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Investor Education Series: What is Portfolio Construction and Why Does it Matter to Venture Capitalists?
Overview
In the month of February we will be sharing a series of educational posts for non-institutional investors. We get a lot of questions about private markets for those newer to the asset class, so the goal is to make it easier to understand and more accessible to the average person.
This week’s post is “What is Portfolio Construction and Why Does it Matter to Venture Capitalists?”
Portfolio Construction
Portfolio construction for venture capital fund managers is a fundamental and necessary activity that is critical to a firm’s long-term success. Each fund manager has a slightly different approach for how they construct portfolios. Regardless of the approach, all are seeking to invest in “enough” companies to increase the probability that a handful of those companies will significantly outperform and make up for the companies that underperform. You may be asking yourself, how much is “enough” and what does it mean to outperform or underperforms. Let’s address the” enough” question first.
There is a law used in statistics called the Power Law. Basically, what it describes is the relationship between two (or more) variables that when working together, produce some…
