Rounds & financing
Also called follow-on, reserves
A follow-on investment is additional money a fund puts into a company it has already backed, funded from reserves the fund sets aside specifically for supporting existing portfolio companies.
Most venture funds reserve a substantial share of their capital, frequently 40% to 60%, for follow-ons rather than new investments. A fund's headline size therefore overstates how much is available to companies it has not yet backed.
A lead investor declining to follow on is one of the loudest signals in a fundraise. New investors read it as the people with the most information choosing not to add more, and it is difficult to explain away.
Follow-ons are usually exercised through pro-rata rights, letting the fund maintain its ownership percentage. Whether to exercise is a portfolio decision as much as a company one, weighing the marginal dollar against reserves for other holdings.
Founders should ask about reserve policy before taking money. A fund at the end of its investment period with reserves committed elsewhere may be enthusiastic today and unable to help at the next round.
Commonly 40% to 60%, though it varies by strategy. Seed funds writing small first cheques often reserve more, because maintaining ownership through later rounds is expensive.
It is generally read as a negative signal by new investors, since the existing backer has the most information. There are benign explanations, such as an exhausted investment period, but they need explaining.
Yes, if there is room in the round and the lead agrees, but without a contractual pro-rata right the allocation is not guaranteed.
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