For Investors: Introducing Quarterly Subscriptions to Earnest Funds

A fund structure built for founders backing founders

It feels weird to continue the day to day nitty gritty work of building new capital structures to back founders with everything going on in the world… but I believe entrepreneurship is a force for good and a source of empowerment. So we press on with the work.

tl;dr we’re updating how commitments are made to Earnest funds and making them a quarterly subscription product. To get more details subscribe here. But since transparent mega posts are how we do things at Earnest, I want to walk through the thinking as well.

Building Earnest has been a slow process of re-examining the standard approach to an early-stage fund. There are rate-limiting factors that prevent us from just scrapping every aspect of fund management at once, but—from the Shared Earnings Agreement as a financing structure, to skin in the game Mentorship, to Trailhead for the pitch process—we’re working our way through each aspect and re-building from first principles.

Doubling down on building Earnest with entrepreneurs, angels, and real people

The trajectory for building a new “micro” fund is now becoming somewhat codified. At first you raise a small fund via many small checks from your personal network, true believers, and folks who just love the mission. These funds are not very sustainable; they strictly allow you to bootstrap an investing track record. The General Partner (GP) is taking very little salary (in my case still $0/year) and running on a skeleton crew with a small stream of management fees. Over time you build a track record and by Fund 2, 3, or 4 you can now pitch the institutional LPs who write the 7- and 8-figure checks and begin to make up most of your capital base.

Earnest was on this path. I truly mean it when I say that I think the opportunity for funding bootstrappers and becoming the default source of capital in the deployment age of software is larger than the entire VC industry. I’m putting one foot in front of the other and making sure we execute well right now, but in my peripheral vision I’m looking for every opportunity I can find to get to a point where we fund 1,000s or 10,000s of companies per year. Large pools of institutional capital seem like the only path to that kind of scale so we’ve been heading in that direction, more by default than any conscious opting-in.

But I’m constantly pointing out to founders that the best way to swing for the fences with their company is to build a profitble sustainable business first, and then explore raising a big round of outside capital on their own terms… I started to think about what a version of that would be for a fund like Earnest.

The big shake up in capital markets from COVID-19 has created the space and necessity for me to think this one through. Do we really want Earnest’s capital base to rely on a tiny group of very large, relatively conservative and risk-averse institutions? What will that do to my allocation of time and energy? What kind of compromises might we have to make to get that done? How much do we end up deviating from the core thesis to fit in a box that matches their pre-existing allocation strategies?

Do I think it’s possible to thread the needle and judo the same pools of capital that allocate millions to the biggest brands in venture and get them to also fund our mission? Yes, we are relentless and we would get it done.

Do I think it’s the optimal strategy to serve our entrepreneurs well? No.

Would we take a 7/8-figure check on our terms from an institutional LP? Absolutely, but I increasingly don’t want that to be a mission critical part of our plan. We’ve made this all backwards compatible with the ‘traditional’ way of subscribing to funds to keep that option full open.

On the other hand we have an awesome capital flywheel that just keeps spinning: we put our thoughts, mission, and strategy out into the world and more and more individuals pick up the vibe we’re putting down and offer to commit their own hard-earned cash to back the next wave of entrepreneurship, make a great return, have some fun and do some mentoring along the way.

When I sat down and evaluated it, the decision was obvious. I’m making a strategic shift to focus on building Earnest first and foremost with capital from individuals, angels, entrepreneurs, operators and folks generally putting their own skin in the game. This strategy starts, but definitely doesn’t end, with the decision here.

The problem with capital commitments

We are introducing a new default way to accept capital commitments from investors: a quarterly subscription where commitment levels can be increased/decreased annually. We think it is better aligned with the needs of individual investors and with our mission. The standard multi-year upfront commitment remains available, but this will be our new default.

I have many one-on-one conversations with current and prospective LPs and I approach these as not just pitches, but also customer development exercises and opportunities to learn. One of the things I noticed as a common thread is that the typical approach to capital commitments that larger funds use to work with institutional investors just isn’t well aligned with individual angels, entrepreneurs, and single family offices that make up the majority of our Fund 1 and Fund 2 investors.

Here’s the way it works now: investors commit a fixed amount of capital at the start of the fund. Over the investment period of uncertain length (ie ~3-5 years) the General Partner will make periodic “capital calls” in order to fund new investments. It amounts to “Hey, remember when you committed $250k 16 months ago? I need $50k from you now. Please wire within 30 days.”

This setup works pretty well for professional LPs like pension funds, fund of funds, endowments, and so on who are paid to allocate capital in chunky commitments while the periodic capital calls allow the GP to fine tune the IRR by not holding idle LP cash in their bank account.

But—and this is what I heard from a lot of investors in Earnest many of whom were/are making their first ever LP commitments—there are three principle problems with this approach when we’re talking about an individual’s capital.

  • An individual has to commit an upfront chunk of capital over a multi-year period, which can make capital calls terrifyingly lumpy.
  • Investing capacity can vary substantially over time as individuals get liquidity in their business, make job and life changes, buy a house, have another child, etc etc.
  • Individual investors don’t have the time or bandwidth to do professional cash management. Everything we know about personal financial management indicates that automated predictable structures are preferable

The Details: Quarterly Subscriptions better align with the kind of LPs we want to work with than the traditional capital commitment approach.

