Strategy & Portfolio
Reserve Ratio
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Quick Answer
The percentage of a fund's committed capital set aside for follow-on investments in existing portfolio companies, typically 30-50% of total fund size.
Reserve Ratio is the percentage of a venture fund's committed capital that the GP allocates for follow-on investments in existing portfolio companies, as opposed to new initial investments. A typical reserve ratio ranges from 30-50% of committed capital, though it varies by strategy. Seed funds that expect to participate in multiple follow-on rounds often maintain higher reserves (40-50%), while late-stage funds may keep lower reserves (20-30%). The reserve ratio is one of the most critical portfolio construction decisions because it balances two competing objectives: deploying enough initial capital across enough companies to capture power law outliers, versus having sufficient reserves to defend ownership and double down on winners. Insufficient reserves force the GP to watch helplessly as their best companies raise future rounds, diluting the fund's ownership. Excessive reserves mean fewer initial bets and a lower probability of finding outliers. Reserve allocation decisions—which companies get follow-on capital and how much—are among the highest-impact decisions a GP makes.
In Practice
A $100 million seed fund sets a 45% reserve ratio: $55 million for initial investments (25 companies at $2.2 million average) and $45 million for follow-on. After 2 years, the GP has deployed $50 million across 23 companies. The top 5 performers receive follow-on allocations of $5-8 million each from reserves, while the bottom 10 receive no additional investment. The targeted reserve deployment ensures the fund maintains meaningful ownership in its most promising companies through Series A and B.
Why It Matters
The reserve ratio directly determines whether a fund can maintain ownership in its winners. Running out of reserves in the middle of a portfolio company's growth phase forces the GP to pass on pro-rata rights, potentially turning a 10x position into a 5x position through dilution. Getting the reserve ratio right is as important as picking the right initial investments.
Further Reading
Venture Capital KPIs: 20 Metrics Every GP Should Track
Most GPs are flying blind. Here are the 20 VC KPIs that separate disciplined fund managers from everyone else — with benchmarks, formulas, and why each one matters.
The Math Behind VC Returns: From Entry to Exit
From entry valuation to exit proceeds, this breakdown covers the full math behind VC returns — including dilution, MOIC, IRR, carry, and the metrics LPs actually use to evaluate fund performance.
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.
Follow-On Reserve Strategy: How Much to Set Aside and When to Deploy
Learn how to size and deploy follow-on reserves in VC — with benchmarks by fund stage, reserve modeling frameworks, and LP reporting best practices.
Portfolio Construction for a $10M Micro VC Fund
Learn how to construct a high-conviction portfolio for a $10M micro VC fund, including check sizes, reserve ratios, ownership targets, and portfolio size trade-offs.
Fund of Funds as LP: How to Get Institutional Capital Early
Fund of funds can provide the institutional credibility emerging managers need early. Here's how FoFs evaluate new managers and how to win their commitment.
Frequently Asked Questions
What is Reserve Ratio in venture capital?
Reserve Ratio is the percentage of a venture fund's committed capital that the GP allocates for follow-on investments in existing portfolio companies, as opposed to new initial investments. A typical reserve ratio ranges from 30-50% of committed capital, though it varies by strategy.
Why is Reserve Ratio important for startups?
Understanding 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 Reserve Ratio fall under in VC?
Reserve Ratio falls under the strategy category in venture capital. This area covers concepts related to the strategic approaches to portfolio construction and management.
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