Tool 12 · the lab · Read: Ch. 9 — Fund Economics

VC Portfolio Construction & Power Law Simulator

Set fund size, check strategy, ownership targets, and reserve ratio. The simulator distributes investments across a power-law return curve and shows whether the portfolio can return the fund.

Fund Parameters

Fund Size ($M)

Target Ownership (%)

Reserve Ratio (follow-on %)

% of fund held back for follow-on

Mgmt Fee Draw (% of fund, total life)

Check & Stage Strategy

Initial Check Size ($M)

Avg Follow-on per Company ($M)

Follow-on Rate (% of portfolio)

% of companies that receive follow-on capital

Expected Loss Rate (%)

% of companies returning < 1x

Power-Law Return Distribution

Allocate the non-loss portfolio across outcome bands. Must sum to 100%.

1x–3x bucket (%)

3x–10x bucket (%)

10x–30x bucket (%)

30x+ (breakout) bucket (%)

Power Law — Return Contribution by Bucket

Concepts reinforced

Power law: a small number of outliers drive total fund returns
Reserve ratio discipline prevents pro-rata dilution in winners
Ownership matters: 10% entry stake erodes through future rounds
Meaningful exit threshold: need at least one company returning 3–5× the fund
Portfolio size: too few bets = concentration risk; too many = diluted attention