Venture Fund Portfolio Construction Models

One of the first steps a general partner (GP) must take when starting a venture fund is to develop the fund’s investment strategy. It is also important to develop or quantify that strategy in a financial model that can be understood by prospective investors.

The rules and parameters that define how a fund’s portfolio is constructed drive the operations of the fund and its performance. Consequently, portfolio construction is a major consideration potential investors use to evaluate a manager during fundraising, as well as offering GPs and limited partners (LPs) guidance over the fund’s operation.

First Republic Bank recently organized a panel of experts to discuss the role and construction of portfolio allocation models, the latest real-world modeling insights, and identification of modeling best practices and common errors. The discussion was directed to First Republic’s growing community of venture CFOs and GPs. This document highlights the key points made by panelists.

Among the panel discussion points:

• The portfolio construction model is a quantitative representation of an investment strategy.

• The basic inputs for building a portfolio construction model come from a GP’s investment strategy — many of which are further defined in a fund’s limited partnership agreement (LPA).

• GPs should consider graduation rates carefully as well as exit.

• Follow-on reserve strategies are an important modeling consideration.

View the full report: Venture Fund Portfolio Construction Models

This article is part of Emerging Manager Operational Road Map: Real-World Insights From the Experts, First Republic’s series for emerging manager VCs.

The views and opinions of the third-party panelists are not necessarily those of First Republic Bank and should not be relied upon as such. The content of this publication is for information purposes only and should not be considered as legal, financial, accounting or tax advice, nor as an investment recommendation or an endorsement of any investment fund. First Republic Bank makes no representations, warranties or other guarantees of any kind as to the accuracy, completeness or timeliness of the information provided in this publication. You should consult with your own professional advisors to fully understand and evaluate the information provided in this publication before making any decision that could affect the legal or financial health of you or your business.