A VC fund with multiple investments must ensure that its portfolio is diversified enough to mitigate the risk of any one investment failing. There are several ways that a VC fund can mitigate this risk time diversification. The typical investment period for VC funds is three to five years. By spreading out these investments over a three to five year period, a VC fund achieves time diversity and smooths out some of the macro cycles. For example, VC funds that raised capital in 1999 or 2000 during the rise and peak of the internet bubble and were fully invested in one year resulted in horrible performance for 1999 vintage funds compared to VC funds that invested over a three to five year period, which also included the period after the bubble burst.

Staged diversification. Some VC funds have adopted an early stage and late stage investing approach to diversify their portfolio within the seed or series A or series B, et cetera stages. Companies can be classified as early or late depending on specific company performance as well. Some VC funds may decide to integrate their early and late stage focus by targeting both seed and series A stage companies in the same fund. Some VC funds adopt the strategy prior to fundraising and communicate this to potential LPs. While other VC funds may adjust their initial strategy while in the investment period sector diversification broadening the sector focus of a VC fund can also diversify their portfolio investments. For example, a VC fund may have both a software and a life sciences sector focus, or they may just have a software focus, but with a broad list of sub-sectors of software such as finance, transportation, education, healthcare, et cetera. Pro-rata investing. Typically, VC funds reserve the right to invest their pro-rata ownership in future rounds, allowing them to maintain their percentage ownership in the company. This prevents any downside or dilution, but it can also deliver higher returns on the upside if the company is outperforming other investments in the portfolio and number of investments. Conventional wisdom suggests that each fund should have at least 25 to 30 companies in the fund. The number of investments depends on market conditions and companies seeking VC investment.