How much should I reserve for follow-on investments?

The twelve inputs that decide the number

Reserves are not a policy applied to a fund. They are an output of these, and changing any one of them moves the answer.

• Ownership target. What you need at entry and what you intend to hold through dilution, since holding ownership is what reserves buy.
• Portfolio size. Every dollar reserved is a dollar not deployed into a new position, at a fixed fund size.
• Stage. Earlier entry means more subsequent rounds to consider, and a longer path to any exit.
• Initial cheque size. Reserves are usually expressed as a ratio to it, which is why the two are decided together.
• Pro-rata rights. Whether you have the contractual right to maintain ownership, and whether it survives later rounds.
• Financing risk. How likely your companies are to need capital in a market where the next round is not assured, which is the risk reserves exist to absorb.
• Follow-on strategy. Whether you follow into strength, support through difficulty, or both, which are different capital requirements and different philosophies.
• Fund size. The constraint everything else sits inside.
• Pacing. Reserves held for years are not deployed, and a fund that reserves heavily and deploys slowly can reach the end of its investment period with capital and no time.
• Concentration limits. What your largest position may become once reserves are added to it.
• Limited partner expectations. What allocators in your category expect to see modelled, which is a question to ask rather than assume.
• Deployment constraints. Whether the fund documents, side letters, or programme requirements limit how reserves may be used.

Three hypothetical scenarios at the same fund size

The numbers below are the same illustrative fund used on Blueprint's fund sizing and portfolio construction pages, carried across so the three can be read together. They are assumptions chosen for legibility, not a recommendation, a benchmark, or a claim about any market. Every output is hypothetical and follows only from the inputs stated.

• Shared hypothetical inputs: a 45 million dollar fund, a 21 percent lifetime fee and expense load leaving about 35 million dollars investable, and a 1 million dollar initial cheque.
• Scenario A, no reserves. Each position costs 1 million. Hypothetical result: about 35 initial positions, no capacity to follow, and ownership that dilutes through every subsequent round.
• Scenario B, reserves at 0.75 to 1. Each fully reserved position costs 1.75 million. Hypothetical result: about 20 positions, with roughly 15 million dollars available to defend them.
• Scenario C, reserves at 1.5 to 1. Each fully reserved position costs 2.5 million. Hypothetical result: about 14 positions, with roughly 21 million dollars of follow-on capacity and a materially more concentrated portfolio.

What the three scenarios actually differ on is not prudence but strategy. Scenario A is a spray strategy that assumes ownership does not matter to the return. Scenario C is a concentration strategy that assumes it matters more than breadth. Neither is wrong, and an allocator's question is whether the reserve choice matches the thesis you described ten slides earlier.

Reserves are also rarely deployed evenly. Most managers plan to concentrate follow-on capital in a minority of positions, which means a stated ratio describes the pool rather than a promise to each company. Say which you mean.

The follow-on policy, which matters more than the ratio

A reserve number without a policy is a number. Allocators ask for the policy, and a first-time manager who has one is unusual.

• What triggers a follow-on: a milestone, a round led by somebody else, a specific ownership threshold, or a judgment call.
• Who decides, and whether the process differs from an initial investment decision. Following into a company you already own is where discipline is hardest.
• What you will not do: the circumstances in which you decline to follow even when you have the right, which is the part most policies omit and allocators most want.
• How reserves are re-evaluated over the fund's life, since a reserve model set at close will be wrong by year three in ways that need a stated response.
• What happens to unused reserves at the end of the investment period.

The consistency check an allocator will run

Reserves appear in at least four places, and they have to agree.

• The deck: a stated reserve ratio or percentage of the fund.
• The construction model: a reserve figure that reconciles with the position count and the fund target on the same page.
• The fund documents: any limits on follow-on investment, concentration, or recycling that constrain what the model assumes.
• The actual investment process: whether your prior behaviour, where a record exists, matches the policy you describe. A manager who reserved nothing historically and now models heavy reserves should say what changed.
• The pacing plan: whether reserves are still available when the companies that need them arrive, which is a timing question rather than a sizing one.

Where a fund raises less than target, the reserve decision is the first casualty. Deciding in advance what you cut at 60 percent of target, and saying so, is far better than improvising it in year two.

What limited partners are testing

Reserves are where allocators check whether the construction is a plan or a slide.

• Does the reserve ratio reconcile with the position count and the fund size in the same document?
• Is there a written follow-on policy with a decision maker named?
• Does the reserve strategy match the ownership claim in the thesis?
• What happens to reserves if the fund closes smaller than target?
• Has the manager followed into a company that was struggling, and what did they decide?

What a reserve model does not prove

It does not prove the capital will be there when it is needed, because reserves compete with new investments for the same pool and the pressure to deploy is real in every fund's second and third year.

This page states no universal reserve percentage and no market standard, because none was verified and the right answer depends on stage, ownership target, portfolio size, and follow-on strategy. The scenarios are hypothetical arithmetic from stated assumptions.

This page is educational and general. It is not legal, tax, accounting, or investment advice. Follow-on limits, concentration limits, and recycling provisions are governed by fund documents and should be confirmed with counsel.