Fund Structure
Portfolio Construction
The deliberate strategy a venture fund uses to allocate capital across investments — including check size, number of investments, reserve ratios, stage focus, and diversification approach.
Portfolio construction refers to the framework a VC fund uses to allocate its capital strategically across investments. Key decisions include: how many companies to invest in, what initial check sizes to write, how much to reserve for follow-on investments in existing companies, at what stages to invest, and how much diversification to seek across sectors and geographies.
Fund size drives portfolio construction math: a $50M fund that writes $1M initial checks can make 25–30 investments while reserving 40–50% for follow-ons. A $500M fund might write $5–10M initial checks. The power law of venture returns (a small number of companies produce most of the returns) creates tension: should you concentrate in your best bets, or spread bets to maximize the chance of catching the next winner?
Highly concentrated funds (20–30 companies) need each investment to have unicorn potential. Highly diversified funds (100+ investments) accept that most won't work but bet on catching outliers.
In Practice
A $75M seed fund plans portfolio construction as follows: 40 initial investments at $500K–1M each, 40% of the fund reserved for follow-ons in the top 10 companies at Series A, targeting a minimum 3% ownership stake at entry.
Why It Matters
Portfolio construction directly shapes investor incentives. A fund concentrated in 15 companies needs each to return 20x+. A fund with 100 companies can succeed with a handful of 50x+ outcomes and a long tail of modest returns. Understanding a fund's portfolio construction helps founders anticipate how their investor thinks about follow-ons, exits, and board dynamics.