The Business of Venture Capital: Insights from Leading Practitioners on the Art of Raising a Fund, Deal Structuring, Value Creation, and Exit Strategies, 2nd Edition

CHAPTER 8 Fund Size and Portfolio Construction

“I agree that two times two makes four is an excellent thing; but if we are dispensing praise, then two times two makes five is sometimes a most charming little thing as well.”

—Fyodor Dostoyevsky, Notes from Underground

Fund size is determined by the portfolio construction and capital needs to maintain fund ownership. Fund size is also determined by target sectors—life sciences, especially, tend to be capital intensive. Institutional investors, especially those managing multibillion dollars, prefer to invest in funds than are at least $100 million in size. This allows them to maintain efficiency and manage relationships appropriately.

Portfolio construction design factors in the size and timing of investments with the view to balancing cash flows and minimizing risk. Portfolio construction design involves the following:

• Total number of companies, typically a range, say 8 to 12. For technology funds, this range tends to be higher, at 20 to 30 companies.
• Average total investment amount per company, typically no more than 10 percent of the fund.
• Average investment amount at the point of entry. Typically, this would be one-third of the average total investment per company. Capital is reserved for future rounds of investment.
• Average target ownership at time of exit, and target exit values leading to target internal rate of return (IRR) estimates.
• Stage of investment—seed, early, or growth. These stages require different amounts ...