I want to tell you a story about two checks I almost wrote. It was 2021. The market was white-hot. Every founder with a slide deck and a pulse was raising at a $20 million valuation. I had two term sheets on my desk for two different AI-native SaaS companies. On paper, they were nearly identical. Both had brilliant technical founders, impressive early traction, and massive market potential. My gut told me to invest in both.
I didn't. I invested in one. The other one went on to become a spectacular flameout, burning through $15 million in 18 months. The one I backed? It's one of the top-performing companies in my portfolio today.
What was the difference? It wasn't the team, the tech, or the market. It was portfolio construction. One of those companies fit my thesis and my existing portfolio like a glove. The other was a shiny object, a distraction. That decision, to back one and not the other, wasn't about picking a winner. It was about building a winning portfolio. And that, I believe, is the single most important skill in venture capital today.
Forget everything you thought you knew. The skills that made VCs successful yesterday—the network, the deal flow, the fancy office in Menlo Park—won't cut it in 2025. I'm calling it now: portfolio construction is the new kingmaker. Here's my prediction.
The Great Unwinding: Why the Old VC Playbook is Dead
For the last decade, VCs could get away with a "spray and pray" approach. Throw enough money at enough startups, and a few unicorns would eventually emerge to save the day. I should know. I've been on both sides of the table, as a founder raising capital and as an angel investor in over 200 companies, including giants like Anthropic, OpenAI, and Scale AI. I saw firsthand how easy it was to raise money in the boom times. It was a party where the champagne never stopped flowing.
But the party's over. The music has stopped. And a lot of VCs are about to be caught without a chair.
The venture landscape is shifting under our feet. The zero-interest-rate-phenomenon (ZIRP) is a distant memory. The public markets are shaky, and the IPO window is basically painted shut. This isn't just a temporary downturn; it's a fundamental reset. Limited Partners (LPs), the people who give VCs their money, are getting nervous. They're no longer impressed by paper markups and vanity metrics. They want to see real, actual cash-on-cash returns. And that means VCs are going to have to get a lot smarter about how they allocate capital.
I remember raising money for my first company, MovieLaLa. It was a grueling process. We pitched dozens of investors. The ones who "got it" were the ones who had a clear thesis. They weren't just chasing heat; they were making calculated bets based on a worldview. The rest were just tourists. In today's market, the tourists are going home.
The Shift to a Portfolio-First Mindset
In this new environment, a deep understanding of portfolio construction is about to become the single most critical differentiator for successful investors. It's no longer enough to just pick good companies. You have to build a cohesive portfolio of companies that work together to maximize returns and minimize risk.
This is a huge mental shift for many in the industry. The old model was deal-centric. The new model is portfolio-centric. It's about thinking like a grandmaster in chess, where every move you make on the board affects every other piece.
So what does that mean in practice? It means obsessing over things like:
Follow-on Strategy: When should you double down on your winners? How much capital should you reserve for follow-on rounds? This is where the real money is made. A 2x return on a seed investment is nice. A 100x return on that same company because you followed on in the Series A, B, and C is life-changing. But you can't follow on in everything. You need a disciplined strategy based on performance, ownership targets, and the overall health of your portfolio.
Ownership and Dilution: How do you protect your ownership stake as your portfolio companies raise more money? This is where the nitty-gritty of term sheets comes into play. Pro-rata rights are your best friend. But you also need to understand the downstream effects of things like option pool shuffles and liquidation preferences. I've seen VCs get diluted into oblivion because they weren't paying attention.
Concentration vs. Diversification: How many bets should you make? A hyper-concentrated portfolio of 10 companies can be a rocket ship to the moon or a fast track to zero. A hyper-diversified portfolio of 200 companies might smooth out your returns, but it also dilutes the impact of your winners. The right answer depends on your fund size, your risk tolerance, and your ability to support your companies. There is no magic number, only a right number for your fund.
