The Business of Venture Capital, 3rd Edition

13Fund Size and Portfolio Construction

What is the correct fund size? How much should you raise? Ask Masayoshi San of Softbank and he will raise his hands up in the air: “A hundred billion,” he might say. The short answer is raise as much as you can, to effectively execute on your investment strategy.

A bottoms-up approach can start with the stage of investments, and capital needed to build a well-balanced portfolio. Let's look at the point of investment — what will be the typical first check size? What capital reserves will be set aside for future/follow-on investments? What stage of investment as well as ownership and dilution are you modeling for?

Some fund managers adopt a highly concentrated approach — fewer companies with much higher ownership — while other fund managers build a large portfolio with small ownership. Some sectors — such as life sciences — tend to be capital intensive compared to technology.

The size of follow-on investments with the view of maintaining ownership can impact fund returns.

Exhibit 13.1 summarizes the factors that impact fund size.

While the life of the fund is legally established for 10 years, the capital is deployed during the investment period, typically the first 5 years. Fund managers actively seek to invest and build the portfolio during this period. The goal is to generate returns rapidly, say, within 4–6 years from the time of investment.

Exhibit 13.1 Factors Determining Fund Size.

Risk	Remarks
Target sector	Funds targeting ...