Pillar
Scenario Engine and Follow-On Strategy
Firm configuration is a question you revisit between funds. A follow-on decision arrives with a term sheet attached and a deadline someone else set. These pages are about the second kind of question, and about what a reading can honestly contribute to it.
8 pages
The module
- Whether to follow on and when are two different questionsWhether to put more money into a company and whether to do it in this round are different questions. What each answer means, why they are kept apart, and what happens when the inputs are thin.
- What actually changes a follow-on decisionThree things decide a follow-on: the strongest signal in favour, the strongest against, and the constraint that binds. What each contributes, and why a fixed shape beats a longer list.
- Why a follow-on model should not tell you what to doA follow-on tool that produces a reading is useful. One that committed capital would be carrying authority it has not earned. What is deliberately left to the General Partner, and why.
Reserve policy
- How much should a fund actually reserveWhat funds actually reserve for follow-on, why the answer depends on fund size, and the scenario work showing that where the reserve lands matters far more than how large it is.
- Has the 40 to 50 percent reserve rule actually broken downThree schools of thought on follow-on reserves: the reserve-light position, the probability-driven position, and the reserve-preserving position. What each argues, who holds it, and the one thing they agree on.
- Should you pick your reserve percentage or derive itWhy a reserve percentage chosen upfront is a modelling artefact, how an earmarked pool creates pressure to spend itself, and what changes when the reserve is derived from stage, ownership, and portfolio count instead.
- What your follow-on rate says about your firmReserve size says little about a firm. The share of the portfolio that receives follow-on capital, and how concentrated those cheques are, says a great deal, and the two coherent answers to it come from firms with different honest views of their own judgment.
- What happens when your fund runs out of follow-on capitalUnder-reserving is a named emerging-manager failure. The three states a fund can be in, what running short costs beyond the money, and the options once it happens.
How to read this module
The Scenario Engine is a companion module to the Colibrí Architecture model rather than one of its three engines. The model evaluates how a firm is built. For one existing portfolio company in one proposed round, the module returns a recommendation, a recommended allocation as a dollar amount and as a share of the fund's pro-rata entitlement, a timing signal, and a three-part rationale naming the strongest signal in favour, the strongest signal against, and the constraint that is actually binding.
The rationale is the part worth reading first. A recommendation on its own is something to agree or disagree with. One that names what is pulling in each direction, and what is actually limiting the number, is something to argue with productively. Among its inputs is the firm's existing exposure to that company across every fund it runs, which is the one a spreadsheet usually misses: a position that looks proportionate inside one fund can be a concentrated firm-level bet once the other funds are counted.
The module is decision support. It does not execute commitments and does not hold a standing recommendation between sessions, so a scenario run in March does not update itself in June. In its first version it evaluates follow-on decisions on existing positions only, and only where the position is still live. It does not evaluate new deals, which is a deliberate scope choice rather than a gap: a new investment is a judgment about a company the firm has no history with, and the module's inputs are largely a record of history the firm already has. The General Partner makes the decision.