Log: What Does a Venture Fund Portfolio Look Like?
Do you ever wonder what a venture fund portfolio looks like?
Here is a chart of a made-up portfolio. Assuming a $100m fund, $80m was deployed into 15 early-stage startups aiming for approximately 15% ownership in each. This would be a disciplined, concentrated approach. The chart provides a snapshot of a venture fund's portfolio at the mid-point of its typical lifespan. It also succinctly displays the fund's investment strategy as well as its current status and return potential.
By year 5, the fund has written up 9 of its investments, indicating an increase in the valuation of these startups since the initial investment. This is a positive sign, suggesting that these companies are growing, presumably hitting their milestones and possibly completing successful funding rounds at higher valuations, hence increasing the value of the fund’s stake.
The 6 write-offs highlight the inherent risks of investing in venture—some startups fail to perform as expected. This is anticipated in venture capital, where a small number of successful investments significantly outweigh the losses from unsuccessful ones if done right.
No realizations mean that the fund has not yet exited any investments, which is not unusual at this stage. Exits typically happen when a company is acquired or goes public, and these events tend to occur after a startup has matured beyond the early growth phases.
The fund seeks to return at least the $100m raised from investors. For this to occur, the total value of the fund's exits needs to surpass this threshold. The current unrealized gains suggest the potential for successful exits. But outperforming venture funds often depend on a few high-performing startups—sometimes referred to as 'unicorns' if they reach valuations over $1 billion—to return the fund 3 to 5 times over.
The expectation is that by year 10, several of the portfolio companies will have matured to a point where they can be sold or go public, providing the liquidity necessary for the fund to realize gains and return capital to its investors. The next five years will be crucial for the fund as it supports the companies towards successful exits, negotiate sales, or prepare for IPOs.
Throughout this period, the fund must manage the portfolio with a hands-on approach, working closely with the companies to ensure they are on track to meet their ambitious targets. This includes constantly evaluating and reevaluating the companies' performance, the competitive landscape, and the overall fit within the portfolio.
The process of building and managing such a fund portfolio is as much an art as it is a science.
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