VC Fund Reserves Planning: How to Balance Initial Investments and Follow-On Capital
VC fund reserves planning is the process of determining how much committed capital to set aside for follow-on investments in existing portfolio companies, separate from the capital allocated to initial checks and fund expenses. Done well, it protects ownership stakes in your winners and positions the fund to generate the returns LPs expect. Done poorly, it leads to dilution, missed opportunities, or capital that runs out before the fund's strongest companies need it most. This post draws directly from a Strut Consulting webinar led by Lauren McDavid-Victor, Director of Finance, who spent more than six years in fund administration before joining Strut.
As Featured In: Strut Consulting Webinar — Strategic Reserves Planning: Optimizing Capital Deployment in Venture Portfolios
Key Takeaways
Reserves planning is not a one-time exercise: it requires quarterly review against actual fund performance.
Initial vs. follow-on splits vary significantly by stage; funds investing at Series A and later typically need larger reserves.
Fund expenses typically consume 20 to 30% of committed capital, which directly affects how much capital is actually investable.
Scorecards are a practical tool for removing emotion from follow-on investment decisions.
Most funds should plan for a 12-year fund life, not 10, and budget expenses accordingly..
Table of Contents
What is VC fund reserves planning and why does it matter?
How should a GP structure the initial investment vs. follow-on reserve split?
How do you build and stress-test a fund model?
What qualitative factors drive follow-on investment decisions?
How should reserves strategy evolve as a fund ages?
What technology supports effective reserves planning?
Conclusion
FAQ
What is VC fund reserves planning and why does it matter?
Reserves planning is the discipline of setting aside enough capital, after initial investments and expense allocation, to participate in future funding rounds of existing portfolio companies. The goal is to support winners in later rounds and avoid the dilution that comes from sitting out a round you should have participated in.
Lauren McDavid-Victor, Director of Finance at Strut Consulting, frames reserves planning as one of the core functions of fund management, not a secondary concern. A fund's reserve strategy is a direct expression of its investment thesis: which companies the GP believes in, how much follow-on conviction the fund is structured to act on, and whether the fund's capital allocation actually supports that conviction.
The need for reserves varies by fund. Stage of investing, fund size, and sector norms all affect how much capital should be held back and for how long. A seed fund will have different reserve requirements than one investing at Series A and beyond, where round sizes tend to be larger. Whatever the structure, reserves planning is most useful when it is treated as a living document, reviewed regularly against how the portfolio is actually developing rather than filed after the fundraise closes.
Learn more about Strut Consulting's fund finance and operations services.
How should a GP structure the initial investment vs. follow-on reserve split?
The capital allocation model is the financial blueprint that determines how a fund's committed capital gets deployed across initial investments, expenses, and follow-on investments. Getting the initial vs. reserve split right is one of the most consequential decisions a GP makes before deployment begins.
The split should reflect the fund's investment stage. As a general trend, funds investing at Series A and later carry smaller initial investment allocations and larger follow-on reserves, because round sizes at those stages are typically heavier. Seed funds have more flexibility in the initial check relative to reserves, though follow-on needs still exist and should be modeled from the start.
Lauren McDavid-Victor recommends building tiers based on portfolio company potential to guide the decision-making process. Companies with high breakout potential receive a larger portion of the reserves allocation; companies tracking below expectations receive less or none. For funds early in the deployment period, where company potential is difficult to assess, market benchmarks from funds of similar size and strategy are a practical starting point for setting reserve targets.
One number worth anchoring to: fund expenses typically consume 20 to 30% of committed capital across the life of the fund. This is not a red flag if your model accounts for it. Many GPs model expenses too narrowly and arrive at investable capital figures that are optimistic. A complete capital allocation model includes management fees, legal, audit, tax, fund administration, and wind-down costs. The reserves strategy should be built on what is actually investable rather than what is committed.
How do you build and stress-test a fund model?
A fund model is only as useful as the frequency with which it is reviewed. Lauren McDavid-Victor's position is clear: a model that sits in a folder from the fundraising period and is never revisited is a document, not a tool. The model should serve as the fund's north star, a mechanism for proving out the investment thesis and tracking performance against what the fund set out to accomplish.
