Portfolio Construction

The set of decisions that determine how a fund or investor’s capital is spread: how many companies, at which stages, over how many years, how much is held back for follow-ons, and how much sits in each risk bucket. The saved tweets filed here approach it from several directions.

• Risk buckets. Chamath Palihapitiya describes a personal barbell: a 45/10/45 split between early-stage and liquid public-market risk, with growth rounds, converts and PIPEs in the middle. Within the early-stage bucket he spreads the money over ten years, holds back a third for reserves, and so arrives at about $3 a year across roughly 20 deals. He notes the barbell can be built on stage, sector or instrument. See Barbell Strategy.
• The fund model. Brian Ma’s thread explains the “Portfolio Construction Model” that VCs use: number of companies per stage, graduation rates, follow-on policy and recycling, with TVPI as the output. In his example the same $10M seed fund ranges from 3.71x to 10.7x depending on assumptions about follow-ons, pick quality and recycling, and VCs compare actuals to the model quarterly.
• Position sizing. Austen Allred notes that Sequoia’s $213.5M FTX loss was about 0.25% of roughly $85B under management: a huge miss as a single investment, immaterial to the portfolio.
• Individual versus system. David Haber likens most successful funds to the 1991 Bulls, winning on one or two stars, and says he is more interested in the later system-driven streak.
• Angel questions. Shruti Gandhi lists six questions for angels, including how much capital to allocate, how many companies over how many years, and when returns are expected. See Angel Investing.
• Further reading. Boris Wertz flagged an advice thread for emerging VCs as an “underrated/overlooked part of successful investing”.

The structure of the vehicle itself is covered under Fund Structure; the wider topic is Capital Allocation.

Where this appears

Saved tweets:

• Investing 101 - Risk Management is… (tweet)
• It Took Me 15+ Years… (tweet)
• It’s crazy that Sequoia lost… (tweet)
• Most Successful Funds Operate Like… (tweet)
• Many of You Are Interested… (tweet)
• Excellent Advice for Emerging VC’s… (tweet)

Concepts: Barbell Strategy, TVPI