My Framework for Portfolio Construction
I've developed my own framework for portfolio construction over the years, based on my experience building two successful companies (RemoteTeam, acquired by Gusto; MovieLaLa, acquired by Gfycat) and investing in hundreds more. It's not rocket science, but it requires discipline and a long-term perspective. Here are the key pillars:
1. Be Thesis-Driven, Not Trend-Driven
First and foremost, you need a clear investment thesis. What are the big, non-obvious truths you believe about the future? What are the specific sectors and business models that you're uniquely positioned to win in? My thesis, for example, is centered around the future of work and the transformative power of AI. That's why I was an early investor in companies like RemoteTeam, Anthropic, and OpenAI. I had a conviction about where the world was heading, and I placed my bets accordingly. A thesis is your filter for the noise. It's what helps you say "no" to 99 good ideas to find the one great one that fits your portfolio.
2. Make Concentrated, High-Conviction Bets
I'm not a fan of the "spray and pray" approach. I'd rather make a smaller number of high-conviction bets than a large number of small bets. For my fund size, the sweet spot is around 25-30 companies. This allows me to be more hands-on with my portfolio companies and provide them with the support they need to succeed. It also means that when I have a winner, it has a much bigger impact on my overall returns. One of my best investments was a company I almost passed on. The founder was brilliant but prickly. The market was crowded. But I had a deep conviction in their unique approach. I wrote a check for $500k, double my usual size. That company is now worth over $2 billion. That's the power of conviction.
3. Be a Proactive, Value-Add Partner
Investing is not a passive activity. You can't just write a check and hope for the best. You need to be actively involved in helping your portfolio companies succeed. That means providing them with strategic guidance, connecting them with potential customers and partners, and helping them recruit top talent. When I was running RemoteTeam, the most valuable investors were the ones who were in the trenches with me. They were the ones I could call at 10 PM on a Tuesday when our servers were down. That's the kind of investor I strive to be. It's not just about adding value; it's about building trust.
4. Master the Math of Venture Capital
At the end of the day, venture capital is a numbers game. You need to understand the math behind portfolio construction to be successful. The power law is a real thing. A small number of companies will generate the vast majority of your returns. A typical $100M fund might hope that one or two investments return the entire fund. That means you need to be constantly looking for those outliers, the companies with the potential for a 100x or even 1000x return. And you need to be willing to let your winners run. It can be tempting to take money off the table early, but that's often a mistake. The biggest returns in venture capital come from holding on to your winners for the long term.
The Future is Now
The venture capital industry is at a crossroads. The old way of doing things is no longer sustainable. The VCs who will thrive in the years to come are the ones who embrace a more disciplined, thesis-driven approach to investing. They are the ones who understand that portfolio construction is not just a buzzword, but the key to unlocking massive returns.
So if you're an LP, I urge you to start asking your VCs about their portfolio construction strategy. Ask them about their follow-on strategy, their ownership targets, and their loss ratio. And if you're a VC, I urge you to take a hard look at your own approach. Are you building a portfolio, or just a collection of deals? The future of your fund depends on the answer.
Frequently Asked Questions
Do all experts agree with this view?
No, and that's fine. The best ideas in business are often contrarian. I share my perspective based on my experience and data, but I encourage you to seek out opposing viewpoints and form your own conclusions.
How has this view evolved over time?
My thinking on most topics has changed significantly over the years. Early in my career, I held many conventional views that experience proved wrong. I try to update my beliefs when the evidence changes.
How can I apply this thinking to my own situation?
Start by identifying the core principle behind the opinion, not the specific example. Then ask yourself: does this principle apply to my context? If yes, test it in a small, low-risk way before going all in.
What experience informs this perspective?
This perspective comes from over a decade of building companies in Silicon Valley, two successful exits (RemoteTeam to Gusto, MovieLaLa to Gfycat), and investing in 200+ startups including Anthropic, OpenAI, and Scale AI. I write about what I've lived.