Follow-On Reserves
Follow-on reserves are capital set aside to support existing portfolio companies in later rounds, defend ownership, and concentrate exposure into winners. Allocators evaluate reserve policy as a governance and discipline signal that materially shapes realized outcomes in venture.
In venture, initial selection is only part of performance. Follow-on reserves determine whether a fund can maintain meaningful exposure to breakout winners and support companies through adverse fundraising environments.
For allocators, reserve policy is one of the clearest indicators of manager maturity: it reveals how a GP thinks about power-law math, concentration, and cycle risk.
How allocators define reserve policy quality
They assess:
- Reserve size: % of fund reserved and rationale
- Decision governance: who decides follow-ons, with what criteria
- Concentration rules: limits and exceptions policy
- Pro-rata strategy: defend winners vs selective scaling
- Cycle behavior: support through down markets vs “mark protection”
- Signaling risk: how follow-on behavior impacts external investor perception
Allocator framing:
“Does the GP have a repeatable system to defend winners and manage downside without emotion or signaling errors?”
Common reserve strategies
- Fixed reserve model: predetermined allocation per company
- Dynamic reserve model: reserves shift based on performance signals
- Barbell model: many small seeds, heavy follow-on into top performers
- Opportunity reserve: flexible pool for unexpected breakout support
How reserves fit in allocator underwriting
Reserves influence:
- ownership dilution and final fund exposure
- ability to bridge companies when markets freeze
- fund-level risk profile and cash management
- realized DPI timing (supporting vs harvesting)
What slows allocator decision-making
- reserves presented as “optional” without governance
- inconsistent follow-on patterns across portfolio
- overconcentration without transparent logic
- follow-ons used to avoid marking down weak companies
Misconceptions
- “More reserves is always better” → too much reserve can reduce initial portfolio breadth and optionality.
- “Follow-ons equal conviction” → sometimes they reflect signaling pressure.
Key allocator questions
- What is your follow-on decision rubric?
- What % of fund is reserved and why?
- How do you avoid propping up weak companies to protect marks?
- How do reserves change in down markets?
- What is your ownership outcome in the top decile winners?
Key Takeaways
- Reserves are a core driver of venture outcomes and ownership retention
- Governance and discipline matter more than the headline reserve %
- The best GPs defend winners and manage signaling risk intentionally