Concentrated Conviction, Revisited: The Portfolio Construction Math Behind a 25-Company Cap

A Number That Sounds Like Marketing

A twenty-five-company cap per fund sounds, at first mention, like a marketing line — a way of signaling seriousness without actually constraining behavior in any way that shows up in the numbers. Every fund, at some point in an LP pitch, describes itself as disciplined; the word has been worn smooth by overuse across the industry. It is worth walking through the actual arithmetic, because the constraint is real, it bites in specific and sometimes uncomfortable ways as a fund scales from $150 million to $450 million to whatever Fund IV ultimately raises, and understanding exactly how it bites is the clearest way for a limited partner to evaluate whether a manager’s stated discipline matches its actual behavior, rather than simply taking the marketing language at face value.

The Simple Arithmetic

Start with the simple version. A $450 million fund, deployed across a twenty-five-company maximum with a $10 million minimum check size, implies an average position size in the neighborhood of $18 million before accounting for reserves held back for follow-on investment in the strongest-performing companies — capital that in practice needs to be set aside from day one, not improvised later once a company’s trajectory becomes clear, since a fund that has already deployed its full corpus into initial checks has no dry powder left to defend its winners in a later round.

That is a meaningfully larger average position than most healthcare venture funds of comparable size hold, where portfolios of forty, sixty, or even more companies are common precisely because diversification is the more conventional way to manage the binary, often catastrophic failure risk inherent in clinical-stage biotech, where a single failed Phase 2 trial can erase a position’s value entirely and without warning — there is no gradual write-down process in most cases; a clinical-stage biotech either has a positive readout, in which case its valuation can multiply, or it does not, in which case the position frequently goes to close to zero within a single trading day of the announcement.

The Case for Depth Over Breadth

The case against that conventional diversification approach, and for concentration instead, rests on a specific and testable claim: that genuine, differentiated diligence — the kind that actually changes an investment decision rather than merely confirming a pattern-matched thesis — does not scale linearly with the number of positions a team can responsibly hold in active management at once.

A partner genuinely tracking a portfolio company’s clinical trial readouts, regulatory strategy, competitive positioning, and follow-on financing needs in real time, with the depth needed to add genuine value at a board level rather than simply attending quarterly meetings, can realistically manage a meaningfully smaller number of relationships with real depth than the same partner could nominally hold on a spreadsheet. Every fund that claims both deep, hands-on value creation and a sixty-company portfolio is, in practice, choosing depth on a small subset of that portfolio and something closer to passive capital deployment on the rest — which may be a perfectly reasonable strategy, but it is a different strategy than the one being marketed, and it is worth naming that distinction plainly rather than eliding it, since an LP evaluating a fund’s stated value-add proposition deserves to know which of the fund’s sixty portfolio companies are actually receiving that value-add and which are, functionally, along for the ride.

The Honest Cost of Concentration

The failure-rate math is where concentration genuinely does cut both ways, and intellectual honesty requires acknowledging the real cost alongside the benefit. Clinical-stage biotech failure rates are high enough, and often sufficiently binary and hard to predict in advance, that a twenty-five-company portfolio will, over a full fund life, almost certainly include several complete or near-complete losses, regardless of diligence quality — that is simply the base-rate reality of the asset class, not a reflection of any particular manager’s skill or lack of it, and any fund claiming its diligence process can somehow avoid this base rate entirely should be treated with real skepticism.

A diversified sixty-company portfolio spreads that same binary risk across more independent bets, which mechanically reduces the variance of overall fund returns, in the straightforward statistical sense that averaging more independent, uncorrelated outcomes produces a smoother, more predictable result — basic portfolio theory, applied honestly, favors diversification for variance reduction, and a concentrated fund has to have a genuinely strong counter-argument to justify deliberately forgoing that benefit.