The fundamental inputs of a well-constructed fund model include: total number of target companies, average and maximum check sizes, round progression assumptions and timing, estimated exit timelines and outcomes, and estimated expenses through the full life of the fund. Exit timelines and outcomes are genuinely difficult to predict, and the model should reflect honest market assumptions and benchmarks rather than optimistic projections. Probability-based modeling, which assigns likelihood estimates to different outcomes rather than assuming a single scenario, produces projections that are more useful for actual decision-making. Lauren notes that fund models where every company is assumed to be a winner are not realistic planning tools.
Once the initial model is built, stress-testing it against a range of conditions is essential. The specific areas Lauren recommends stress-testing: ownership targets, round valuation inflation, exit sizes, and portfolio attrition rates. These variables interact with each other, and a model that only reflects one scenario leaves planning value on the table.
A practical point on fund timelines: plan for 12 years, not 10. Lauren observes that very few funds actually term at the 10-year mark in the current environment. Most LPAs include two one-year extension periods, and those extra years carry real costs: additional fund administration, audit, and tax that should be modeled from the start rather than discovered late in the fund's life.
What qualitative factors drive follow-on investment decisions?
The quantitative side of reserves planning tells you how much capital is available for follow-on investments. The qualitative side tells you where to direct it. Lauren McDavid-Victor describes this as a GP's "secret sauce": the combination of judgment, pattern recognition, and direct portfolio company knowledge that determines whether a follow-on makes sense beyond what the model alone indicates.
Quarterly reviews of the fund model and portfolio performance create the discipline to assess this consistently. The specific factors Lauren recommends tracking: portfolio company KPIs against industry norms and the fund's investment criteria, competitive dynamics in the market, the broader fundraising environment, and sector-specific conditions affecting the fund's thesis. Not every KPI is universal. ARR is a useful metric for many companies but does not apply to all sectors.
Scorecards are one of the most practical tools for systematizing the qualitative side of follow-on decisions. A scorecard applied consistently across portfolio companies gives GPs a structured basis for comparing opportunities and helps prevent emotion from overriding the analysis. Lauren is direct on this point: there will always be portfolio companies a GP believes in deeply but whose numbers do not support continued investment. A scorecard provides a mechanism for evaluating conviction alongside evidence rather than choosing one over the other.
An investment committee or reserves committee, where one exists, provides a similar function at the governance level: a structured process for reviewing follow-on decisions against the fund's overall goals rather than evaluating each opportunity in isolation. For funds without a formal committee, internal team accountability and documented decision criteria serve the same purpose.
How should reserves strategy evolve as a fund ages?
The reserves strategy that made sense in year two of a fund will not look identical by year six or year ten. Lauren McDavid-Victor describes a common arc: GPs tend to be conservative in the early years, more aggressive in the middle years as portfolio companies distinguish themselves, and increasingly focused on DPI preservation and exit management in the later years.
Early-year conservatism often leads to over-reserving: holding back more capital than necessary because the GP has not yet identified which companies are likely breakouts. Lauren's recommendation is to allocate a portion of reserves as explicitly opportunistic capital, held back for companies that prove themselves over time rather than committed to all portfolio companies from the start. Not all portfolio companies will be winners, and allocating reserves to all of them equally is not an efficient use of limited capital.
The over-reserving vs. under-reserving tension is real. Over-reserving can result in unused capital or missed initial investment opportunities. Under-reserving can produce dilution in the companies that matter most. Lauren frames this as more of an art than a science and recommends against rigidity in either direction. LPs, she notes, are generally not focused on whether a GP followed the exact fund model from the fundraising period if the returns are strong.
As a fund approaches the end of its investment period and the later years of its life, DPI generation becomes the priority. Secondaries have become an increasingly relevant exit path. Not every portfolio company will reach an M&A event or IPO, and a secondary sale that generates DPI for LPs in years 10 to 12 can be a better outcome than holding indefinitely for an exit that may not materialize on a useful timeline. As that point approaches, GPs should assess whether stock distributions or buybacks make sense and should discuss those options with their tax team before acting.
Recycling, the practice of reinvesting returned capital into new investments, has become less common in recent years. In the current environment, with difficult fundraising cycles and management fee pressures, the risk of not being able to meet fund expenses from management fees makes recycling a harder call, particularly for emerging managers and younger firms. Where the LPA allows for recycling, the provision is worth reviewing carefully with the fund's legal and finance advisors before relying on it as part of the capital deployment plan.
