Eniac Ventures published an article on Medium about Seed Fund Portfolio Construction for Dummies. The article discusses the mistakes that new seed managers make in terms of the number of initial investments, the pacing of the initial investment period, and the average size of initial investments.
The article explains how to choose an initial strategy, including the number of investments to make, pacing, and investment size. In addition, the article covers recycling and follow-on strategies.
It also notes that the distribution of venture returns generally follows a power law, and the initial portfolio construction should align with this distribution. The article also emphasizes that the initial strategy is a starting point that must be measured and adjusted over the life of the fund.
- Make sure your portfolio construction aligns with power law-shaped distribution returns.
- Your initial portfolio construction is just a starting point. It must be measured and adjusted over the life of investing.
- Getting recycling right at seed is challenging. Use a holistic model that pulls in everything to optimize your chances.
- When choosing your initial strategy, ensure that you have a solid starting point with enough portfolio companies for a good number of "shots on goal" for exits that can be fund returners.
- Pacing is a hard thing to project, but you'll still want to layout over how many quarters you'll make your initial investments.
- The percentage you own of a portfolio company when it exits is important, not the amount you put in. Pick a target ownership percentage you'll try to stay close to, and based on the average terms you project investing at, approximate the average allocation you'll need to invest to buy that ownership.
- The size of your initial checks will have a strong impact on your strategy.
- To what extent do you want to follow on in order to maintain your ownership through subsequent rounds? The optimal answer depends on the size of your fund.
Full Story: HERE (Medium / Eniac Ventures)
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