Not every dollar goes to a new company
Fund construction is the plan for how a fund's total committed capital splits between initial checks (first investments in new companies) and reserves (capital held back specifically to follow on into existing portfolio companies in later rounds, per Lesson 18's pro-rata rights). Because the power law (Lesson 21) means the winners matter disproportionately, defending ownership in them through reserves is often as important as finding them in the first place.
A worked $100m fund plan
| Allocation | Amount | Purpose |
|---|---|---|
| Initial checks (25 companies @ $2m) | $50m | First investment, establishing the position |
| Follow-on reserves | $35m | Defending pro-rata in winners across later rounds |
| Management fees (2%/yr x 10 years) | $15m | Fund operations, salaries, overhead |
| Total committed capital | $100m | — |
Why the reserve ratio matters so much
A fund with too few reserves gets diluted out of its best companies exactly when it matters most, unable to defend ownership in the outlier the power law says will drive most of the return. A fund with too many reserves and too few initial checks sees fewer companies in the first place, reducing the odds any one of them becomes that outlier at all. Most seed and early-stage funds target reserving roughly $0.50-$1.00 for every $1.00 deployed in initial checks, though this varies by strategy and stage focus.
Reserves aren't a rainy-day fund. They're the mechanism that lets a fund keep buying more of the one company that turns out to matter.
Checkpoint
- Fund construction: the plan for splitting capital between initial checks and follow-on reserves.
- Reserves exist to defend ownership in winners, directly serving the power-law logic from Lesson 21.
- Too few reserves risks losing the outlier; too few initial checks reduces the odds of finding one at all.
If anything here still feels unclear, ask before moving to Lesson 23.