20VC Why the Theory of ProRata is Often False, How Rolling Funds Impact Both Pricing and Competition & The Biggest Lessons from Working with Jack Dorsey with Avlok Kohli, CEO @ AngelList Venture

In the final episode before the Christmas break, AngelList Venture CEO Avlok Kohli joins the discussion to delve into the transformative impact of AngelList on the startup and venture capital landscape. With over 5,000 startups funded, including 47 unicorns, and $2.2 billion in assets under management, AngelList is at the forefront of innovation with the introduction of rolling funds. Kohli, who successfully built and sold two companies before joining AngelList, shares insights on customer-centricity, the importance of founders becoming investors, and the democratization of venture capital through rolling funds. The conversation also touches on the future of AngelList as a comprehensive financial platform, extending beyond fund managers and LPs to include startups, and the potential for rolling funds to scale up to the size of traditional billion-dollar funds.

• AngelList Venture has played a significant role in the funding of startups, with over 5000 startups funded, including 47 unicorns.
• They manage a large number of funds and syndicates, with substantial assets under management.
• Avlok Kohli, CEO of AngelList Venture, has a background in building and selling companies before joining AngelList.

"They have facilitated the funding of over 5000 startups, including 47 unicorns, and they're the home to 4300 funds and Syndicus with over $2.2 billion in assets under management."

This quote highlights the scale and impact of AngelList Venture in the startup ecosystem, emphasizing the number of startups funded, the presence of successful unicorns, and the assets managed.

• AngelList Venture launched rolling funds, a new and discussed funding structure.
• Avlok Kohli also launched his own rolling fund called Avlok Capital.
• Prior to joining AngelList, Avlok successfully built and sold two companies, Fastbite and Fairy, and is an angel investor in 25 companies.

"This year, Angelist Venture launched the much discussed rolling funds and Avloc recently launched his own rolling fund, Avlock Capital."

The quote explains the introduction of rolling funds by AngelList Venture and Avlok Kohli's personal involvement with the launch of his own rolling fund, Avlok Capital.

• Avlok Kohli's journey into startups was predictable, but his venture into venture capital was not.
• He grew up in various parts of the world, leading to a diverse upbringing.
• He chose engineering over medicine due to his squeamishness about blood and studied software engineering at the University of Waterloo.
• Avlok moved to San Francisco during the financial crisis and worked as an engineer in successful companies before starting his own.
• His experience at Square, especially pre-IPO, left a lasting impression and provided valuable lessons.

"I grew up in different parts of the world. My early childhood was spent in the Middle east and India, and high school and university was spent in Canada. I'm indian by background, and so the usual influences were doctor or engineer, but I get squeamish about blood, so engineering was an easy choice."

This quote provides insight into Avlok Kohli's personal background, his global upbringing, and his decision to pursue engineering, which paved the way for his career in technology and entrepreneurship.

• The most significant learning from Avlok's time at Square was the importance of keeping the customer in mind in every aspect of the business.
• Square emphasized customer focus in all activities, from public market reporting to internal planning.
• Avlok stresses the importance of internal frameworks and the practice of using the product as a customer to maintain focus on customer needs.

"The biggest learning was always keeping the customer in mind. And we did this across everything we did, and I mean everything."

The quote emphasizes the lesson of customer centricity learned at Square, which Avlok Kohli identifies as crucial for a company's success and a principle he carries forward in his career.

• Avlok learned the importance of writing and building with the customer's needs in mind.
• He advocates for frameworks that help maintain customer focus, such as Amazon's practice of writing product memos as press releases and Square's 'jobs to be done' framework.
• Avlok believes that having the team use their own product is the best way to understand customer experience and build something valuable.

"The simplest thing you can do is always write as if you're building for a customer."

This quote conveys the strategy of approaching product development from a customer's perspective to ensure that the end product meets their needs and expectations.

• Avlok recalls a time when Jack Dorsey took on dual CEO roles at Twitter and Square.
• Despite internal discontent and concerns about stock price linkage, Jack explained his decision-making process with understanding and firmness.
• Jack's approach to leadership during this time left a strong impression on Avlok, highlighting the importance of making tough decisions and expecting the team to disagree and commit.

"Look, we don't always need to agree, and that's okay."

This quote reflects Jack Dorsey's leadership philosophy, emphasizing the necessity of making decisions in the face of disagreement and the value of commitment from the team despite differing opinions.## Leadership and Decision-Making

• Leaders may face situations where they must make unpopular decisions based on their convictions and principles.
• Firm leadership involves understanding and considering all perspectives before making a decision.
• Even if a decision is contrary to the majority opinion, it can still be the right one if all opinions and perspectives have been considered.
• The key is to ensure that people feel heard and that their opinions have been taken into account.

"And it was really fascinating to watch how firm he was in his thinking and his principles, and he stood his ground and he still did it."

This quote exemplifies the importance of being steadfast in one's decision-making as a leader, even when facing opposition.

"The important piece is that you are soliciting everyone's opinion, so you're understanding all the different blind spots."

This quote highlights the necessity for leaders to seek diverse perspectives to identify potential blind spots in decision-making.

