Portfolio Construction Debate

One of the oldest discussions in VC and portfolio theory centers on how many startups to back and how much to invest in each. Some managers adopt a concentrated approach, writing larger checks into a smaller number of companies. Others follow a “spray-and-pray” strategy, spreading smaller checks across many startups to maximize the chance of catching an outlier.

The “Spray and Pray” Approach

This strategy deploys capital across a large number of startups — sometimes 100 or more — with small, low-touch checks and limited follow-on reserves.

Rationale: Startup outcomes follow a power-law distribution: roughly 1–2% of companies generate ~90% of total returns. The objective, therefore, is to maximize shots on goal — since predicting which company will become the outlier is nearly impossible. This approach captures the statistical inevitability of power-law winners.

Y Combinator is the archetype of this model.

The Concentrated Approach

This model focuses on a smaller number of startups, each receiving a larger check and deeper engagement — the philosophy of “venture capital, not venture indexing.”

Rationale: Although outcomes remain power-law distributed, access, conviction, and ownership determine alpha. Top-tier firms aim for significant stakes in their highest-conviction companies, actively supporting them through board participation and strategic guidance.

Most concentrated funds back 20–30 companies per vintage, often reserving capital for multiple follow-on rounds to protect ownership through Series C/D.

Typical Structure: At the portfolio-construction level, a common split is one-third of capital for initial investments and two-thirds for follow-ons, enabling managers to double down on emerging winners.

The Hybrid Approach

Many managers combine both philosophies: they build broad initial exposure to identify early signals of success, then concentrate follow-on capital into the top performers.

This hybrid approach balances diversification with conviction — capturing the upside of discovery while preserving meaningful ownership in breakout companies

Conclusion

Empirical evidence shows that top-quartile fund returns are driven by concentration, not diversification.

In particular, secondary funds — such as Fabrica Ventures — benefit from a concentrated strategy, since outcomes are less stochastic, portfolio companies are already scaling, and information asymmetry is significantly reduced.