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Portfolio Construction Analysis for VC Funds
Send the investment record and the construction you described to LPs, and get the drift measured by dollars deployed rather than by company count.
Portfolio construction content is written for the fund that has not been raised yet. How many companies, what ownership target, what reserve ratio, what the power law implies about position count. Useful once. Then the fund deploys for six years and nobody recomputes any of it, because the construction is treated as a design decision rather than a measurement. The question an LP actually asks in the next raise is whether the portfolio you built is the one you described, and that question has an arithmetic answer.
Bramblewick Fund III is an invented example. A 150.0m fund that told LPs 65 percent enterprise software, 25 percent fintech infrastructure and 10 percent opportunistic, across 24 to 28 companies. It has 22 companies and 118.0m deployed. By company count it looks close: 14 enterprise software of 22 is 63.64 percent, five fintech is 22.73 percent, three health tech is 13.64 percent. By initial checks alone it also looks close, at 63.01, 23.29 and 13.70 percent of the 73.0m.
Weight it by the dollars actually deployed and the picture changes. Enterprise software is 68.0m of 118.0m, or 57.63 percent, seven and a third points under target. The three-company opportunistic bucket is 25.0m, or 21.19 percent, more than twice its 10 percent target. Nothing about that shows up in a count. It happened in the 45.0m of follow-on, where 15.0m of the 45.0m went into a single health tech company, and no reporting cut the fund produces is weighted that way.
The drift is in the reserves, and it is usually not correctable
Initial checks are a decision the partnership makes deliberately, with the strategy in the room. Follow-on checks are governed by which companies are working, which concentrates capital wherever the early evidence is strongest. Often that is the right call. It becomes a problem because the stated construction describes only the deliberate half of the deployment while the reserves rewrite the rest. And where those constraints sit in the partnership agreement, Delaware policy is to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements.
The constraint that fails first is usually the single-company cap. Bramblewick told LPs no more than 12 percent of committed capital in one company, which is 18.0m of the 150.0m. Larkspur Health has taken 4.0m of initial and 15.0m of follow-on, so 19.0m, or 12.67 percent. That cap was a representation, and an adviser to a pooled vehicle may not make any untrue statement of a material fact to any investor in the pooled investment vehicle-8). The 1.0m breach arrived across five separate decisions.
Then the finding nobody wants. With 8.0m uncalled, and 118.0m plus 24.0m of fees plus 8.0m reconciling to the 150.0m commitment, every remaining dollar into enterprise software reaches 60.32 percent, still 4.68 points short of target. Closing the gap would take 24.86m, or 3.11 times the capital that exists. So the drift is a disclosure question rather than a plan, which is why the compliance rule's requirement to review, no less frequently than annually, the adequacy of the policies and procedures-7) is where this belongs.
How it works
Send the record
One line per company with sector, entry stage, initial check, follow-on to date and entry ownership.
Send the strategy
The construction you described to LPs, including every stated band, cap and count range.
Weight three ways
Allocation by count, by initial dollars and by total deployed, with the divergence between them named.
Test the correction
What the uncalled capital can reach against each target, and where it arithmetically cannot.
What you get
- The realized allocation computed three ways: by company count, by initial checks, and by dollars deployed
- Each stated constraint tested against the record, with the breach sized in dollars rather than described
- Follow-on capital attributed by sector and by company, which is where construction drift is generated
- The correction arithmetic: what the remaining capital can reach, and what it would take to close the gap
- A reconciliation of deployed capital plus fees plus uncalled against the committed capital
- A doc written for the partnership and for the LP conversation, with the drift stated and not softened
Common questions
Why does weighting by dollars matter so much?
Because a fund's economics are dollar-weighted and its reporting is usually count-weighted. On the worked example the opportunistic bucket is 13.64 percent of companies and 21.19 percent of capital, and only the second number describes the fund an LP is buying. A sector at target by count can be double its target by dollars.
Is construction drift a compliance problem or just a reporting one?
It can be either, which is why the analysis sizes it rather than characterising it. An adviser to a pooled vehicle may not make an untrue statement of material fact to an investor in that vehicle, and the compliance rule requires an annual review of the policies meant to prevent violations. Whether a specific gap is material is counsel's call.
What if we deliberately changed strategy mid-fund?
Then say so in the strategy field and the analysis measures against the revised construction with the change dated. That is a much better position than an unexplained divergence, and it is a materially different conversation with an LP. What the arithmetic cannot do is infer a strategy change from the deployment pattern that followed it.
Does it tell us where to put the remaining capital?
No. It tells you what the remaining capital can and cannot reach against each stated target, which is a different thing. Where the reserve is the live question, follow-on and reserve analysis prices a point of ownership in each company. The allocation itself stays with the partnership.
Where does the investment record come from?
Whatever you keep the positions in. The portfolio monitoring pack already holds sector, stage, ownership and check history in the shape this reads, and the entry rationale usually sits in the investment memo pack. Follow-on amounts are the field most often wrong, because they accumulate across quarters.
How is this different from fund performance reporting?
Performance answers what the portfolio returned. Construction answers whether it is the portfolio you said you would build, and the two can disagree completely. A fund can beat its benchmark and still have drifted badly. Fund performance and benchmark analysis handles the first question from actual cash flows.
When in a fund's life is this worth running?
Once a year, and before any next-fund raise. Run it early enough and the remaining capital can still move the numbers. Run it at 118.0m of 150.0m deployed, as in the example, and the answer is what to disclose rather than what to do. Realization and attribution review is the companion retrospective on exits.
Portfolio Construction Analysis for VC Funds
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