Portfolio & Operations
What is a reserve strategy in VC?
Quick Answer
A reserve strategy determines how much of a fund is set aside for follow-on investments in existing portfolio companies. Typically 40-60% of fund capital is reserved, allowing VCs to double down on their best-performing companies in later rounds.
Detailed Answer
Reserve strategy is how a VC fund manages capital allocation between initial investments (new companies) and follow-on investments (existing portfolio companies).
Common reserve models:
**1. Fixed ratio (most common)** - 50/50: Half for new investments, half for follow-ons - 60/40: Slight bias toward initial investments - 40/60: Heavy follow-on emphasis (conviction-based)
**2. Per-company reserves** - Set aside 2-3x the initial check for each company - Example: $1M initial → $2-3M reserved for follow-ons
**3. Dynamic reserves** - Adjust based on portfolio performance - Concentrate reserves into top performers - Release reserves from underperformers
Reserve management challenges: - **Over-reserving** — Too much capital sitting idle, missing new opportunities - **Under-reserving** — Can't maintain ownership in breakout companies - **Pro-rata pressure** — Hot companies raise huge rounds, exhausting reserves - **Timing** — Early exits free up reserves; slow exits lock them up
Best practice: Model reserve scenarios at fund formation. Track reserve utilization quarterly. Be disciplined about which companies receive follow-on — not all deserve it.
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