Here’s Everything You Need To Know About Follow-On Investment
Glossary

Here’s Everything You Need To Know About Follow-On Investment

December 8, 2023 | By

A follow-on investment, in the context of venture capital, is an additional investment made in a startup by an existing investor.

Table of Contents

What Is A Follow-On Investment

A follow-on investment, in the context of venture capital, is an additional investment made in a startup by an existing investor. This investment occurs after the initial funding round and is aimed at supporting the company’s growth and development. Follow-on investments are typically made to help the startup reach important milestones, such as expanding its market presence or launching new products or services.

What Is A Follow-On Strategy?

It is a predetermined plan of action by a venture capital firm regarding its continued support for a portfolio company. Based on the startup’s performance and funding needs, this strategy outlines when and how follow-on investments will be made. It involves setting criteria and triggers that determine when additional capital should be injected into the company.

What Is The Difference Between A Lead And Follow-On Investor?

A lead investor and a follow-on investor are two distinct roles within the venture capital landscape. The lead investor is typically the first to invest in a startup’s initial funding round. They play a significant role in negotiating terms, and setting the valuation and often take a more active role in guiding the company.

In contrast, a follow-on investor participates in subsequent funding rounds. They build upon the lead investor’s initial investment and can be existing investors or new investors who join as the company progresses.

Which Are The Two Types Of Follow-On Markets?

  • Primary Market: The primary market involves the issuance of new securities, including additional equity, convertible debt, or other financial instruments, by the startup. These new securities are offered to existing investors in follow-on funding rounds.
  • Secondary Market: In this market, existing shares of a startup are bought and sold between investors. This allows early investors, employees, or founders to liquidate their holdings without waiting for an exit event such as an IPO or acquisition.

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