The concentrated counter-argument is not that concentration eliminates that variance — it plainly does not — but that the same depth of diligence and hands-on portfolio support that concentration enables should, if the underlying thesis is correct, meaningfully raise the probability of success on each individual position, more than offsetting the reduction in diversification benefit. That is a genuinely falsifiable claim about a manager’s actual investment process, not merely a philosophical preference for a particular portfolio-construction style, and it is the specific claim any concentrated manager’s track record has to actually validate over time for the approach to be worth the trade-off. A concentrated fund that cannot point to a genuinely elevated hit rate, relative to comparable diversified funds, has not earned the right to claim concentration as a virtue rather than simply a higher-variance bet dressed up in the language of discipline.

A Second, Compounding Concentration Bet

Geographic and stage concentration compounds the position-count concentration in ways worth naming explicitly rather than treating as incidental. A fund operating across six cities on three continents, with a stated focus on India-rooted founders and high-growth emerging markets specifically, is making a second, independent concentration bet layered directly on top of the company-count concentration — a bet that the specific origination advantages of deep, genuine on-the-ground presence in India, the Gulf, and East Africa outweigh the diversification benefit that a more geographically dispersed, generalist global healthcare fund would otherwise capture by simply spreading capital more broadly across regions and reducing correlated regional risk.

That second concentration bet has its own distinct logic worth stating separately from the position-count argument: geographic depth compounds over time in a way that geographic breadth does not. A fund with genuine, multi-year relationships across the specific regulatory bodies, hospital systems, and founder networks of India, the Gulf, and East Africa develops an origination and diligence advantage in those specific markets that a generalist fund splitting its attention across twenty countries simply cannot replicate, regardless of how much capital the generalist fund can deploy.

The Discipline That Actually Scales With Fund Size

The $320 million of dry powder still to be deployed across the back half of Fund III, and the capital being raised for Fund IV alongside the newly launched Africa-focused SPAC, both have to be underwritten against this same twenty-five-company discipline, which becomes measurably harder to honor as absolute fund size increases rather than easier, contrary to the naive intuition that more capital simply means writing bigger checks into the same number of positions without any change in underlying behavior.

Larger average check sizes concentrate more capital, and correspondingly more real financial risk, into each individual diligence decision, which in turn raises the bar for what qualifies as genuine conviction rather than simply an acceptable, defensible allocation of capital that needs to go somewhere. That escalating bar, more than the headline company-count cap itself, is the actual discipline we are holding ourselves to as the fund scales — and it is considerably harder to maintain in practice than the twenty-five-company number alone suggests to an outside observer reading it off a pitch deck, since the temptation to relax underwriting standards grows in direct proportion to the pressure to deploy an increasingly large fund within its committed investment period.

What This Framework Is Not Claiming

None of this is an argument that concentration is categorically superior to diversification as a portfolio-construction philosophy — reasonable, sophisticated investors disagree genuinely and defensibly on this question, and the honest answer depends heavily on the specific manager’s actual diligence and value-creation capability, which is inherently difficult for any outside party to verify with confidence in advance of results. A generalist LP building a broad healthcare venture allocation across many managers has entirely legitimate reasons to prefer some diversified funds in that mix alongside concentrated ones like ours, since even a concentrated manager’s twenty-five positions still carry real, undiversified idiosyncratic risk at the fund level.

What We Are Actually Asking to Be Held To

It is an argument that the twenty-five-company cap is a real, binding constraint with genuine costs as well as genuine benefits, not a marketing flourish, and that any limited partner evaluating this fund should hold us to the actual arithmetic behind that discipline — average check size, reserve allocation, and realized position-level outcomes over a full fund cycle — rather than to the number itself in isolation. A twenty-five-company cap that is never actually tested, because the fund never gets close to that many attractive opportunities in the first place, proves nothing about discipline; a twenty-five-company cap that regularly forces us to pass on opportunities we would otherwise fund, because taking them would breach the position limit, is the only version of this discipline that actually means something, and it is the version we intend to keep operating under as the fund continues to scale.