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Upekkha, which runs a fully remote SaaS (software-as-a-service) startup accelerator, is launching a “rolling fund" in the coming quarter. This is a concept pioneered by AngelList in the US this year as an alternative to the traditional venture capital (VC) model.

Upekkha is the first one from India to set up a rolling fund on AngelList. It has a subscription plan, where limited partners (LPs) make quarterly investments, rather than a lump sum. Think of it as the VC version of a systematic investment plan (SIP) or an equated monthly instalment.

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“Normally a VC takes six to 18 months to raise a fund, which is invested in the next three years. Then it raises another large fund. The challenge is to get commitments for the three-year investment amount upfront," says Prasanna Krishnamoorthy, partner and co-founder, Upekkha.

“The subscription model lets a fund get going with $500,000 to $1 million per quarter. Instead of relying on a commitment of $100,000-500,000 per investor, you could take in someone who commits $10,000 per quarter for a year."

Investor pool

Upekkha plans to invest $550,000 per quarter in SaaS startups targeting global markets with their headquarters in the US. The investors would mostly be SaaS founders themselves, who have exited their startups and are now based in the US. There would also be senior personnel from big SaaS firms. Thus, it broadens the investor pool by lowering the ticket size and tapping a large SaaS community.

“Apart from the SIP mode of investment, rolling funds that focus on a specific segment, as Upekkha is doing with B2B (business-to-business) SaaS, are attractive to me because of their filtering criteria. I don’t need to hunt and invest in those startups as an angel investor," says Vijay Rayapati, founder of Bengaluru startup Minjar Cloud Solutions, which was acquired by San Jose-based Nutanix in 2018. Now a GM at Nutanix, Rayapati intends to join the first batch of LPs for Upekkha’s rolling fund.

The challenge with an angel network model, says Rayapati, is that “you have to first find a startup that you like and then find like-minded people who are interested in that segment. So, if I want to invest in Indian SaaS startups focused on long-term sustainability, which is Upekkha’s philosophy, it makes sense for me to go through them. And the other advantage is that I can invest $10,000 to $50,000 a quarter instead of putting up something like $200,000 at one shot".

The lock-in period is 10 years, just like in other VC funds. The difference is that LPs invest their money over four to eight quarters, instead of committing the whole amount at the outset. This also enables them to reassess their annual commitment in case of a black swan event like covid.

One limitation with raising funds every quarter, instead of a larger fund for a three-year period, is that it leaves little scope for participating in follow-on rounds of startups that enter a growth stage and require more capital or encounter a blip and need a runway extension.

AngelList dusted out a US Securities and Exchange Commission (SEC) regulation to enable the investment vehicle. It handles the regulatory aspects of managing the rolling fund, for a fee. The SEC stipulates the maximum number of subscribers who should all be accredited as investors in the US. One of its regulations allows rolling fund managers to canvass openly for investment, provided they ensure their investors are accredited. The provision enables a continuous fundraise quarter after quarter. On the other hand, traditional VCs can only go public after receiving the full commitment for a fund.

While the rolling fund vehicle helps Upekkha get going faster than it could have as a traditional VC, potentially creating access for smaller LPs as well, that’s only one side of its funding innovation. As an accelerator, its thesis has been oriented towards SaaS startups aiming for revenue-led sustainable growth instead of chasing mega-funding and valuations.

Sustainable model

Four of the first 10 startups to join Upekkha, founded in 2017 in Delaware, have crossed $1 million in annual recurring revenue (ARR), and 18 of the first 20 startups are cash-flow positive, says Krishnamoorthy. It now extends the same philosophy to its rolling fund which follows a model pioneered by Indie.vc. This model supports founders who are more interested in building a profitable business than going after larger and larger venture capital rounds.

The Indie.vc model gives such founders the option to buy back their startup’s equity from the VC once they hit a healthy ARR, usually after about two years. Then they can chart their own course instead of coming under pressure from the VC to scale up crazily for a mega exit. Upekkha similarly will have a clause to enable a buyback of equity with revenue, giving the fund a modest 3x return on investment.

“Globally, Atlassian or Mailchimp did not need a lot of venture capital to hit hundreds of millions of dollars in revenue. In India, we have seen SaaS startups like Freshworks, Postman and WhatFix becoming very large. But there’s another set like Minjar, FusionCharts and Wingify which became profitable without raising a lot of money," points out Krishnamoorthy.

Such a model works well for Upekkha’s focus segment because SaaS startups from India tend to become profitable quickly if their product is right.

US-based TinySeed.com, which calls itself a startup accelerator for bootstrappers, is another proponent of this thesis.

“The main difference here is optionality," says co-founder Einar Vollset. “We invest in such a way that a life-changing outcome for the founder—say getting to $10 million ARR and selling the company for $65 million—is something the founders, us and our investors would celebrate. That’s not necessarily true in more traditional VCs. Typically, there the goal is to become worth $10 billion or above, or it’s considered a failure, so the companies are geared towards the kind of growth you need to achieve those kinds of outcomes. Of course, if you run that hot, then the chances that you end up imploding also goes up."

There’s some evidence to back the thesis. TinySeed has been investing for less than two years, “but already we are seeing companies that have crossed $2 million ARR". It is currently raising a fund dedicated to Asia, expected to launch next year.

“The founder should think long and hard about what kind of outcomes they would be happy with and what the risk/reward functions are for various paths," says Vollset. “If you go the traditional VC route, then your chances of becoming a household name are definitely there. However, there’s also the risk that a ‘mid-level’ success is much less likely. Some VCs will pressure you to take a 1/100 chance of reaching a $10 billion exit over a 1/2 chance of reaching a $100 million exit. Are those the same trade-offs that you would make?"

Malavika Velayanikal is a Consulting Editor with Mint. She tweets @vmalu

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