What technology supports effective reserves planning?
Selecting the right technology for fund modeling and portfolio management affects how consistently a fund can execute its reserves strategy. Lauren McDavid-Victor walks through the tools she recommends and the trade-offs between them.
Tactic is Lauren's recommendation for fund modeling when GPs want a dedicated platform rather than a spreadsheet. Its scenario planning capability is particularly useful: GPs can build a base-case fund model, copy it, and iterate on it to test different assumptions side by side. The caveat is that Tactic is a relatively involved platform with a significant number of inputs. For GPs who want more direct control over how calculations flow through the model, a well-structured spreadsheet offers more transparency into the mechanics. Strut Consulting has its own fund modeling template, refined across many fund engagements, that Lauren offers as a starting point for managers who want to build in that direction.
Portfolio management software covers a different set of needs from fund modeling. Totem and Omni are the platforms Lauren sees most often across the funds she works with. The key distinction: Totem gives GPs more control over how valuations are entered and adjusted within the system, which is useful for funds that want flexibility in how portfolio company values are reflected. Omni is more tightly driven by investment documents and offers less flexibility in valuation inputs. Totem is newer and growing in adoption among Strut's client base.
Regardless of platform, the most important practice is using it consistently: monitoring reserve status, tracking follow-on investments, and reviewing the model against actual performance each quarter. Staying close to portfolio companies is both a relationship imperative and a data collection necessity. The KPIs and health signals that come from regular founder contact are exactly what a scorecard-driven reserves process requires.
Learn more about Strut Consulting's fund operations and technology services.
Reserves Planning Is a Continuous Process, Not a One-Time Decision
VC fund reserves planning does not end when the initial allocation model is built. It is a continuous discipline: reviewing fund performance quarterly, updating the model when market conditions shift, applying scorecards to follow-on decisions, and adjusting strategy as the fund ages and the portfolio matures.
Strut Consulting's finance team, led by Lauren McDavid-Victor, works with fund managers at every stage of this process, from initial capital allocation modeling through fund wind-down planning.
For the full picture on Strut's fractional finance and fund operations services, see our Services page. To discuss your fund's specific situation, contact Strut Consulting.
FAQ
Q: What is VC fund reserves planning?
A: VC fund reserves planning is the process of determining how much of a fund's committed capital to set aside for follow-on investments in existing portfolio companies. The goal is to support winning companies in later funding rounds, protect ownership stakes from dilution, and deploy capital efficiently across the full life of the fund. Strut Consulting's finance team works with managers at every stage of this process.
Q: How much should a VC fund reserve for follow-on investments?
A: The right reserve percentage depends on stage, fund size, and portfolio construction strategy. Funds investing at Series A and later typically carry higher follow-on reserves because round sizes at those stages tend to be larger. As a practical starting point, Lauren McDavid-Victor recommends using benchmarks from funds of similar size and strategy if the portfolio is still early and company potential is difficult to assess.
Q: What should a VC fund model include?
A: A well-constructed fund model should include: total target number of portfolio companies, average and maximum check sizes, round progression assumptions and timing, exit timeline and outcome assumptions, and estimated fund expenses through the full life of the fund. Expenses typically consume 20 to 30% of committed capital. Planning for a 12-year fund life rather than 10 is a common best practice in the current environment.
Q: How do GPs decide whether to follow on with a portfolio company?
A: Follow-on decisions involve both quantitative and qualitative factors. Lauren McDavid-Victor recommends using structured scorecards that apply consistent metrics across portfolio companies, which helps GPs evaluate follow-on opportunities without letting emotion override the analysis. Relevant factors include KPI performance against industry norms, competitive dynamics, market conditions, and the GP's conviction in the team and thesis.
Q: What happens if a VC fund's performance diverges from the fund model?
A: Divergence from the fund model is common across a 10 to 12-year fund life. Lauren McDavid-Victor recommends reviewing the model quarterly and being willing to pivot when market conditions or portfolio development demand it. A portion of reserves should be held as explicitly opportunistic capital, available for breakout performers that emerge over time. GPs should not avoid good opportunities simply because they deviate from the original plan.
