Fund Structure
Follow-On Reserve Ratio
Last updated
Quick Answer
The percentage of a fund's capital set aside for additional investments in existing portfolio companies versus initial investments in new companies.
What it is
The follow-on reserve ratio determines how a fund allocates its capital between initial investments in new companies and follow-on investments in existing portfolio companies. A fund with a 50/50 reserve ratio deploys half its capital in initial investments and reserves the other half for follow-ons. The optimal ratio depends on the fund's strategy, stage focus, and expected graduation rate from one round to the next.
In Practice
The $100M seed fund maintained a 60/40 follow-on reserve ratio, deploying $60M across 40 initial seed investments and reserving $40M for pro-rata follow-on investments in the ~15 companies expected to raise Series A rounds.
Operational context
What good looks like
The term is tied to a real workflow, not just a definition.
Ownership, timing, and evidence are clear.
The reader can tell what decision the concept supports.
Related terms point to the next useful explanation.
Why It Matters
Getting the reserve ratio wrong can destroy fund returns. Too little reserve and you can't support your winners; too much and you're not making enough initial bets to find winners. The ratio should reflect your stage, strategy, and historical graduation rates.
VC Beast Take
Reserve ratios are one of the most debated topics in fund construction. Early-stage funds increasingly lean toward higher reserve ratios (50-60%) as the cost of maintaining ownership in breakout companies has increased. The key is having the discipline to deploy reserves only in your best companies.
Related tools and reading
Term Family
Related concepts
Further Reading
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Modern Portfolio Theory for Venture Capital: Does MPT Apply to VC?
Harry Markowitz's Modern Portfolio Theory revolutionized public markets. But VC returns follow power laws, not normal distributions. Here's where MPT works in venture — and where it completely breaks down.
Portfolio Construction for VC Funds: How Many Bets and How Much Per Bet
The power law rules VC. Seed funds do 25-40 deals, Series A funds do 15-25. Here's the math behind check sizes, reserves, ownership targets, and concentration risk.
VC Interview Questions: 30 Questions They'll Actually Ask (With Answers)
30 real VC interview questions organized by category: technical, market thesis, deal evaluation, and behavioral. With frameworks for answering each one.
Solo GP Venture Capital: How to Run a One-Person VC Fund
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Pro Rata Rights: Why They Matter and When to Exercise
Pro rata rights can make or break your fund's returns — but only if you know when to exercise them. Here's a practical framework for making smarter follow-on decisions.
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Frequently Asked Questions
What is Follow-On Reserve Ratio in venture capital?
The follow-on reserve ratio determines how a fund allocates its capital between initial investments in new companies and follow-on investments in existing portfolio companies.
Why is Follow-On Reserve Ratio important for startups?
Understanding Follow-On Reserve Ratio is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
What category does Follow-On Reserve Ratio fall under in VC?
Follow-On Reserve Ratio falls under the fund-structure category in venture capital. This area covers concepts related to how venture capital funds are organized, managed, and governed.
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