We are allowing LPs to subscribe to a flexible quarterly commitment to Earnest funds, rather than committing a large amount of money upfront and having randomly timed capital calls for years. I think this better serves our preferred investor partners in a few ways.

1/ Predictability: Normal people who aren’t professional capital allocators need more predictability over cash requirements. Quarterly subscriptions allow LPs to plan for liquidity needs and put them on auto-pilot like the majority of their financial planning.

2/ Flexibility: Financial circumstances and priorities change over time. Quarterly subscriptions can be scaled up and down over time to better match the investment profile and liquidity needs.

3/ Expectation Management: One of the best insights I’ve heard on working with institutional LPs is “they are not just evaluating you for one fund, they know you’ll be back looking for more capital before it’s clear if the first fund is a success or not, so they make an upfront evaluation for committing to 2-3 funds.” This is a smart approach and something I have done a bad job of educating our LP base on. With Earnest funds we expect the majority of distributions back to investors to come between years 4-7 of the fund. We will have invested Fund 1 over 18 months so we’ll be finishing Fund 2 or 3 before we really start to see the bulk of the cashflows of Fund 1. I think a quarterly contribution structure versus big one-off commitments better aligns with how investors think about long-term investments like IRAs.

Fees & Carry

Earnest subscriptions will charge a one-time 12.5% subscription fee, once, on each quarter’s commitment as it comes in. This lets us run our operations, pay the awesome team, and cover our remote-first infrastructure bills (Zoom, Airtable, Basecamp, etc). We will still charge a standard 20% “carry” on the profits of the fund once investors get their full investment amount back.

12.5%!? Isn’t that way more than the 2% you hear of in “2 & 20”??

No, it’s way lower. Let me explain.

The typical benchmark for venture funds, hedge funds, and other long-term private funds is “two and twenty” which breaks down to the management company receiving a management fee of 2% of the total fund size per year and 20% of the profits once investors get their initial capital back. But the 2% is quite misleading because it’s 2% of the entire fund size and it’s taken every year of the fund’s existence. So if you have a $100m fund with a 10-year fund life that’s 2m per year for 10 years = $20m = 20% of the fund. Even more, calling it 2% per year is pure paper shuffling. In practice no new money is coming into the fund in say year 7, so where does the 2% for that year come from? It’s just reserved upfront when the capital comes in and is then deducted each year. So the standard benchmark for management fees is really 20% of capital upfront and we’re doing 12.5%.

Why? Because everything we do is about trying to relentlessly align incentives. Management fees are necessary, we couldn’t build a team to source deals and run our mentorship program without them, but I’m dedicated to minimizing them as much as possible.

But what about forecasting investing pace and fund operations?

Yes this does make it more difficult to forecast exactly how much capital we’ll have available to deploy and what our stream of fees will be to make payroll. But building a business on recurring subscriptions is much more in our wheelhouse than trying to gather all the capital for multiple years upfront. It’s like running a business on growing MRR versus raising a venture round to fund the business for several years. I feel much more at home with the former.

One of the things that has been particularly annoying to me is the “fixed mindset” that the traditional fund structure requires. You raise and close the fund and then you have a fixed stream of fees to hire talented folks to help you build. Find someone absolutely amazing that you must work with half-way through the fund? Too bad, you can’t hire them for years until the next fund. This has been a really hard adjustment for me as an entrepreneur where you can typically be more opportunistic with hiring talent. A fund structure that can be scaled up quarter by quarter gets us much closer to that kind of growth mindset with regards to the team and strategy.

A flexible fundraising strategy is also better for LPs. We launched Earnest Trailhead to allow founders to initiate the “pitch” process on the optimal timeline for their company. Subscriptions allow us to accept new LPs at the optimal time for them. In the traditional fundraising process I have to force investors to make an in-or-out call and commitment level for ~3 years in a single fundraising close period. This new approach lowers the barrier and friction to becoming an LP meaning we’ll get the right partners, at the right time, to help us succeed.


Capital commitments to Earnest Fund 2 can now be made on a quarterly basis and will be called regularly at the start of each quarter.

  • The minimum for new investors is $5k per quarter (this may increase over time due to limitations on total number of LPs in a fund).
  • The minimum commitment period is 4 quarters. We assume most LPs will choose to renew. We’re still working on the exact UX for either renewing or cancelling after that but expect a simple to use form.
  • We will create funds sequentially, every 4 quarters we’ll do a new fund. Any commitments received within that 1-year period go into the currently active fund. Commitment subscriptions will rollover into the next 1-year fund at the end of each period and we’ll invest sequentially out of each fund.
  • Commitment level can be increased/decreased roughly annually between each 1-year fund cycle.
  • 12.5% one-time subscription fee + standard 20% carry + no annual management fee
  • We’ll offer a few “plans” to guide investors to the right level… ie if you’re an investor who would typically commit $100k to a fund, then $10k/quarter likely makes the most sense. You better believe I’m thinking about what benefits we can offer to those on the Premium plans 🙂

Our first fund kicks off 1st of July but new commitment can be made at any time and will just go for 4 quarters rolling into the next fund.

Get more information via the form below.

Note: we can only accept accredited investors for this product, but we’ll be providing more guidance there via email. If you’re unsure if you’re accredited check this FAQ and this tweet for context.

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