The document discusses the challenges of portfolio construction in venture capital, emphasizing that there are no definitive answers when it comes to investment strategies. It outlines various case scenarios for capital allocation and the trade-offs involved, including considerations for backing winners and maintaining portfolio size. Additionally, it highlights the importance of rules in decision-making while stressing that trust and intellectual honesty are irreplaceable in the venture capital process.

1. THE HARDEST
DECISION IN
VENTURE
CAPITAL
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Ritesh Banglani
Stellaris

2. AGENDA
Why portfolio construction is
crucial
Why there’s no right answer
How rules can help
But not too much: why culture
eats strategy for lunch
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3. CAPITAL ALLOCATION IS WEALTH CREATION
2
Investment judgment is continuous
Democracy is death
Cost of mistakes keeps escalating
Case 1: Equal allocation Case 2: Identify losers Case 3: Identify losers AND winners
10%
40%
50%
15%
60%
25%
43%
40%
17%
1.8x
3.0x
7.3x

4. RETURN THRESHOLD
3
0.5x
0.7x
1.0x
20% 15% 10%
Probability of winner
Bar for 3x gross return
Can’t triage at first investment – all companies need
to meet same bar
Earlier stage = higher bar
Larger funds can increase ownership
1x for smaller fund < 0.5x for larger fund
Syndication is key decision

5. RESERVE RATIO
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Extreme 1: Deploy everything at seed
Extreme 2: Support company in every round
When do you stop supporting a company?

6. TRADE OFFS
Portfolio size vs reserve ratio
Backing your winners vs having more winners
Multiple vs IRR
Return vs reputation
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7. RULES CAN HELP
Return bar
Investment pace
Progressively harder decision-making
Max allocation/company
No individual incentive
But nothing replaces trust and
intellectual honesty
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