Four lines that tie fund size, number of companies, reserve ratio and ownership target together, and the round price hidden inside them.
A VC portfolio construction model works from the commitment down: subtract fees and expenses, add recycling, split what is left between initial cheques and reserves, then divide by the cheque size. An illustrative 150 million fund has 137.25 million to invest; with half held in reserve and 2.0 million initial cheques it can back 34 companies at 12.5 per cent entry ownership, not the 75 that dividing the fund by the cheque suggests.
Worked in full in Venture Capital by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A limited partner reading a pitch deck sees three claims that must be consistent: the fund size, the number of companies and the ownership target. They are tied together by four lines of arithmetic, and a fund whose deck cannot reconcile them has not decided its strategy. The model below is the version an investment committee or an LP due diligence team should rebuild from the private placement memorandum before reading anything else.
| Input | Value |
|---|---|
| Commitments | 150 |
| Management fee, years 1 to 5, on commitments | 2.0% |
| Management fee, years 6 to 10, on commitments | 1.5% |
| Fund expenses over the life | 1.5 |
| Recycling of early proceeds, share of commitments | 10% |
| Reserve ratio, share of investable capital | 50% |
| Initial cheque | 2.0 |
| Seed post-money at entry | 16.0 |
| Investment period for initial cheques | 4 years |
The fee is kept on commitments for all ten years to keep the arithmetic visible; a fee that steps down to invested capital would leave a little more to invest.
Investable capital = commitments − management fees − expenses + recycled proceeds
Initial pool = investable × (1 − reserve ratio); reserve pool = investable × reserve ratio
Number of companies = INT(initial pool / initial cheque)
Entry ownership = initial cheque / post-money
In Excel: =INT((B1-B2-B3+B4)*(1-B5)/B6)
Step 1, the fees. 2.0 per cent of 150 for five years is 15.00; 1.5 per cent for five more is 11.25. Total 26.25, or 17.5 per cent of the fund, never reaches a company.
Step 2, investable capital. 150 − 26.25 − 1.5 + 15.0 = 137.25, which is 91.5 per cent of commitments. Recycling matters: without it the figure is 122.25 and the same split backs 30 companies, not 34. Whether the fund can really recycle 15.0 depends on the clause and on early exits arriving in time; see how much a recycling provision adds.
Step 3, the split. A 50 per cent reserve ratio puts 68.625 into initial cheques and 68.625 into follow-ons.
Step 4, the count. 68.625 / 2.0 = 34.31, so 34 companies, 8.5 a year over a four-year investment period. Each has 2.02 of reserves behind it on average, roughly one follow-on dollar for each initial dollar, and the fund commits 4.04 per company in total.
Step 5, the ownership. 2.0 into a 16.0 post-money round is 12.5 per cent at entry.
The fund is a 34-company seed fund with 12.5 per cent entry ownership and one-for-one reserves. That is the sentence the deck should contain. Dividing commitments by the cheque gives 75 companies, which overstates the portfolio by 121 per cent: most of the gap is the reserve, since with no reserve the fund could make 68 investments, and the rest is fees and expenses net of recycling.
| Reserve ratio | Initial pool | Cheque 1.5 | Cheque 2.0 | Cheque 3.0 |
|---|---|---|---|---|
| 30% | 96.07 | 64 | 48 | 32 |
| 40% | 82.35 | 54 | 41 | 27 |
| 50% | 68.62 | 45 | 34 | 22 |
| 60% | 54.90 | 36 | 27 | 18 |
Every cell is a different fund. Moving from a 50 to a 30 per cent reserve ratio adds 14 companies at a 2.0 cheque; moving the cheque from 2.0 to 3.0 removes 12. The ownership side of the trade-off is the cheque divided by the post-money:
| Initial cheque | At 16.0 post-money | At 24.0 post-money |
|---|---|---|
| 1.5 | 9.4% | 6.2% |
| 2.0 | 12.5% | 8.3% |
| 3.0 | 18.8% | 12.5% |
If seed rounds in the fund's market price at 24.0 post-money rather than 16.0, holding 12.5 per cent needs a 3.0 cheque, and the same fund can make only 22 investments. A fund that promises both "34 companies" and "12.5 per cent ownership" is making a promise about the price of rounds, not about its own discipline.
How many companies a fund should hold is a separate question, about the odds of finding the outlier; the arithmetic of that trade-off is in how many companies a VC fund should invest in. Construction tells you how many it can hold.
Setting the reserve ratio as a convention rather than computing what it buys. A reserve that is spread evenly at one-for-one across 34 companies defends very little: the cost of keeping a stake through later rounds rises with each round's price, so the pool runs out on the few companies that matter. Size reserves from the cost of defending the likely winners, then let the number of initial cheques fall out of what is left.
The book measures the reserve separately from the initial cheques and finds they earn very different multiples; the free workbooks for the book carry its fee schedule, investable capital and reserve model with every input editable.
Seed funds often quote around half, but the ratio is a choice, not a standard. On 137.25 million of investable capital, a 30 per cent reserve with 2.0 million cheques gives 48 companies and a 60 per cent reserve gives 27. The right ratio is the one that funds the follow-ons the fund will actually make in its best companies.
Commitments less fees and expenses, plus whatever recycling adds. On an illustrative 150 million fund, fees of 26.25 million and expenses of 1.5 million leave 122.25 million; recycling 10 per cent of commitments lifts it to 137.25 million, 91.5 per cent of the fund.
From the ownership target and the price of rounds: cheque equals target ownership times the post-money. 12.5 per cent of a 16.0 million post-money round is 2.0 million; of a 24.0 million round it is 3.0 million, which cuts the same fund from 34 companies to 22.
This article is one calculation from Venture Capital. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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