Definition
A follow-on investment occurs when an investor that has already invested in a company invests additional capital in a subsequent financing or investment opportunity.
In venture capital, follow-on investments commonly occur when a portfolio company raises a new funding round, such as a Series A, Series B, or later round. An existing investor may participate to maintain or increase its ownership, provide additional capital to the company, or continue its exposure to the company's growth.
Follow-on investment is different from a new investor entering a company for the first time.
How does follow-on investment work?
A simplified example:
Seed round:
Investor A invests $1 million.
Series A:
The company raises additional capital.
Investor A decides to invest another $2 million.
The second investment is a follow-on investment.
The company may also receive capital from entirely new investors in the same financing.
Why do investors make follow-on investments?
Maintain ownership
An investor may invest in later rounds to reduce the dilution of its ownership caused by new shares being issued.
Increase exposure
If the company is performing well, an investor may want to increase its investment.
Support the company
Existing investors may provide additional capital when the company reaches important growth stages.
Deploy reserved capital
Venture capital funds often reserve part of their capital for follow-on investments in existing portfolio companies.
Preserve strategic relationships
Corporate or strategic investors may continue investing because the company remains relevant to their long-term objectives.
Follow-on investment and dilution
When a company raises new equity financing, existing shareholders can be diluted if they do not participate, because new shares are issued to investors.
For example, an investor owns 10% of a company before a new financing round.
If the company issues new shares and the investor does not purchase additional shares, its ownership percentage may decrease.
A follow-on investment can allow the investor to maintain some or all of its ownership percentage, depending on the amount invested and the financing terms.
→ Equity Financing
Follow-on investment vs. new investment
The distinction is straightforward:
New investment:
An investor invests in a company for the first time.
Follow-on investment:
An existing investor invests additional capital in a company it already owns an investment in.
A single financing round can contain both.
For example:
Existing Investor A: follow-on investment
Existing Investor B: follow-on investment
New Investor C: new investment
New Investor D: new investment
All four can participate in the same Series B financing.
Follow-on investment vs. co-investment
These terms describe different relationships.
Follow-on investment refers to an investor investing again after its initial investment.
Co-investment refers to multiple investors investing in the same company or opportunity.
An investor can do both simultaneously.
For example, an existing investor participates in a Series B alongside two new investors.
For the existing investor, it is a follow-on investment.
For the group participating together, it is also a co-investment.
→ Co-investment
Follow-on investment vs. new funding round
A funding round is a financing event in which a company raises capital.
A follow-on investment describes the action of an existing investor participating again.
Therefore, a Series B is a funding round, while an existing Series A investor's participation in that Series B is a follow-on investment.
→ Funding Round
How do investors decide whether to follow on?
Investors may reassess the company before committing additional capital.
Factors can include:
Revenue growth
Customer traction
Product development
Market conditions
Management team
Competitive position
Capital requirements
Valuation
Future financing needs
Performance relative to the original investment thesis
An investor does not have to participate simply because it invested previously.
What is a follow-on reserve?
A venture capital fund may set aside part of its committed capital for future investments in existing portfolio companies.
This is sometimes referred to as a follow-on reserve.
For example, a fund may invest in a startup's seed round and later use part of its reserved capital to participate in the company's Series A.
The size and use of such reserves depend on the fund's strategy, fund documents, portfolio construction, and investment decisions.
Why does follow-on capital matter to startups?
Existing investors can be an important source of capital in later financing rounds.
A founder may benefit from investors who already understand:
The company
The founding team
The market
Previous milestones
Historical financial performance
Existing challenges
Existing investors may also help attract new investors by demonstrating continued support.
However, founders should not assume that existing investors will automatically participate in future rounds.
Can an investor choose not to follow on?
Yes.
An investor may decide not to invest additional capital for many reasons.
For example:
The company is underperforming.
The investor's fund mandate has changed.
The investment no longer fits the portfolio.
The valuation is unattractive.
The investor has exhausted its available capital.
The investor prefers to allocate capital elsewhere.
An investor's decision not to participate does not necessarily mean that the company is failing.
Example
A startup raises:
Seed: $3 million
Investor A invests $1 million.
Two years later, the startup raises:
Series A: $12 million
Investor A invests another $2 million alongside several new investors.
The $2 million is Investor A's follow-on investment.
The new investors are making their initial investments in the company.
Common misconception
Every existing investor is expected to participate in every future funding round.
No.
Follow-on participation is an investment decision.
An investor may participate in some subsequent rounds and not others, depending on the company's performance, valuation, fund strategy, available capital, and other considerations.
