Jeff Bussgang wrote a great post about how VCs manage reserves.  When a VC invests, they allocate (reserve) some additional amount for follow-on financing.  For example, a company may raise $5m for Series A, but the fund will reserve $10m for Series B, C, etc.

In the current climate, many reserve models are at risk of blowing up:   VCs that assumed additional investors for later rounds may find themselves doing all the funding themselves (the “inside round”).  Jeff makes a good suggestion for every venture-funded entrepreneur:   understand what your investor is carrying for reserves for your company.

For entrepreneurs raising new funding now (tough, but certainly possible), a closely related issue is the age (vintage) of the VC’s fund.  Older funds are full of “reserve challenges”:  companies readjusting their funding strategies, and becoming more dependent on inside rounds.  In a newer funds, the bulk of the money is yet to be invested, and later investments from the fund will factor in current conditions and the realities of follow-on investors into the reserve model.

For entrepreneurs today fortunate enough to have multple funding options, fund vintage is a major factor to consider.  Newer is much better.