Todd Ehrlich is the Co-Founder and CEO, of Rule 1 Ventures, a studio based out of Atlanta, Georgia. Rule 1 Ventures is a medium-to-large studio, founded in January 2021, employs about 60 people, and has eight portfolio companies; and about seven new companies will be funded within the next twelve months.

Raising money for a studio is definitely different than raising money for an individual startup; it’s more complex. It was a big transition for me. We officially began our first raise three months after starting in March 2021. At the end of March 2021, that was when we did our first close for something close to $3 million. Initially, we intended to raise $10 million, but we realized that to do what we wanted, it’s got to be $25 million. Now we’ve extended again because we’ve got the 25 million committed, and we have about 40 plus in what I would call a pool of potentially committed investors coming in. We expect to finish up around 35-40 million. 

When you start fundraising, you want to have your structure defined. Any ambiguity regarding how your fund’s structure will operate in relation to the studio and the general partnership needs to be defined. If it’s not, you’ll create confusion in the eyes of your investors.

Evergreen (Open-ended) versus a Closed-end fund

When we started, we saw hundreds of different studios and met dozens of them, mainly through GSSN. (Thank you guys very much!). We noticed that there was no rhyme or reason for anybody doing anything at the surface level. We figured out that if you start classifying everybody, they fall into categories based on where their capital comes from. Having been the guy coming up with the idea, forming the company, raising money, and then building the companies, I knew it could take longer to build companies than the traditional venture route allowed for, and that is why we chose the evergreen model after a lot of modeling and research. 

The traditional venture route is a closed-end, ten-year fund, whereas we chose an Evergreen Fund, which has an unlimited life. Therefore, there’s no time torsion put on the portfolio companies to grow at a rate they can’t sustain organically. Instead of that top-line growth performance, we focus on profitability and managing burn. 

If you can build a studio of ten profitable companies, you can make a ridiculous amount of money. I’m not trying to compete against venture capital; they look at us as competitors because we get the deals before they get to them, and then we keep them for ourselves, but these are really two different asset classes. We don’t want their money because we don’t want to ride that rollercoaster of investment. The Evergreen Fund allows you to de-risk some of the early investment ups and downs by not being forced to spend a large amount of money on an expensive team. The studio gives you the structure to build more methodically and in a less complex way. 

Closed-end funds are great, but it’s not the best deal for your investors. It’s not the best deal for your founders or your CEOs. It forces the liquidation at a future date and time, which is good for the general partner. When raising money from family offices and high net-worth individuals, I found that they don’t like continuously rolling their money in funds. They don’t like reinvestment risk, and they would rather let a good deal ride, which is why you’ve seen the best-in-class players like Sequoia convert to Evergreen funds. Also, closed-end funds may leave a lot of money on the table, and investors are tired of missing out on the upside because of forced liquidations. 

Since Sequoia went Evergreen (read more here), it’s much more acceptable now. An open-ended model takes a lot of explaining and education, but if you can sell the benefits from a reinvestment investment risk and a timing perspective, smart, sophisticated investors will be very open to it.