Want to make that 3 or 4x fund an 8x? Then you better have reserves.
A new report from Primary Venture Partners shows that reserves strategy is one of the biggest drivers of returns in venture capital. Let’s dig in…
From Good to Great (Funds)
Partner Jason Shuman analyzed over 150 mature VC funds with strong returns. He segmented them into two groups: good (3.5x average return) and great (18x average).
One of the biggest differences between good funds and great ones was how they handled reserves.
Great funds kept around 40% reserves, versus less than 20% for the good funds. To put that in perspective, many funds keep no reserves at all — and their performance probably suffers because of that.
The impact of those additional reserves was transformative.
With a different reserve strategy, the good funds could’ve become world beaters! Well, we live and we learn.
Are Those Reserves In Your Pocket, Or Are You Just Happy to See Me?
From day one, I’ve kept reserves. I’m actually a bit more aggressive than the average “great fund” — I keep 50% reserves.
This is one of the reasons I write small first checks — usually $5k. I want to have lots of cash in reserve to pour into the best companies in the Series A and onward.
I only give follow-on checks to the very best performers. That would generally be the top 15-25% of my investments.
I invest earlier than most of the funds in this report — typically seed and pre-seed. So, it makes sense for me to take more shots on goal and re-invest in fewer companies.
The earlier you invest, the more failures you’ll have.
Why Reserves Make Sense: Information and Access
I wrote 11 first checks in 2022. At the time, I had a gut feeling which ones would do the best.
But I was totally wrong!
I loved all the companies, or I never would’ve invested. But the ones I was certain would crush it actually didn’t.
Meanwhile, the ones I had more moderate conviction on grew like mushrooms!
By 2023 and 2024, things looked very different. Two likely winners have emerged from the pack.
One has scaled to a $7 million a year run rate, another to $11 million. I’ve managed to get a 2nd check into one and hope to re-invest in the other soon.
After two years of working with all 11 founders, I know these companies well. I see what’s working and what’s not.
My 2nd bet was far better informed than my first. And since I have unique knowledge and access, I have an advantage over other investors.
Wrap-Up
Reserves vs. no reserves is one of the hottest debates in venture capital. Primary’s new report should settle it.
We make lots of investments. Sadly, most don’t make it.
But when those winners emerge, we need to double down. Owning more of the most successful companies is our best chance at notching huge returns.
What do you think about reserves? Leave a comment and let us know!
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