Strategy & Portfolio
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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.
VC Beast Take
The 50% reserve ratio has become venture capital dogma, but it's increasingly outdated in today's market. Seed funds often need 60-70% reserves due to longer development cycles and more financing rounds, while growth funds can operate with 20-30% since they're making fewer, larger bets. The smartest funds are moving toward dynamic reserve ratios that adjust based on portfolio performance rather than rigid predetermined allocations—a much more capital-efficient approach.
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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.
Understanding Reserve Ratio is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
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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