Your Next Check Matters More than Your First
Scrutinize your follow on decisions as much as you do your initial one.
Antagonizing and hand-wringing over a new investment decision is a rite of passage for every venture capitalist. It's our first dance with a potential unicorn, our initial leap of faith with a startup. But in reality, especially in the early stages, be it pre-seed, Seed, or Series A, this first check is often the smallest a VC will write into any given company. The bulk of the capital will actually come later. This isn't to devalue the initial decision and corresponding outlay. On the contrary, most venture firms spend more time and resources on new investment consideration versus all of the entirety of the firm’s activities. At the end of the day, you’re either in winning companies or not.
However, I believe that it’s the follow-on checks which are the real overlooked game-changers, both for a fund and for the investor herself. Inside many institutional venture firms, the follow-on decision can feel nearly perfunctory, especially when a new outside lead enters the equation. At my previous firm, it always baffled me how much time was invested in the initial decision of whether or not to invest, but then, like near clockwork, we'd often continue with our pro-rata without as much as batting an eyelid. (Somewhat paradoxically, individual angels devote more consideration to subsequent follow-on round investment decisions, as perhaps it’s more salient that these dollars are just as real and impactful as the prior ones.)
But it's essential to remember: follow-on capital typically represents a larger portion of the fund size than the initial check. No principal or junior partner ever faced dreaded negative career repercussions for writing one small check that turned sour. The real stakes emerge when you're staring down the barrel of a larger commitment, leaning into an investment that seems promising but could go sideways. The easiest route to the venture career exit door is backing up the truck in a seemingly rising portfolio star which leaves a large, unrecoverable hole when things go south.
That being said, it is worth emphasizing that any new investment carries a moral weight and a commitment to an entrepreneur. Depending on what expectations are set during the initial investment conversations given a firm’s stated strategy, there is at the very least an implied if not explicit understanding of continuing to invest in subsequent rounds of financing. And beyond the moral responsibility, there is also reputational risk in this “founder friendly” environment of not continuing to invest fully in the next round. I believe that it’s paramount to communicate your firm’s follow-on approach crispy and then subsequently honor that commitment.
Venture capital financing evolved by design to fund companies in stages rather than all at once. There’s a reason why we don’t fund startups with all of the capital they need from inception to IPO all up front, but rather apportion it with each set of meaningful milestones. So as a venture investor it’s not just an opportunity, it’s your fiduciary responsibility, to evaluate each successive investment into a company with the same critical lens and diligence that you would was it anew. And the good news is that you have an unfair advantage… you’ve already been an investor for a number of months or even years thus far with special access to understanding how it’s performed to date and its prospects going forward.
Our approach at NextView to decision-making is designed to consider these nuances between initial and follow on investments. While the first check into a company is typically driven by one partner - a champion with a vision who might see what others don’t - our follow-on decisions demand rigorous consensus of the entire partnership. Our decision making process is specifically designed to be adventurous with that first check exploring to find the true outlier in a power-law distribution curve of outcomes, with the subsequent checks leveraging our asymmetric information advantage as insiders to know whether or not this coming round of financing is risk-adjusted good capital to deploy.
The threads of initial investment and follow-ons weave together to define the ultimate success of a fund’s portfolio. In the end, all of the dollars which go out the door matter. While the initial investment company gets things started, it's often the follow-on decisions which shape the overall outcome impact to the fund. Your role is to both identify promising companies and continue to support those which continue to hold that promise, not blindly “do your pro-rata.”
As a parent, I often tell my kids that it’s OK to make small mistakes, just avoid the big ones. It’s the same in venture, don’t sweat the small stuff. Focus on what truly impacts the outcome, including those large follow-on checks..