Portfolio construction is the careful calculus of a number of different decisions related to how a fund is run and the impact that each of those inputs have on each other . The major contributing factors to portfolio construction are:

Some funds perform “return the fund” analysis before making an individual investment. This analysis essentially looks to understand what value a given company would have to exit at to both return the fund as well as hit the targeted net return given assumed dilution over time.

Finally, another common approach is to back into the required fund value to guarantee a Net LP return multiple (i.e. net of fees and carry). For e.g. for a $100M fund to return 3x net to its LPs given the standard 2 and 20 model and $850K in total fund expenses, the total net return for the fund would have to be $370M after taking into account the... See more

One of the most important things a General Partner (GP) needs to consider early on when starting a venture fund is their portfolio construction strategy. Portfolio construction will impact nearly every aspect of running a fund, including return performance. 

Of course most funds hope that not all but one company they invest in has an exit, so the GPs must then make some assumptions around the percentage of companies that go to zero, return 1x capital, return a modest 3x capital, return a healthy 25x capital and return more than 100x capital. Making assumptions around graduation rates can help GPs... See more