Follow-On Investment
A follow-on investment is additional capital invested into an existing portfolio company after the initial investment.
Allocator relevance: Affects portfolio construction, reserves planning, and concentration—often a major driver of venture outcomes.
Expanded Definition
Follow-ons are used to defend ownership, support growth, and concentrate capital into winners. In venture, follow-ons can be essential because outcomes are power-law distributed—allocating more to top performers can drive fund performance. However, follow-ons also increase concentration risk and can create overexposure if not governed properly.
Allocators evaluate follow-on discipline through reserve strategy, decision thresholds, and evidence that follow-ons are tied to underwriting rather than emotion or signaling.
How It Works in Practice
Managers reserve capital (follow-on reserves) and deploy it across later rounds based on performance, traction, and pricing. Pro-rata rights and priced rounds influence how follow-ons are executed.
Decision Authority and Governance
Governance defines when follow-ons are approved, how reserves are allocated across the portfolio, and what concentration limits apply. Weak governance leads to inconsistent reserve use and forced dilution or overconcentration.
Common Misconceptions
- Follow-ons always mean the initial bet was right.
- Reserves should be deployed evenly across companies.
- Follow-ons reduce risk by “supporting” companies.
Key Takeaways
- Follow-ons are strategic capital allocation decisions.
- Reserves discipline is a key venture performance driver.
- Concentration and pro-rata mechanics must be managed.