The number of companies in a venture portfolio should emerge from a budget. That budget needs to include capital and the time required to select and support investments.
Starting with a target deal count and working backwards can conceal incompatible promises: meaningful ownership, ample reserves, small fund size and intensive support. A useful construction model makes those constraints visible together.
Key takeaways
- Calculate initial-investment capital after fees, expenses and reserves; divide that budget by a realistic cheque size.
- Check whether entry prices, ownership targets and future dilution are compatible with the proposed number of investments.
- Test partner workload and shared exposures alongside the financial model. A portfolio can fit its capital budget while exceeding the team’s capacity.
Calculate investable capital first
Take an illustrative £20m fund. Assume its planned lifetime fees and expenses total £3m, leaving £17m for investment. Earmark £5m for possible follow-ons, leaving £12m for initial cheques.
| Budget item | Amount |
|---|---|
| Commitments | £20m |
| Planned lifetime fees and expenses | −£3m |
| Capital available for investment | £17m |
| Follow-on allocation | −£5m |
| Initial-investment budget | £12m |
At an average £400,000 initial cheque, the budget supports 30 companies. At £600,000, it supports 20. The model assumes no recycling, investment income or additional capital, and that the cost allowance proves sufficient.
Replace each assumption with the actual fund terms and operating plan. A £20m headline fund does not mean £20m is available for first cheques.
Check whether the cheque buys the intended ownership
At an illustrative £8m post-money valuation, £400,000 buys 5%. At £12m, it buys about 3.33%. If the strategy promises 5% at entry, the second investment requires £600,000 on a simple priced-equity basis.
That change reduces the number of initial investments the same budget can support from 30 to 20. It is not a minor adjustment to a spreadsheet cell; it changes portfolio breadth.
Model plausible dilution after entry. A 5% holding diluted by 20% in each of two rounds becomes 3.2%. Maintaining more ownership requires additional capital and suitable participation rights, both of which belong in the plan.
Give reserves a purpose and timetable
The £5m follow-on allocation should connect to expected decisions, not simply a preferred percentage. Estimate which milestones could justify more investment, when those rounds might occur and the approximate cheque requirements.
Stress-test bunching. Several companies may raise at once, particularly if market conditions delay earlier rounds. A reserve sufficient in total can still be difficult to allocate across simultaneous needs.
Treat follow-ons as fresh investment decisions and include a process for declining. Our reserve-strategy guide examines how to compare those cheques with alternative uses of capital.
Add the partner's capacity constraint
Suppose one investor has 400 hours a year available for new-investment diligence and direct portfolio support, after other responsibilities. Assume detailed diligence takes 20 hours per completed investment, including an allocated share of unsuccessful reviews.
Ten new investments use 200 hours. Supporting an average of 20 active holdings at 12 hours each uses another 240. The total is 440 hours, above the stated capacity before unexpected events.
These are illustrative workload assumptions, not industry norms. They show why a financially feasible portfolio may be operationally infeasible. The investor must change the pace, support model, staffing or portfolio size.
Do not assume that selecting fewer companies automatically solves the problem. Larger positions may carry more intensive diligence or governance expectations.
Examine shared exposure within the portfolio
Count companies, then group them by common failure conditions. Businesses in different sectors can still depend on the same buyer budget, financing market, platform or regulatory outcome.
Use that map to stress-test the construction. What happens if a major distribution channel changes its terms or several capital-intensive holdings cannot finance their next stage? Breadth is less helpful when apparently separate positions fail for the same reason.
This does not make specialisation inherently wrong. It makes the cost of specialisation explicit alongside the knowledge advantage the investor expects to bring.
Reconcile the promises before raising
A final construction model should show the investment count, initial cheque range, entry ownership, dilution assumptions, follow-on capital, costs and workload. Run a smaller-close case and a higher-entry-price case.
If the model only works at the fundraising target or with unusually favourable allocations, say so and define the adjustment. The credible answer to “how wide should we build?” is the portfolio whose capital, ownership and operating requirements can all be met together.
FAQ
How many companies should a venture fund invest in?
Calculate the initial-investment budget after costs and reserves, then divide by a realistic cheque size. Check ownership, access and team capacity against the resulting count. The number is a consequence of compatible assumptions, rather than a target that can be chosen independently of the rest of the strategy.
Does a wider portfolio necessarily hurt returns?
No simple count establishes that. More positions can broaden exposure while increasing selection and support work. Assess the support model, staffing and common risks, and test whether adding investments changes diligence quality. A portfolio can be affordable in capital and still demand more time than the team has.
Can you build a broad portfolio without raising a fund?
Yes, through a series of investments or suitable vehicles, but funding, costs and administration must work for each position. Repeated SPV raises do not provide the same capital certainty as a committed pool. Include the ongoing records and corporate actions from earlier deals in the workload.
How much should be reserved for follow-ons?
Tie reserves to possible financing dates, cheque requirements and selection criteria. Test several companies raising simultaneously and a smaller overall fund close. Reserved capital has an opportunity cost, so the policy should explain when you would decline a follow-on as well as when you would participate.
What does “diversify, then concentrate” mean?
It describes making a broader set of initial investments and allocating later capital selectively as evidence develops. It is not free diversification: follow-ons consume the same overall budget and can increase exposure to shared risks. New prices and ownership terms still need underwriting.
