VC Money Management: A Peek Inside Their Spending Strategy

An article we liked from Thought Leader Chris Neumannof Panache Ventures:

🎵 IF I HAD A (HUNDRED) MILLION DOLLARS 🎵

Thinking about how to spend money is something that VCs do regularly.

In venture capital, “portfolio construction” refers to how a fund “spends” (invests) its capital. How much is invested in new companies vs. follow-on investments? How big should each investment be? How many companies will the fund invest in? And so on.

So let’s jump in and discuss the variables that come into play when a VC decides what to do…If I Had a (Hundred) Million Dollars.

Check Size

Check size is the first variable founders tend to think about: how large of a check does a VC write?

(That makes sense, since it’s the most important variable from the founder’s point of view.)

"We write checks between $500K and $1.5M.”

Number of Investments

Naturally, the next thing to think about is the number of investments. How many $500K to $1.5M checks will our hypothetical VC write?

For simplicity’s sake, let’s take the median of their investment range. This gives us an average check size of $1M. The VC will, thus, invest in $100M / $1M per company = 100 companies.

"We write checks between $500K and $1.5M. This fund will invest in about 100 companies.

Simple, right? Not so fast…

New Investments vs. Reserves

The number of investments isn’t only about check size. We also need to consider what percentage of the fund the VC intends to put towards new investments vs. the funds they will reserve to put additional money into portfolio companies down the road.

For example, a “60/40” fund will deploy 60% of its capital into new companies and then take the remaining 40% and put it into...