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reserves

Investment firms, like venture capital firms, refer to the amount of money that they are planning to invest (but have not yet invested) into portfolio companies as "reserves."   Investment firms often believe that most new ventures will require multiple rounds of financing not just one.  If they participate in one round but not in future rounds, they risk dilution or other economic damages (in some cases severe dilution if a previous investor does not invest in a new round their shares can be converted from preferred to common at a very significant discount resulting in severe dilution).  For these reaons, investment firms will save, or "reserve," additional funding for portfolio companies beyond the initial amount of funding.  So for example, if a VC firm invested $5M into ABC Company in a Series A financing, it might reserve an additional $5M for future funding.  When ABC Company needs a Series B financing, the VC firm already has money budgeted for this purpose. 

Dynamic Nature of Reserves

Reserves are dynamic and can change based on several factors:

• The cash needs of the portfolio company.  If ABC Company gets to cash flow breakeven, it might not need cash.  If it continues to lose money for long periods of time, it may need more cash than expected.
• The cash needs of other portfolio companies.  If other companies in an investment firm's portfolio need cash, the firm may have to shift reserves from one company to another thus decreasing the availability of reserves for one company and increasing the reserves for another company.
• Availability of exits.  If exits, or liquidity events, are widely available given macro-economic or industry conditions a firm may feel more confident in having a smaller amount of reserves for a company. 
• Market dynamics.  General macro-economic or company-specific industry factors may cause the firm to change reserves.  If risks increase in the industry, they may bolster reserves.  If they decrease, they may choose to decrease reserves.
• Partnership politics.  Partnerships are political environments.  Some partners have more power than others.  In the investment industry, power generally derives from achieving successful exits. A more powerful partner can usually garner higher reserves for his or her company than a less powerful partner.

Importance of Reserves for Entrepreneurs

Reserves are a very important concept for entrepreneurs to understand as they engage with an investment firm, or funding partner.  Knowing the reserves that investment firms have for your company can give you a sense of how long your runway is.  This will allow you to avoid hitting a wall and planning for success.  Also, the amount of reserves that a funding partner brings to the table may influence your choice in a funding partner in the first place.  Generally, the higher the reserves the better because they can "afford" to fund you longer should your business take longer to succeed than anticipated.