Glossary
Portfolio Construction
The systematic process of selecting and sizing investments to achieve fund-level returns.
By Amit Tyagi, Fitoor Capital · AletheiaAI Glossary
Definition
Portfolio construction is how a VC fund decides which companies to back, how many to fund, and how much capital to allocate to each. It's the mathematical framework that determines whether a fund can hit its return targets—typically a 3x to 10x multiple on capital deployed.
The core logic: if a fund raises ₹100 crore, it might deploy that across 15–25 companies at different check sizes. Some get ₹2–5 crore (Series A bets), others ₹50 lakh (early-stage). The fund then models scenarios where 1–2 companies become "winners" (10–50x returns), several are steady performers (2–4x), and the rest fail. The math only works if the winners are large enough to offset losses and carry the fund's IRR above 20–25%.
Decisions include: concentration risk (how much in one bet?), stage focus (early vs. growth), sector clustering, reserve allocation (keeping 30–40% capital for follow-on rounds), and dilution planning. India-based VCs often work with tighter capital constraints than US peers, forcing tighter portfolio discipline and higher concentration in fewer bets.
India Context
Indian VCs typically construct smaller, more concentrated portfolios than US counterparts. While Sequoia or Accel might back 50+ companies per fund, Indian GPs often fund 12–20 due to capital constraints and ticket-size realities. A ₹100 crore fund writing ₹1–2 crore checks can only support 50–100 companies if structured as a SPV model, but core portfolio sits at 15–20.
SEBI regulations on Category I and II AIF structures affect portfolio construction. A registered AIF must diversify holdings (no single investment exceeding 15% of fund corpus) and maintain liquidity reserves. DPIIT recognition favors earlier-stage deployment, which influences allocation patterns for funds seeking tax benefits under Section 80IAC or angel investor exemptions.
Indian fund timelines also matter: exits take 5–7 years on average (vs. 4–5 in US), delaying capital return and forcing longer portfolio patience. Reserve allocation in India often runs 35–40% due to follow-on intensity required to protect stake dilution in competitive Series A–B rounds.
Example
Blume Ventures (₹100 crore+ fund) constructs its portfolio around 18–22 core early-stage bets at ₹80 lakh–₹1.5 crore per company. It reserves 40% for follow-ons to support winners through Series B. Two portfolio companies—Razorpay (exited at $7.5B valuation) and Slice—delivered outsized multiples that carried fund returns. The remaining 70% of portfolio had lower outcomes, but the concentration on fintech and payments (sector clustering) ensured winners were large enough to justify the model.
Contrast this with a typical US Tier-1 fund backing 50 companies across VC1–VC4. The Indian fund's tighter construction required higher conviction per bet and earlier expertise deployment.
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