How much should a fund reserve?

What funds actually do

A survey of more than sixty emerging fund managers worldwide, conducted by Blue Future Partners and published through OpenVC, found a median fund size of $56 million, a median initial cheque of roughly $850,000, and 55 percent of committed capital held for follow-on. Sapphire, looking across its own portfolio of fund managers, found most of them clustered around a one-to-one split between initial and reserve capital. Fred Wilson has written plainly that his firm reserves about half of each fund and raises the next one after deploying the other half.

These examples explain why a reserve near half the fund is a familiar reference point. They do not establish the right share for every strategy. The next question is what the fund expects that money to do.

Why fund size changes the question

The clearest framing of this comes from the LP side. Alex Edelson, who allocates to emerging managers, breaks the answer into three bands rather than offering one: at $20 million and under, a preference for limited reserves or none at all; between $20 million and $40 million, a grey area where some reserve makes sense but well short of half; at $50 million and above, room to justify a ratio approaching one-to-one.

The reasoning is about trade-offs. How much ownership could the fund maintain or add in a later round, on the rights and terms actually available? What could the same capital buy in a new investment? Edelson’s size bands express his allocation preference, not a universal boundary. The disagreement over reserves has its own page in this library.

The same reserve can produce different results

Laura Thompson at Sapphire illustrates the importance of selection using modeled scenarios, not observed fund returns. She held the reserve strategy constant and varied where the follow-on capital landed. Her base case returns 5.5x gross, which becomes 4.0x net after fees and carry. Deploy the same reserve concentrated into the eventual winners and the net figure rises to 5.0x. Spread it evenly across the portfolio instead and it falls to 3.3x. Deploy it into companies that turn out not to be the winners and it falls to 2.5x.

The reserve ratio stayed constant across those scenarios. What changed was which companies received it. The example isolates that decision within its assumptions; it does not tell a manager in advance which companies will win.

This adds a second question to the reserve budget: how will the firm decide where to deploy it? Review the evidence available at each decision, the cost of maintaining ownership and the alternatives. Confidence alone does not establish that a concentrated follow-on strategy will work.

A calmer way to arrive at the number

One way to test a reserve plan is to start with the initial investments. Estimate check sizes from entry valuations and ownership targets, then multiply by the number of companies. Account for fees, expenses and other obligations before treating the remaining capital as available for follow-on. Compare that amount with the follow-on needs and participation assumptions you expect.

This makes the reasoning behind the percentage easier to discuss with LPs. You can see which assumptions would need to change if the reserve were larger or smaller. That planning approach has its own page as well.

What the model does with the number

The Colibrí Architecture model takes no position on the right reserve percentage and does not recommend one. What it does is read the consequence. The reserve share determines how much capital remains for initial cheques, and dividing that by the target portfolio count gives the initial cheque the fund has implicitly committed to. Whether that cheque is consistent with the stage the fund says it invests at is one of the dimensions Portfolio Efficiency evaluates.

So the model will not tell a General Partner that 55 percent is too high or 20 percent too low. It will show whether the number chosen leaves the fund able to write the cheques its own strategy requires, within the model’s simplified assumptions. A full cash budget still needs to account for fees, expenses and fund terms.

Sources

• An LP take on VC portfolio constructionRodrigo Ferreira, Blue Future Partners, published on OpenVCSurvey of more than sixty emerging fund managers worldwide, with the reserve share, ticket sizes, and portfolio counts they reported.
• Dirty Secret: Venture Reserves are Not Always a Good ThingLaura Thompson, Sapphire, May 2022The scenario work showing the same reserve producing three very different net outcomes depending only on where it lands.
• LPs Seeking Alpha: Decoding the Myths and Mastery of Fund Structure, Size, Reserves, Access, and SelectionAlex Edelson on The Full Ratchet, episode 430An LP's answer keyed to fund size rather than to a single industry ratio.
• ReservesFred Wilson, AVC, January 2017The long-standing case for reserving about half a fund, from a firm that does it.