Being a small fund, one common question we get is whether we have follow on capital. Like most VC’s, we do have follow on and generally invest more than we originally did when we follow on, but like most VC’s, our follow on capital comes with strings. Here’s what VC don’t tell you about their follow-on capital:
You’ve got to earn it. No smart investor throws good money after bad so if your business is underperforming, do not expect a VC that has follow on capital to provide it. Generally, a VC has to underwrite your business from scratch when they consider making another investment in your company. This means going to committee and convincing their partners that they would do the investment even if they weren’t already invested.
It won’t be the best deal. If you only turn to your existing VC for your new round and don’t test the general market, you’re unlikely to get the optimal valuation and structure. When VC have to compete, your valuation improves, so unless time is really of the essence or the distraction of a raise isn’t worth a better valuation (sometimes it’s not), you should go out to the wider market when it’s time to fundraise and at least see what you can get.
Some VC need a 3rd party. Some VC can’t give you follow on capital unless a new investor prices the round. The reason: the VC needs a 3rd party to validate the valuation to his own investors/LP’s.
Follow on has become less important. In the current environment, the ability of your seed and Series A investors to follow-on in future rounds has become less relevant. The reason being Series B and C investors have raised such large funds, they now need to take up your entire round leaving no room for follow-on. This has happened to us in multiple portfolio companies whereby we wanted to follow-on, but the new lead investor said no because they wanted the entire round. Similarly not only might there be no follow-on, but the lead investor will ask if we’re interested in selling.
All that said, follow on capital has some value, but just understand it’s not automatic and nor should it be a major criteria for you when selecting an investor.
Visit us at blossomstreetventures.com or email firstname.lastname@example.org if you have a Series A or B opportunity.