Seed Fund Portfolio Construction for Dummies

  • Make sure your portfolio construction aligns with power law shaped distribution returns
  • Your initial strategy is just a starting point. It must be measured and adjusted over the life of the fund.
  • Getting recycling right at seed is challenging. Use a holistic model that pulls in everything to optimize your chances. 🔥We’ve included a downloadable version of ours below🔥

Choosing your initial strategy

The first thing you need to do is layout your initial portfolio construction. As I’ll explain in the next section this should not be the construction you end up with but it’s still very important to have a solid starting point to iterate off of.

Here’s me preparing to write this post

Portfolio construction must be dynamic

Over time we’ve come to appreciate that portfolio construction needs to be optimized throughout a fund’s lifecycle as projections are replaced by real data. If you’re planning on fully recycling (which almost every sophisticated LP wants to see since it effectively allows you to recycle your fees away) having a dynamic strategy is pivotal. As I mentioned before, one way to build your preseed/seed portfolio is to pick a later stage portfolio that gives you a good number of potential fund returners and work backward. To do this you’ll project a conversion rate between each round, but these are educated guesses so you’ll want to update these as you see real world results.

If your strategy isn’t dynamic it can lead to big issues

Driving with a single holistic model is key

For years we used a handful of models to maintain our portfolio construction. Generally at least one to lay out and track the strategy and another to project future cash needs over time. When Kristin joined us from Point72 last fall we finally had some serious modeling experience on the team. She and I worked together (99.9% Kristin, .1% Hadley) to put together this model which does a great job of tying everything together.

  • On the Summary and Assumptions tab, you can change the investment variables and view a summary of the fund’s current and predicted metrics.
  • The Portfolio tab pulls in these variables to create a hypothetical portfolio, which can be updated with real data as you make investments.
  • The Model tab then takes this hypothetical portfolio and creates a cash flow model, the results of which are summarized on the Summary and Assumptions tab.
  • Fund name, size, and start date (cells D9:D11)
  • Expected number of investments (cell D102)
  • Average size of expected investments (cell D101 for the initial check, cells K102:K105 for follow-ons)
  • Predicted conversion rate between each round (cells K111:K114)
  • Frequency of investments and follow-on rounds (cells K118:K123)
  • Fund fees and expenses (cells C141:C151)
Thanks for reading the whole thing!

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Eniac Ventures

Eniac Ventures

We lead seed rounds in bold founders who use code to create transformational companies.