Investment Process
What is follow-on investing?
Quick Answer
Follow-on investing is when a VC invests additional capital in a portfolio company in subsequent funding rounds. Firms typically reserve 40-60% of their fund for follow-ons, concentrating capital in their strongest performers.
Detailed Answer
Follow-on investing is one of the most important strategy decisions in VC portfolio management. It determines how capital is allocated between new investments and supporting existing winners.
Follow-on strategy: - **Reserve ratio** — Funds typically reserve 40-60% of capital for follow-ons - **Selection** — Not every company gets follow-on; capital goes to top performers - **Pro-rata** — Most follow-ons aim to maintain or increase ownership percentage
Why follow-on matters: - Best returns in VC come from a few breakout companies - Investing more in winners (and less in losers) drives fund performance - Pro-rata rights in a hot deal can be more valuable than any new investment
Follow-on frameworks: - **Always follow on** — Maintain pro-rata in every company that raises (simple but not optimal) - **Selective follow on** — Double down on top performers, let losers dilute - **Anti-portfolio** — Some firms never follow on, preferring new companies
Power law example: If a fund makes 20 investments and one returns 100x, investing $2M follow-on in that winner at Series B generates more return than 10 new seed investments.
Key metrics: Follow-on ratio ($ follow-on / $ initial) and reserve utilization (how quickly reserves are deployed).
Related Questions
What is deal flow in VC?
Deal flow is the stream of potential investment opportunities a VC firm receives and evaluates. Top firms see 2,000-3,000 deals per year and invest in 1-2% of them. Strong deal flow is a VC firm's most important competitive advantage.
What is a lead investor?
The lead investor is the VC firm that sets the terms of a funding round, contributes the largest check, negotiates the term sheet, and typically takes a board seat. Having a strong lead is essential — most VCs won't invest without one.
What is syndication in venture capital?
Syndication is when multiple VC firms co-invest in the same deal. The lead investor brings in other VCs to share risk, increase the round size, and add strategic value. Most Series A+ rounds involve 2-5 investors.
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