https://www.signatureblock.co/articles/portfolio-construction
Effective venture fund portfolio construction requires balancing key drivers like fund size and check sizes while optimizing for ownership and returns through strategic modeling.
Portfolio construction stands as the core responsibility of fund managers, determining how capital is deployed across investments. The model a manager builds directly influences check sizes, investment volume, and ultimately returns. This isn't a one-time exercise but rather an ongoing optimization process that evolves as assumptions are replaced with actual performance data.
Fund managers must make fundamental choices that align with their strengths and constraints. These include whether to lead rounds or follow other investors, which investment stages to focus on (early-stage, Series A, growth, or multi-stage), and whether to pursue a diversified portfolio (40+ companies) or a concentrated approach (20 or fewer investments). Each strategy creates different risk-reward profiles.
The portfolio construction model operates on several interconnected variables:
Experienced fund managers warn against several pitfalls, including over-complicating portfolio construction, having too few investments in early-stage funds, failing to target specific ownership percentages, and misunderstanding the relationship between fund size and necessary ownership percentages. A fund requires sufficient "shots on goal" to account for the power law distribution of returns in venture capital.
The article provides a Basic Venture Fund Model template for managers to test different scenarios and understand how variables interact. This model covers fund inputs, investment inputs, outcome assumptions, and projected results by stage. Additional resources include more sophisticated modeling frameworks from industry experts.
Portfolio construction — The strategic framework for allocating capital across investments in a fund, including decisions about check sizes, investment stages, and reserves strategy.
Power law — A statistical principle where a small percentage of investments (outliers) will generate the vast majority of returns, making diversification essential in early-stage investing.
Lead investor — The investor who sets the terms of a funding round and typically contributes the largest check, taking a more active role in governance.
Follow-on investor — An investor who participates in a funding round but doesn't set the terms and typically contributes a smaller check than the lead.
Reserves — Capital set aside for additional investments in existing portfolio companies in later funding rounds to maintain or increase ownership percentages.
Carried interest (carry) — The percentage of profits a fund manager receives after returning investors' initial capital, typically 20% but can vary based on performance.
Multiple on Invested Capital (MOIC) — A performance metric calculated by dividing a portfolio's total value by the initial investment amount.
Distribution to Paid-In Capital (DPI) — The ratio of capital actually returned to investors divided by capital deployed, a key metric for limited partners.
Internal Rate of Return (IRR) — A metric that represents the annual growth rate a portfolio is expected to generate, heavily influenced by the speed of capital deployment and return.
Recycling — The practice of reinvesting early returns or unused management fees back into the fund to increase the total capital deployed.
Semil Shah — Founder of Haystack, a seed-stage venture firm. Quoted in the article emphasizing portfolio construction as the core job of fund managers and highlighting the importance of balancing ownership targets with fund size.
Abe Othman — Head of Data Science at AngelList, who contributed insights to the article on quantitative approaches to portfolio construction.
Ben Casnocha — Co-founder of Village Global, a network-driven venture firm, who provided expertise for the article on portfolio strategy considerations.
Terrence Rohan — Founder of Otherwise Fund, contributed perspective on portfolio construction strategies and trade-offs.
Todd Goldberg — Co-founder of Todd and Rahul Angel Fund, offering practical insights on portfolio management from an operator-investor perspective.
Hadley Harris — Founding General Partner at Eniac Ventures, authored "Seed Fund Portfolio Construction for Dummies" referenced in the article, emphasizing the need for sufficient portfolio diversification.
Taylor Davidson — Creator of venture modeling tools at OpenVC, cited for his work on fund modeling frameworks.
Sam Gerstenzang — Created the Open Source Venture Model (OSVM), highlighting how venture returns are driven by power laws rather than averages.
Ryan Hoover and Vedika Jain — The authors of the article and team members at Signature Block, providing educational resources for fund managers.
This article is particularly relevant as we're seeing a significant increase in first-time fund managers entering the venture capital market. After a period of exuberance in 2020-2021 when many tech operators and angel investors raised micro funds, many are now navigating the challenges of portfolio construction amid a more constrained funding environment.
The concepts covered are especially important in 2026 as the venture market continues to normalize after several years of valuation corrections. New fund managers need to understand how different fund construction strategies impact returns, especially as limited partners have become more selective about where they commit capital.
For aspiring fund managers, the portfolio modeling tools provided offer crucial frameworks for raising capital in a market where LPs increasingly demand sophisticated planning and strategy. For existing managers, the emphasis on continuous optimization serves as a reminder to reassess assumptions as market conditions evolve.
The insights about ownership targets, reserves strategy, and fund sizing are particularly relevant as competition for deals remains intense despite the more selective funding environment, forcing managers to clearly articulate their edge and portfolio strategy.
Imagine you have a bag of marbles and $100 to spend. Some venture investors put all their money on a few big, expensive marbles hoping one becomes super valuable. Others buy lots of smaller marbles, knowing most won't be worth much but hoping a few become incredibly valuable. The article explains how investors decide how many marbles to buy, how much to spend on each one, and how much money to save for buying more of their best marbles later. These decisions really matter because usually just one or two marbles end up being worth way more than all the others combined!
The core value expressed in this article is responsibility. The article repeatedly emphasizes that fund managers have a fundamental responsibility to thoughtfully construct their portfolios as the core of their job.
This value appears through the article's detailed explanation of how fund managers should approach portfolio construction with intentionality rather than haphazardly or by simply copying others. The guidance to understand key drivers, model different scenarios, and continuously optimize demonstrates that responsible fund management requires both initial planning and ongoing adjustment.
The value is being upheld as a professional standard—the authors and contributing experts present this as the minimum expected behavior for competent fund managers. They implicitly critique managers who fail to take this responsibility seriously by highlighting common mistakes like having too few investments or misaligning fund size with ownership targets. The underlying message is that failing to properly construct a portfolio represents a breach of duty to limited partners who have entrusted capital to the fund.
Responsibility