Lecture 4 - Foundations of Venture Capital:
Portfolio Construction

Overview

Lecture 4 turns the power law from Lecture 1 into a set of decisions. If a few extreme winners create essentially all the value, then the manager's job is captured in a single sentence: shift the exit distribution to the right — raise the odds of a big winner and cut the downside. Portfolio construction is how that shift actually happens.

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The session works through the levers a general partner controls, in plain language, and shows how they interact. The recurring tension is between diversification and conviction: enough positions for the power law to have a chance to work, but enough ownership in each that a winner actually matters to the fund. Reserves — capital held back for follow-on investments — get their own treatment, because they are the lever limited partners least often understand. The lecture included a live demonstration of how random outcomes distribute, making the statistics tangible.

Learning Objectives

By the end of this session, a participant should be able to:

• Explain why portfolio construction exists as a discipline distinct from picking companies.

• Describe the main construction levers and how each affects the return distribution.

• Understand the trade-off between diversification and conviction.

• Explain how reserves and follow-on strategy protect and concentrate ownership.

• See how construction choices are sized against the eventual exit.

Key Concepts Covered

• Shifting the exit distribution: the goal of construction

• Number of investments — concentration vs. diversification

• Check size and ownership

• Stage and entry valuation

• Reserves and follow-on discipline

• "Shots on goal" and the power law applied to building a portfolio

Guest Speaker

None

Go Deeper

• Ravi Jagannathan et al. — NBER Working Paper No. 27690

• Gompers, Gornall, Kaplan & Strebulaev (2020) — Journal of Financial Economics

• Gornall & Strebulaev (2020) — Journal of Financial Economics

Educational content only. Not investment, legal, or tax advice, and not an offer of any security.

Access

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