How much of my fund should I allocate to potential follow up investments?
When relevant, how much of my fund should I allocate to potential follow up investments? What would typically determine relevance and sizing of such follow-up allocation?
The allocation strategy between initial investments and reserving capital for follow-ons depends on the fund size and strategy. Many small Fund 1s don’t have reserves due to their size. Beyond pro-rata considerations, factors to consider include the potential for future rounds, the growth trajectory of portfolio companies, market conditions, and the need to support companies through critical milestones. Balancing initial investments with reserves ensures you can support successful companies in subsequent rounds.
The stage, the secret sauce and the manager's to raise significant capital affect the follow-on strategy. Funds under $20m will struggle to have an follow on reserves because there is not enough capital to properly execute this strategy.