Key takeaways
- Reserves are money kept back for later rounds in existing companies.
- Treat each follow-on as a new decision with its own memo.
- Not following on can send a signal to new investors.
How follow-on investment decisions are made
When a portfolio company raises again, the fund looks at what has changed since its first cheque: traction against the plan, the new terms, the new lead and how much of its reserves the round would use. Many funds write a short memo and take it to the same committee that made the first decision.
An example
A fictional seed fund owns 10 percent of a company raising a $10 million Series A. Its pro rata allocation is $1 million. Revenue has grown well but churn is rising, so the committee approves $600,000, keeping the rest of the reserve for a company with clearer momentum.
Reserves and portfolio strategy
Funds decide at the outset roughly how much of the fund goes to first cheques and how much to follow-ons. Too little in reserve and the fund is diluted in its best companies; too much and it backs fewer companies to begin with. See pro rata rights and dilution.
Common confusions
- Follow-on versus pro rata: pro rata is the right to invest; a follow-on is the decision to use it, or to invest more or less.
- Insider rounds and bridges are follow-ons led by existing investors, often when outside interest is weak.
- A follow-on is not a rescue by default. It should rest on evidence, like the first cheque.