How VC Funds Work
What does 'reserves' mean in a VC fund?
Reserves are capital set aside by a VC fund to invest in follow-on rounds of existing portfolio companies. Most funds reserve 40–60% of their capital for follow-ons, not just initial checks.
When a VC fund makes its first investment in a company (the initial check), it rarely deploys all the capital it intends to put into that relationship. Instead, it sets aside "reserves" — additional capital earmarked for future rounds.
Reserves serve several purposes. First, they let investors protect their ownership percentage by participating in later rounds (pro-rata rights). If a fund owns 10% of a company at the seed stage, following on in the Series A allows it to maintain that 10% rather than getting diluted. Second, reserves let a fund double down on winners — deploying more capital into companies that are performing well.
Reserve ratios vary widely. Early-stage funds focused on seed and pre-seed might reserve 1:1 — for every $1 of initial check, $1 in reserve. Growth-stage investors may have lower ratios. The right ratio depends on stage, check size, and portfolio construction philosophy.
Poor reserve management is a real pitfall. Funds that deploy capital too quickly or under-reserve can run out of follow-on capacity exactly when their best companies need more capital. Conversely, over-reserving means leaving early deployment capital on the table.