Construction
Portfolio construction math for small funds
Before a single deal is a good deal, it has to be a good deal for your fund. A $1M check is aggressive out of a $10M fund and rounding error out of a $200M one. This guide walks the four numbers every emerging manager should be able to produce on demand — average check, ownership per check, position as a share of the fund, and the exit a single position needs to return the whole thing — with the exact arithmetic, worked on a $25M fund.
Pure arithmetic — the same checks the kit's model runs. Nothing here is a recommendation; it turns the numbers you already have into consistency checks.
Start with deployable capital, not fund size
Your fund size isn't what you deploy into initial checks. You hold back reserves for follow-on. So the first move is:
initialCapital = fundSize × (1 − reserves)avgInitialCheck = initialCapital ÷ numPositions
Reserves matter more than beginners expect. Many early-stage funds reserve 30–50% to defend ownership in later rounds; if you reserve too little, you get crushed in the rounds that matter and your winners dilute away.
The four checks, worked on a $25M fund
Take a $25M fund, 22 planned initial positions, 40% reserves, a 5% target ownership — and you're weighing a $1.0M check into a $20M post-money round.
| Check | Formula | Result |
|---|---|---|
| Deployable (initial) capital | 25M × (1 − 0.40) | $15.0M |
| Average initial check | 15M ÷ 22 | $681,818 |
| This check vs. average | 1.0M ÷ 681,818 | 1.47× |
| Ownership this check buys | 1.0M ÷ 20M | 5.0% |
| Position as a share of the fund | 1.0M ÷ 25M | 4.0% |
| Fund-returner exit | 25M ÷ 0.05 | $500M |
Reading the results
- Ownership: 5.0% — exactly your target, so this deal clears your ownership floor. If it bought only 3%, you'd need a bigger check (or a lower price) to hit target.
- 1.47× the average check — a meaningful concentration but not alarming. A common guardrail flags checks above ~1.75× average as an anchor position that needs deliberate sign-off.
- 4.0% of the fund — comfortably inside the norm; most construction models keep a single initial position well under ~15% before reserves.
- Fund-returner exit: $500M — at 5% entry ownership, this one company must exit around $500M just to return the whole $25M fund (ignoring dilution — with dilution it's higher). That single number tells you whether the deal can be a fund-maker or is at best a nice multiple.
Concentration and thin diversification are where small funds quietly break. A few common flags: a check above 1.75× your average (an unplanned anchor); a single position above 15% of the fund before reserves; reserves under 20% (you'll get diluted out of your winners); or fewer than ~15 positions (early-stage returns are power-law — you need enough shots to catch an outlier).
Ownership and dilution are linked
The fund-returner number above uses entry ownership. But you don't hold entry ownership at exit — you hold your diluted stake. So the real exit a position needs to return the fund is higher than the naive number, and reserves are how you fight that dilution. The construction math and the exit waterfall are two halves of the same question: can this position move my fund?
Run your own fund
Set your fund size, positions, reserves, and the check + post-money you're weighing. The model runs the exact checks above.
Fund-construction checks
Same arithmetic as the kit's portfolio sheet.
Illustrative — you supply every input. The fund-returner figure uses entry ownership and ignores dilution, so treat it as a floor, not a forecast.
Get the construction model as a sheet.
The kit's portfolio-model spreadsheet runs these checks and warnings, alongside the dilution / exit waterfall, the 8-section memo template, three worked memos, and the stage-weighted scorecard.