Venture Fund Portfolio Construction | Journal | Kauffman Fellows

This blogpost explores venture portfolio construction and the various trade off implications a GP must consider and enables you to construct your own portfolio to understand how various assumptions impact returns to LPs and GPs. 

One of the most important things a General Partner (GP) needs to consider early on when starting a venture fund is their portfolio construction strategy. Portfolio construction will impact nearly every aspect of running a fund, including return performance. 

Portfolio construction is the careful calculus of a number of different decisions related to how a fund is run and the impact that each of those inputs have on each other . The major contributing factors to portfolio construction are:

Graduation Rate Assumptions: Individual company dilution needs to be factored into fund performance. One way to do this is to make some assumptions around the percentage of total companies raising subsequent financing rounds, as well as assumptions on the size and pre-money valuations of those rounds. Some funds may assume that of all the seed inv

... See more

Fund Level Expenses: In addition to the management fees that are paid to the management company for running the fund, there are other expenses that are deducted directly from the fund assets. These fees include legal set-up costs, fundraising expenses and other administrative, legal and infrastructure costs. These costs can range from $250K on the

... See more

Finally, another common approach is to back into the required fund value to guarantee a Net LP return multiple (i.e. net of fees and carry). For e.g. for a $100M fund to return 3x net to its LPs given the standard 2 and 20 model and $850K in total fund expenses, the total net return for the fund would have to be $370M after taking into account the ... See more