How can small investors make money with early stage blockchain investments?
As I read Cointelegraph's Blockchain Venture Capital Report, the following caught my eye:
"Dedicated blockchain VC funds have significantly outperformed the market and regular VC funds over the past seven years. While traditional funds have their Rate of Return in the low double digits, several block-chain venture capital funds have managed to match those returns 10 times over including Blockchain Capital and CoinFund. As the market matures, those returns are likely to taper off, however, we are still very early. Blockchain venture capital amounts to less than 1% of the entire VC market."
Investing in blockchains is bringing in massive returns. Most of the time, however, these investments are only available to a select few due to regulatory barriers that prevent retail investors from accessing them. They are typically only accessible to what are defined as qualified investors, that is, investors whose investments total at least USD 5 million.
As an accredited investor, I was unable to get access to early stage venture funds after contacting 15 funds. There is no other way to access that deal flow. This is where AngelList Ventures' rolling fund comes in!! It surprised me to discover this option of rolling funds that gave me access to early stage venture investments in Blockchain companies. Through this, smaller investors can access deal flows they might not otherwise have access to. Those looking outside in can take advantage of this option to access early stage investments in Blockchain. Like me, you might have thought it was impossible. You can do it by investing in rolling blockchain funds that put their money into highly promising blockchain companies that you generally wouldn't be able to access.
In this post you can learn about another method to build your blockchain fortune. Let's look at what rolling funds are and how they work.
What is a rolling fund?
It is a series of quarterly funds offered one after another. This allows fund managers to accept money more frequently than just at the beginning of the fund after a lengthy fundraising campaign. Furthermore, the fund managers can invest the capital in quality deals right away rather than worrying about fundraising. The fund's subscribers are known as Limited Partners (LPs). A quarter's worth of contributions collected from LPs are pooled together to allow the fund manager to decide how to invest the money based on the qualified deal flow.
Each quarter, I can subscribe to these rolling funds. The subscription, if not invested, rolls over to the next quarterly fund. In reality, I am investing in a series of multiple quarterly funds. The subscription period, as defined by the fund managers, is the minimum number of quarters to which I am required to subscribe in advance. Subscription period may cover a single quarter or several quarters.
Unlike traditional venture capital funds, I do not need to make a large initial investment. The investment is made for just a quarter. I participate in investments that fund managers make during the quarter. Subscription to a future quarterly fund can also be made in advance. By doing so, I am able to decide how much capital I want to invest over a period of time and manage my exposure.
After subscribing, can I change my mind? When a subscription period spans multiple quarters, cancellations or decreases are not allowed without meeting those commitments.
How do I subscribe?
Subscriptions to funds must be funded by the deadline date. Typically, funds are transferred every quarter. Wire transfers or ACH transfers can be used to transfer funds. I personally would not like to put an ACH in place and permit them to withdraw funds without my participation. A wire transfer, in which I control the push of funds, will be more expensive. Which one will win: Savings or convenience? Oh, decisions, decisions, decisions. Using Alto IRA allows me to invest in these early stage venture funds with retirement savings. Investing in a venture fund is a long term proposition, because the distribution is done only when there is an exit or an IPO of an investment. So, it makes sense to use funds that cannot be released for some time.
Once I subscribe, what services are available?
Dashboard giving information on portfolio and other insights is available with real time reporting. Capital calls (request for funds from LPs when the need arises) and distributions get handled online giving for a more self service model with its associated flexibility. Schedule K-1 tax document for each quarterly fund to which they are subscribed are provided.
What about distributions?
My ownership in a quarterly fund is pro-rated based on my contribution relative to total investment by other LPs. I get paid only from the distributions of the quarterly funds in which I have contributed. As the fund exits the investments made with my contributions, I'll receive the returns. As a result, my risk and return are highly dependent on specific quarters and not on the overall investments of the fund. My risk is not spread across multiple investments. If a VC fund's return on investment looks like below, it would be wise to spread my investment across multiple early stage companies.
Instead of investing the same amount in one quarter, I should spread out my risk exposure over multiple quarters.
What are my costs?
Management fee - Typically 2%
Carried interest - Typically 20%. Carried interest is a portion of the profits that the fund managers keep for their services to find, evaluate, and invest in deals. The carried interest paid is based on the subscription period. The money will be paid to the fund managers only after I have received my full subscription amount.
AngelList admin fee: 0.15%
A100x is one rolling fund option that I see which invests in early-stage companies utilizing blockchain & artificial intelligence.
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