What return must the fund produce?
The portfolio plan sets company count, first cheque size, ownership targets and reserves. In a $100 million fund expecting one winner to return the fund, the stake retained at exit sets the required outcome. Cash available for follow-ons affects whether that stake survives.
A portfolio plan applies this calculation across the fund. When a manager expects a few exceptional outcomes to drive returns, the model reveals how much each winner would have to contribute for that expectation to hold.
Cambridge Associates' private-investment benchmarks group results by vintage, sector and location. Available deals change with the market. Spreading exposure across years and strategies helps address that uncertainty, even when a manager is ready to take money now.
The evidence also takes time. Cambridge Associates cautions that private-fund performance may need roughly 5 to 6 years before relative rankings become real.
A $100 million fund could initially place $5 million into 20 companies or $10 million into 10. The first plan creates more chances to find a winner. The second gives each successful position more power, but also makes each mistake more costly. The better plan depends on attainable ownership and the capital needed after the first cheque.
Fund size sets the burden
A $100 million fund that reserves 50% and targets 5 companies has $50 million for initial cheques, or $10 million per company on average. If the manager cannot deploy that amount at the stated stage without changing price or ownership, the strategy and fund size do not fit.
A larger fund can write larger cheques, move into later rounds, or add companies. Each choice changes the original product. Later-stage rounds may offer less ownership for each dollar, while a broader portfolio may leave every position too small to affect returns.
Why Ownership at Exit Matters
A $10 million investment at a $50 million post-money valuation begins with 20% ownership. Two later rounds that each dilute existing holders by 20% reduce the stake to 12.8% before any pro rata investment.
Entry ownership is only the start. More companies reduce reliance on one business. But dilution can leave stakes so small that even a large exit barely moves fund returns. Fewer, larger positions give winners more impact and make mistakes more costly.
Initial checks, follow-on reserves, fees, and liquidity buffers compete for the same fund capital. Actual construction depends on fund documents, strategy, and reserve policy.
Portfolio Plan Levers
Initial checks, follow-on reserves, fees, and liquidity buffers compete for the same fund capital.
View chart data and assumptions
| Area | Treatment |
|---|---|
| Initial investments | 57% |
| Follow-on reserves | 28% |
| Fees and expenses | 10% |
| Liquidity buffer | 5% |
Reserves are a second portfolio decision
If the fund holds $50 million of reserves across 5 companies, it has $10 million per company on average. Concentrating that capital in 4 emerging winners raises the average to $12.5 million. The reserve policy decides which initial positions can become durable ownership.
Seed firms often raise several rounds before exit, which can create larger reserve needs. Later-stage or secondary deals may require less. Fresh evidence gives another cheque its case; without it, reserves can prolong a weak bet as easily as support a strong one.
How Much the Fund Depends on Outliers
Carta notes that venture-company outcomes can reach 100x or even 1,000x while many investments return zero. How many such winners a fund needs depends on their size relative to the fund and the losses elsewhere.
A leading company exiting at half the expected value or returning cash later can change the whole fund result. A higher loss rate elsewhere adds to the strain. If modest changes undermine the return case, the fund depends more on a few outcomes than its company count suggests.
Different Companies Can Share the Same Risks
Twenty holdings can still carry one shared risk when they depend on the same customers, financing market, or route to exit. Concentration can also appear after investment as one winner becomes a large share of NAV. Sector, geography, and later-round capital providers belong in the same review as position size.
What Does the Construction Mean for the LP?
Company outcomes feed into the LP's net MOIC and net IRR after fund costs. The schedule of calls and likely distributions shows when those outcomes could affect cash. This connects the manager's portfolio choices to the LP's liquidity needs.
CalPERS: Construction Rules Before Individual Selections
CalPERS' June 2024 policy set portfolio rules before the choice of managers. It defined private-equity strategy ranges and limits on deals staff could approve. That made the plan enforceable. A list of attractive deals cannot do that job.
Within private equity, the permitted venture-capital range was 0% to 12% of NAV.
Growth and expansion occupied a wider 5% to 30% range, giving the programme more room to deploy at later stages.
Commitments above the staff's delegated limit still needed committee approval.
The limits are specific to CalPERS. The broader principle is that agreed strategy ranges and approval rules give individual deals a place within the portfolio. Exception rules explain how choices outside those limits can be considered.
Primary sources: CalPERS, June 2024 investment policy. The CalPERS programme is a public institutional reference and does not imply a Frontierspace investment outcome.
Frequently Asked Questions
How many companies should a venture fund hold?
There is no single correct company count. Ownership targets and reserves determine how much capital each position uses. Stage and fund size limit how many the strategy can support, while sector exposure and the required outlier returns reveal the risks in the resulting mix.
Why do venture funds maintain reserves?
Reserves allow follow-on investment in selected companies and can protect ownership through later rounds. They can also compound mistakes if follow-on decisions lack judgment.