Fund Structure
Follow-On Reserve Ratio
The percentage of a fund's capital set aside for additional investments in existing portfolio companies versus initial investments in new companies.
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.
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.
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