Portfolio & Operations
What is portfolio construction in VC?
Quick Answer
Portfolio construction is the strategy of how a VC fund allocates capital across investments — number of companies, check sizes, reserve ratios, sector/stage concentration, and follow-on strategy. It directly determines fund return outcomes.
Detailed Answer
Portfolio construction is the blueprint for how a fund deploys its capital. It's arguably the most important strategic decision a GP makes, yet it's often underappreciated.
Key portfolio construction variables:
**Number of investments:** - Concentrated: 10-15 companies (higher variance, bigger ownership) - Diversified: 25-40 companies (lower variance, smaller ownership) - Index: 50+ companies (spray and pray)
**Check size allocation:** - Initial checks: 40-60% of fund - Follow-on reserves: 40-60% of fund
**Stage focus:** - Pre-seed: $100K-$500K checks - Seed: $500K-$3M checks - Series A: $3M-$15M checks
**Ownership targets:** - Seed: 7-15% ownership - Series A: 15-25% ownership
The math of VC portfolio construction: - Average VC fund: 20-30 investments - Expected outcomes: 50% fail, 30% return 1-3x, 15% return 3-10x, 5% return 10x+ - The 5% (1-2 companies) drive 50-80% of fund returns
This is the "power law" of VC — returns follow an extreme distribution where a few huge winners matter more than everything else combined. Portfolio construction must account for this reality.
Related Questions
What does a board seat mean in VC?
A board seat gives a VC investor a formal governance role on the company's board of directors, including voting rights on major decisions, fiduciary duties, and direct influence over strategy, hiring, and fundraising.
What is a reserve strategy in VC?
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.
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