How I think about Follow On Investments
As an angel investor you invested in a company very early. They do well, you pat yourself on the back. Now they are raising more money. Fork meet road. To follow on or not to follow on, that is the question.
I have heard a lot of Angel investors say “I never do bridge rounds” or “I’ll just take the markup and save my capital for more shots on goal.” Another view is “Double down on your winners.” Which strategy is superior? In a market where power laws apply and the “winners” deliver the vast majority of the returns at all stages, it is important to have a framework to decide (at every stage) “is this one a winner?”. In my investment career, I evolved from an early only to a “double down on your winners” investor. If you are an “early only” investor today, I encourage you to read on. You may think differently about follow on investing. Or not, this is my model, you need to figure out your own.
Over decades of early stage investing I have stood at this fork dozens of times. Here are a couple of concepts I have found helpful over the years standing at this kind of crossroad.
