What are reserve funds and what should entrepreneurs know about them?

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What are reserve funds and what should entrepreneurs know about them?

• Reserves are the amount of investment capital proportioned to individual investment companies.

• A firm in its early stages may see a VC make a $1m investment but may have set aside a further $5m to invest in future rounds.

• This is an amount well defined within the VC fund.

• However, VCs may have no reserves for a company in its later stage aiming for an IPO soon.

• A $50m fund with $25m initial investment could have $25m reserves to invest in future rounds.

• Under- reserving can see VC’s pick favourites and allocate future investments only to their top entrepreneurs.

• Over reserving is not a problem for entrepreneurs but is economically disadvantageous for VCs and LPS in the fund.

• Most VCs can raise a new fund when they have committed and reserved 70% of their funds which incentivises VCs to over-reserve.

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