Does the 40 to 50 percent reserve rule still fit?

The convention, and why it is contested

Holding 40 to 50 percent of a fund for follow-on is a familiar convention in venture. The reasoning is straightforward: preserve capital to maintain or increase exposure to companies that warrant another investment. But the right budget depends on the fund’s size, strategy, access and ability to assess those opportunities.

That convention is now contested, and the disagreement is not a single dispute with two sides. It is at least three distinct positions, each with a different argument and a different view of what a reserve is actually for. Reading them as schools rather than as a running argument makes it easier to work out which one describes your fund.

The reserve-light school

Walk makes four arguments: fast follow-on rounds can leave little time to assess progress; crowded rounds can limit participation despite pro-rata rights; larger funds may accept prices that do not suit a smaller fund’s return objectives; and past results may not describe current conditions. These are reasons for his reserve-light position, not findings that settle the question for every fund.

The commentary also points to concentrated capital flows. The Fund CFO, drawing on the PitchBook-NVCA Venture Monitor, records three firms taking in 48.1 percent of all venture capital raised in the first half of 2026, and megadeals of $100 million or more absorbing 87.5 percent of the $412.7 billion deployed. Those aggregate figures provide market context. They do not establish whether a particular fund can exercise its participation rights in a specific round.

The probability school

Andreas Schmidt makes the sharpest version of this, and it is uncomfortable because it is about selection rather than market structure. For a fund with a thirty-company portfolio that follows on into five companies, he puts the probability of selecting the eventual winner at random at less than 17 percent. That calculation assumes random selection of one eventual winner; it does not measure an actual manager’s selection ability or cover every possible return pattern. His conclusion is that funds up to roughly €25 to €30 million should deploy all their capital into initial positions instead.

The same logic runs through graduation rates, which is the other input the probability is built on. Capital reserved for a round that does not occur may need to be redeployed or returned under the fund’s terms. Expected progression to later rounds therefore matters when sizing the reserve. This is the school that treats the reserve percentage as an output of the arithmetic rather than a starting assumption.

Note that this school and the reserve-light school reach similar conclusions for small funds by different routes. One argues from the market a small fund operates in; the other from the odds a small portfolio faces. They are not the same argument, and a firm persuaded by one is not automatically committed to the other.

The reserve-preserving school

The evidence here is the same evidence. Konvoy's work on the Series A crunch, drawing on Carta's fund performance data, finds that 30.6 percent of companies raising a seed round in the first quarter of 2018 reached a Series A within two years, against 15.4 percent of the companies that raised seed in the first quarter of 2022. The share roughly halved between those two cohorts within that two-year window. It is not a claim about every company or its eventual financing outcome.

The same cohort comparison can support different questions. How much capital should be held for uncertain future rounds? And how important is it to have capital ready for the companies that do raise? Reaching a Series A provides new information, but does not establish which company will ultimately produce the strongest return.

There is also a position that declines the choice. The Fund CFO points to recycling provisions rather than passive reserve pools: redeploying early exit proceeds lets a fund reach well over 100 percent deployed without holding capital idle for years, with Walk's own firm reportedly getting past 120 percent invested in each of its first two funds this way. Recycling can expand investable capital only where the fund’s terms permit it, required approvals are in place and proceeds arrive in time. It is an additional planning option, not a guaranteed substitute for reserves.

What the schools agree on

Fund size is a recurring distinction in these arguments. The reserve-light argument confines itself to funds of $100 million or less. The probability argument confines itself to funds up to roughly €25 to €30 million. Neither claims to describe a $500 million fund.

Bring the debate back to the fund under review. What participation is affordable and available? How much ownership could it maintain? What information will guide selection, and what other use of capital would it displace? Those questions make the competing positions easier to assess.

Where the Colibrí Architecture model sits

The model has no position on the right reserve percentage, and it would be a mistake to read one into it. What it does is make the consequences of the choice visible in the rest of the configuration, because a reserve decision is not a self-contained one.

Reserves are declared as a share of fund size, and that share determines how much capital is left for initial cheques. Divide what remains by the target portfolio count and you have the implied initial cheque, which either matches the stage the fund intends to enter at or does not. This is one of the dimensions Portfolio Efficiency reads. A fund that raises its reserve percentage without changing anything else has quietly reduced its initial cheque; a fund that drops reserves to near zero has raised it. Neither is wrong. Both change what the fund is.

The Scenario Engine sits on the other side of the same decision. It is a companion module, not one of the three engines, and it takes up the question after the reserve policy has been set: for a specific existing portfolio company, in a specific proposed round, should this fund follow on, how much, and when. It reads the company's trajectory, the round terms, the fund's remaining reserve capacity, and the firm's existing exposure to that company across every fund it runs, and it returns a recommendation, an allocation expressed against pro rata, a timing signal, and a three-part rationale.

It is decision support and nothing more. Each scenario is a point-in-time evaluation against current inputs. The Scenario Engine does not execute commitments, does not maintain a standing recommendation between sessions, and does not optimize or allocate a reserve pool. The General Partner makes the decision. What the module offers is that the reasoning behind it is explicit and reviewable, which matters more than usual on a question the industry itself has not settled.

Sources

• I've Changed My Mind. Early Stage Venture Funds of $100 Million or Less Should Hold Almost No Reserves for Follow-On.Hunter Walk, 23 July 2026The fullest statement of the reserve-light position, from an investor who held the opposite view for a decade.
• #361: Rethinking VC ReservesThe Fund CFO, July 2026Carries the concentration figures both sides cite, and the recycling proposal that sidesteps part of the disagreement.
• Why Micro-VCs Shouldn't Play the Reserve GameAndreas Schmidt, Multiple Capital, 17 March 2026The probability-driven case, with the selection math for a small fund.
• Failure to Launch: The Series A CrunchKonvoySeed-to-Series-A graduation rates by cohort, drawn from Carta's fund performance data. Read as support by more than one school.