"What people really want to feel is that they've been heard that their opinion and perspectives were considered, and that with all of that, the right decision is made."

The quote emphasizes that people want their viewpoints to be considered in the decision-making process, even if the final decision does not align with their own opinions.

• Rolling funds are compared to printing presses, enabling more widespread access to venture capital.
• Before rolling funds, venture capital was limited to closed networks, but now it can be accessed more openly.
• Rolling funds allow for high-resolution fundraising, streamlining the process for venture capitalists.
• The presence of more venture capitalists in the market can lead to more innovation and more founders starting companies.
• Rolling funds have democratized the venture capital industry, making it easier for new investors to enter and for founders to receive funding.

"Similarly, rolling funds enable capital to flow to more VCs who fund the tech innovation."

This quote explains how rolling funds facilitate the flow of capital to a broader range of venture capitalists, thus fostering technological innovation.

"Now all you need is a tweet and a fund, and the network just comes to you."

The quote illustrates the ease with which venture capitalists can now raise funds, emphasizing the reduced barriers to entry in the venture capital industry due to rolling funds.

"When you have more VCs in the ecosystem, you actually do get more innovation."

The quote conveys the belief that a greater number of venture capitalists in the market correlates with an increase in innovation.

• Portfolio construction and reserve allocation are complex topics that new venture investors may not initially grasp.
• Over time, venture investors learn and adapt their strategies for portfolio construction.
• AngelList educates rolling fund managers on these concepts, including whether a reserve strategy is appropriate for them.
• Some established fund managers intentionally do not have a reserve strategy, preferring to focus on initial investments and use other methods for follow-on investments.
• The availability and strategy for prorata investments in later funding rounds can be unpredictable, leading to different approaches by fund managers.

"Some of this is actually taught over time."

This quote suggests that knowledge of portfolio construction and reserve allocation is acquired through experience in venture investing.

"We as AngelList, we are actually starting to educate rolling fund managers."

The quote indicates that AngelList plays a role in educating new fund managers on best practices in portfolio management.

"You can create a spreadsheet and this beautiful model of how prorata and reserves and everything's going to work... But in reality... people get squeezed out."

This quote points out the discrepancy between theoretical investment models and the actual dynamics of later-stage funding rounds.

• Venture capitalists have different strategies regarding ownership targets on initial investments.
• Some investors prefer to take a significant ownership stake with their first check, while others are content with a smaller share.
• The strategy an investor chooses depends on their goals and the stage of the company they are investing in.
• Success in venture capital is not guaranteed by any single strategy; it can depend on various factors, including deal flow, access to top companies, and investment timing.

"I've seen folks write 25k checks, return many, many times their fund, because the company just does really, really well."

This quote illustrates that even small initial investments can yield significant returns if invested in a highly successful company.

"Can you get into the best companies? Can you have the deal flow and the access into the best companies at the right time?"

The quote raises the question of whether an investor can secure opportunities to invest in the most promising companies, which is a critical factor in venture capital success.## Risk Perception in Hindsight

• Hindsight often leads investors to wish they had invested more in successful ventures.
• Perception of risk at the time of investment can differ significantly from the view looking back.
• It's challenging to predict which companies will succeed at early stages like pre-seed and seed.

"I should have written a larger check. That's what I'm saying to myself. And I'm like, wait a second. At that moment in time with that information, I thought the founder was great, but it was still risky."

This quote reflects the common retrospective realization that a larger investment could have been more profitable, tempered by the acknowledgment of the risk involved at the time of the initial investment decision.

• There are common sayings in the investment community about the nature of investing at different stages.
• Growth investors are seen as more calculated, while pre-stage investors are considered gamblers.
• The sayings reflect the varying attitudes and perceived risk profiles associated with different investment stages.

"In your winners, you will always have wanted that larger check. And then the other one is anyone that invests past your stage, they're growth investors. And anyone that invests before you, total gamblers."

The quote captures two prevalent sentiments among investors: the desire to have invested more in successful ventures and the characterization of investors based on the stage at which they invest.

• Rolling funds are changing the landscape of early-stage investing.
• Concerns exist about how rolling funds might affect valuation and pricing due to an influx of capital.
• The increase in available capital is matched by a growing number of high-quality startups.

"Software markets are much larger than anyone thought. The billion dollar companies are now $10 billion companies."

This quote suggests that the growth potential for startups has been underestimated, justifying higher entry valuations and, consequently, an impact on pricing.

• Increased competition among VCs is beneficial for founders as they have more options.
• VCs are adjusting their strategies, choosing to invest earlier or later to differentiate themselves.
• The rise of rolling funds and solo capitalists is reshaping the investment landscape.

"Now, for VCs, what happens, you now have to go earlier, and if you are investing at seed, you'd want to find a way to invest at pre-seed."

The quote explains how VCs are responding to increased competition by shifting their investment focus to earlier stages in a startup's lifecycle.

• Rolling funds allow continuous capital inflow and are flexible for both managers and limited partners (LPs).
• LPs can commit to rolling funds quarterly, and their carry is calculated based on the duration of their commitment.
• Rolling funds differ from traditional funds in that new LPs only get exposure to investments made after they join.

