The portfolio-construction equation
Three numbers determine everything:
- Fund size · N (target number of investments) · Reserve % (held back for follow-ons)
Initial cheque = (Fund × (1 − reserve)) / N
For a $50M fund, 25 cheques, 50% reserves: ($50M × 0.5) / 25 = $1M average initial cheque.
Stage-by-stage cheque sizing
Pre-seed
$50K – $250K. Size for at least 1% ownership; ideally 3–5%. At pre-seed valuations of $5–10M post, this means $50K–$500K cheques. Many specialist pre-seed funds prefer 3–5% and concentrate.
Seed
$250K – $2M. The most common range. Lead funds write $500K–$1.5M for 8–15% ownership. Co-investors and follow funds write $100K–$500K. Position lead vs. follow upfront — don't switch mid-conversation.
Series A
$2M – $15M. Leads target 15–22% ownership at $30M–$80M post-money. The price gets set by competition; ownership target gets enforced by cheque size.
Reserve modelling
The single biggest fund-construction debate. Three approaches:
Pro-rata only (40–50% reserves)
You hold back enough to maintain ownership through one or two follow-on rounds for the top half of your portfolio. Most disciplined for new funds.
Concentrated (60–70% reserves)
You make small initial cheques and reserve heavily for the winners. Higher variance but mathematically correct given the power law.
Diluted (20–30% reserves)
Lots of small initial bets, light reserves. Common for pre-seed, increasingly out of fashion at seed.
Empirical rule: 10–15% of your portfolio will absorb 70% of your reserves. If your reserve plan can't accommodate tripling-down on your top 3 names through Series A and B, you're under-reserved.
Lead vs. follow
Leading means setting the price, doing primary diligence, and taking a board seat. It costs more time. The trade:
- Lead when you have unique conviction or value-add the founder needs. You can negotiate ownership, structure, board.
- Follow when you have positive but not lead-level conviction, or when the founder is already over-subscribed. Your role is capital + intros, not control.
Worked example: $50M fund, 25 cheques, 50% reserves
Fund size: $50M Initial cheques bucket: $25M Reserves bucket: $25M Target investments: 25 Average initial cheque: $1M Avg pre-money entry: $9M Avg ownership at entry: 10% Reserve allocation (likely outcome): - Top 5 (10× outcomes): $15M reserves (60%) - Mid 10 (1–3×): $7M reserves (28%) - Bottom 10 (write-offs): $3M reserves (12%, partial follow-ons that didn't pan out) Expected fund returns (TVPI): - Top 5 returning 10× of $4M total = $40M - Mid 10 returning 1–3× of $14M total = $20M - Bottom 10 returning 0.2× of $7M total = $1.4M Total: ~$61M out of $50M committed → 1.2× DPI in first 6 yrs, 2–3× over 10 yrs
Allocation discipline
Set your max initial cheque and stick to it. The temptation to write a $2M cheque when your model says $1M is enormous when you have conviction. If you can't follow your own rules under enthusiasm, your portfolio construction is theatre.