deployment, tax reporting, record keeping, and more. For 10 years of those services, AngelList charges 2% + $25k of each quarterly fund size.
These services might otherwise cost fund managers (also known as general partners or “GPs”) anywhere between $200k and $400k over the life of the fund.
There are often additional expenses outside of these services that fall to the management company that operates the fund. AngelList can assist fund managers in the formation of their management company.
The costs covered by the management company range from several thousand to tens of thousands of dollars a year, depending on the complexity of the management company and its operations. GPs often cover these costs through management fees charged to the fund. I budget for a range of expenses related to operating my fund, including:
- Annual LLC filings
For many funds, the biggest expense item is salaries and wages for employees and contractors. Your budget for salaries and wages can vary widely depending on the size of the fund and your strategy. Funds managed on AngelList can operate without hiring a large support staff, and many Rollings Funds choose to run fairly lean operations.
Insurance costs vary depending on the size of your fund. For funds with less than $20M, a VCAP (venture capital asset protection) policy of $1M is typically sufficient. Premiums for this type of policy usually start at around $10k per year but vary based on the needs and investment strategies of the fund. Depending on the fund’s size and strategy, some fund managers decide that the cost of insurance isn’t worth the extra protection.
Spending on travel, marketing, software (e.g., email, storage, website, productivity tools, community tools) is largely discretionary and will vary based on the size and strategy of the fund. I talk to other managers in similar situations to help benchmark and budget for these types of expenses.
Budget by Scenario
Since the size of the fund may vary from quarter to quarter depending on how many investors have joined, renewed, or left (and at what subscription levels), budgeting for a Rolling Fund requires some careful planning to make sure revenues and expenses align.
The amount of capital called directly impacts the revenue of the management company and the amount of cash available to pay the forecasted expenses. Accounting, taxes, and legal services can all fluctuate based on the size of your fund. Expenses for staff, contractors, marketing, and travel all vary depending on the size of your fund and its related operational strategy.
For this reason, I try to budget according to a set of ranges and scenarios. This helps me think critically about how I operate my fund. Instead of focusing on fixed outcomes, I use a quarterly budget process to answer questions and evaluate scenarios.
Instead of focusing on “what should I budget for this expense?,” I ask the question “what is the potential range for this expense given the potential size of the fund and our strategy?” I encourage GPs to structure their inputs and outputs in their budget so they can think about how the fund and budget changes based on different scenarios.
The expense budget I use for Possibilian breaks down expenses into fixed and variable expenses. Fixed expenses are largely independent of the fund size, whereas variable expenses are directly tied to contributed capital and the fund’s strategy. For variable expenses, the key driver is the forecast of upcoming capital calls. Each quarter, my partners and I re-evaluate projected expenses based on the capital due to be called by the fund in that and subsequent quarters.
Understand Your Incoming Cash Flow
One of the most common mistakes I see new GPs make is failing to understand their incoming cash flow. The cash flow is determined by the management fees, and the management fees change quarter to quarter depending on the size of the fund.
It’s common for LPs to pay a management fee of around 2% of committed capital per year to a fund’s GPs. These fees are generally paid over the first 10 years of a fund’s life and are sometimes payable in advance over the first year or two (when most of the legwork involved in running the fund takes place). The GP subtracts these management fees and additional operational fees from the total contributed capital to determine how much investable capital they have on hand.
The Rolling Fund structure necessitates a different approach. Management fees are set as a percentage of called capital, and all of a quarterly fund’s capital is called upfront. AngelList then distributes management fees to the fund manager over the quarterly fund’s management fee schedule. Similarly, AngelList charges their administrative fee upfront.
As a fund is getting started, its incoming cash flow typically will start small and grow as contributed capital grows. As GPs grow their LP base and committed capital, they’ll have more cash to cover overhead expenses or reinvest in the fund. Many GPs will choose to reduce or forgo a salary to reinvest a significant portion of management fees in the fund, further aligning their incentives with LPs and increasing their investments into the portfolio.
Build Your Own Rolling Fund Budget
My Rolling Fund budget template takes into account a wide range of the factors discussed, including new committed capital by quarter, called capital, management fees, GP commitment, fund administrative fees, and operating expenses. These help forecast the fund’s capital, investments, revenues, and expenses for the management company.
To learn how to use my budget template, visit my website.
You can download my budget template using the following link:
Questions about how to use the template? Contact me anytime: email@example.com