What is portfolio construction in venture capital?

Portfolio construction is one of the most important — and underappreciated — strategic decisions in venture capital.

The basic math: a fund needs to return 3x net to LPs to be considered good. A $100M fund needs to return $300M. Given power law dynamics (most companies fail, a few return 10–100x), achieving that requires at least one company that can return the fund on its own.

Key decisions in portfolio construction:

**Number of investments:** Early-stage funds often make 20–40 investments. More investments = more shots at a fund-returner, but thinner ownership. Concentrated funds (10–15 companies) bet on conviction; diversified funds (40–60) bet on coverage.

**Check size:** Determines ownership percentage. If you need 5%+ ownership for a deal to matter (since smaller stakes rarely return a fund even on a massive exit), check size relative to round size is critical.

**Reserves:** How much capital to hold back for follow-on rounds. Most early-stage funds target 1:1 or higher — for every $1 of initial check, $1 in reserve. Follow-on decisions determine whether winners get the fuel to grow.

**Ownership targets:** What % of each company do you need at exit to return the fund? Working backward from fund return requirements tells you how much ownership matters.

Different fund models make different tradeoffs. Spray-and-pray seed funds make many small bets. Focused seed funds make fewer, larger bets. Each strategy has worked for different funds.