"The rolling fund can continue to accept new capital from new LPs, while being fair to all of your prior LPs."

This quote highlights the unique structure of rolling funds, which allows for fairness and flexibility in accepting new investments and LPs.

• Rolling funds provide a modern approach to venture funding, utilizing software to enhance flexibility and access.
• They offer advantages like general solicitation and the ability to scale commitments over time.
• Rolling funds can simulate traditional fund structures but are often preferred for their inherent flexibility.

"You can actually create a traditional fund structure out of a rolling fund by adding constraints and parameters, and you can simulate a traditional fund, but most people choose not to do that."

The quote explains how rolling funds can be adapted to resemble traditional funds but are generally chosen for the benefits that come with their flexibility and modern features.

• Institutional investors are beginning to commit to rolling funds.
• The adoption rate varies between institutions that are active in venture capital and those that are not.
• The tipping point for widespread institutional investment in rolling funds is likely tied to familiarity and due diligence processes.

"Short answer is yes, we're already starting to see this, and it really is a question of which institutions are actively investing in venture and which ones sporadically invest in venture."

This quote confirms that institutional investment in rolling funds is occurring and suggests that the trend will continue as institutions become more familiar with the structure.## Rolling Funds and Institutional Investment

• Institutions take time to understand the structure of rolling funds.
• Institutions are investing in rolling funds for exposure to the investments of General Partners (GPs).
• GPs have the leverage in raising rolling funds and bringing Limited Partners (LPs) into the fund.

"The institution invests in venture overall, the more time it takes them to understand the new structure. And we're actually working with a lot of them right now in order to walk them through the structure itself."

This quote explains that there is a learning curve for institutions when it comes to understanding rolling funds, and efforts are being made to educate them on this new investment structure.

• LPs should view their investment in a rolling fund as their own pool of capital managed by the GP.
• The pool of capital is invested over a set term, and distributions are made from this pool based on investment performance.
• AngelList is planning to launch a section on their website to explain distributions and capital terms to LPs.

"And that now, as any distributions are coming in, there's a liquidity event from a startup, it is coming into that pool of capital, and then, based on whatever the terms are, either get your distribution from that pool of capital that's calculated across the investments made in that pool of capital for that time."

The quote clarifies how distributions work for LPs in rolling funds, emphasizing that each LP's capital is pooled for investments and any returns are distributed from this pool.

• There is no limit to the capital that can be closed into a rolling fund.
• Fund size is determined by the fund manager's strategy.
• Some rolling funds may cap capital to participate in venture rounds rather than lead them.
• Expectations are set for the emergence of rolling funds equivalent to a billion-dollar fund.

"And there really is no limit to the amount of capital that you can close into a rolling fund."

This quote emphasizes the scalability of rolling funds, indicating that they can accommodate an unlimited amount of capital.

• AngelList aims to be the largest financial platform in venture, serving fund managers, LPs, and eventually startups.
• AngelList provides a full stack of services necessary for rolling funds and other financial products.
• Owning the full stack, like Apple, allows AngelList to innovate and offer unique solutions like rolling funds.

"Think about Angelis is we're going to be the largest financial platform in venture, and today our customers are fund managers and lps who invest in funds. And tomorrow we're also going to be including the startups."

The quote outlines AngelList's vision to expand its role in the venture ecosystem, ultimately encompassing fund managers, LPs, and startups.

• Avlok's favorite book is "Meditations" because it helps him stay present.
• The hardest part of his role is prioritizing great ideas over merely good ones.
• Avlok's biggest strength is determination, and his biggest weakness is staying present.
• He advocates for more founders becoming investors due to empathy and networking benefits.
• Avlok's goal for rolling funds is to support the next cohort of great founders in their early funding rounds.
• Jack Dorsey is a personal inspiration for success.
• Main takeaway from working with Naval is the importance of delivering extreme value to customers.
• Avlok's recent investment in Settle was driven by the founder's background and the company's product-market fit.

"I have a tendency to get consumed by work, which takes me out of the present. And the book taught me a few concepts and frameworks to stay in the present."

The quote reveals Avlok's personal challenge of staying present and how the book "Meditations" has helped him with practical concepts and frameworks.

• Avlok wishes to see more innovation in the venture industry, particularly with founders investing.
• The biggest benefit of founders investing is the empathy they bring and the inspiration they provide to potential founders.
• Success in the venture industry is associated with individuals like Jack Dorsey, who balance significant achievements with presence.
• Learning from Naval has highlighted the critical nature of creating valuable products for customers.

"Founders becoming investors."

This quote encapsulates Avlok's desire to see a shift in the venture industry where founders also take on the role of investors, bringing unique insights and networks to the table.

• Avlok values products like Hello Sign and Affinity for their focus on user experience and efficiency.
• He acknowledges the importance of communication tools like Zoom for building relationships in business.
• Avlok appreciates the integration of services that enable efficient management and networking within the venture capital industry.

"The importance of building a product that delivers extreme value to customers and constantly, constantly thinking about that."

This quote highlights the fundamental principle Avlok has learned from Naval, which is the relentless focus on delivering exceptional value to customers through product development.