Should a venture fund invest in a follow-on round?

Frame the decision at company and fund level

A follow-on is not only a view on the company. It is also a choice about the fund’s remaining reserve, concentration and ability to support other portfolio companies. The investment case can remain strong while the proposed check is too large for the fund, and the fund can have capacity while the company evidence is not yet sufficient.

Confirm the round economics

Record the proposed check, pre- and post-money valuation, security and material terms, existing and pro forma ownership, dilution, participation rights, total round size, lead investor, named commitments and the portion still unfunded. Test at least a lower and higher check so the partnership can see what ownership protection costs.

Update the company evidence

Compare operating performance with the plan used at the previous investment. Review revenue or other company-appropriate measures, cash, runway, burn, use of proceeds, milestones expected before the next financing and the risks that have improved, worsened or appeared since the last vote. Use current board materials, the company deck and public research where authorized and relevant.

If a required fact is unavailable, name it and decide whether it changes the recommendation to more evidence. Do not fill an evidentiary gap with confidence language.

Protect the rest of the fund

Show the check as a percentage of remaining reserves and total fund exposure. Then review known or plausible needs across the rest of the portfolio. A single-company decision should not silently consume capital already relied on elsewhere. Sapphire’s modeled examples illustrate why reserve outcomes depend on selection, not merely on maintaining a fixed reserve percentage.

Give the committee a usable conclusion

A decision memo should conclude go, no-go or more evidence, followed by the reasons and any conditions. Approval might depend on confirmed syndicate commitments, final allocation, ownership above an agreed threshold, runway through a named milestone or exposure remaining inside the fund’s limit. State who confirms each condition and when the decision returns for review.

The Follow-On Decision Memo applies this structure to one company. Architecture supports the decision and preserves its record; the GP makes the investment decision.

Sources and limits

The sources support scenario testing and show why the allocation of reserves matters. They do not identify which company will succeed or provide an investment recommendation. Company evidence, terms and public information can be incomplete or change quickly; the manager must verify the final record and decide.

• Dirty Secret: Venture Reserves are Not Always a Good ThingSapphire Ventures, May 2022Modeled scenarios showing that a constant reserve policy can produce different results depending on which companies receive follow-on capital.
• Scenario Modeling for Private Funds: A Forecasting FrameworkCartaA current framework for testing portfolio construction, reserves and follow-on assumptions across scenarios.

Questions GPs ask

What should a venture follow-on investment memo include?

Include round terms, current and pro forma ownership, company performance, runway, use of proceeds, syndicate status, changed risks, remaining reserves, total exposure and explicit approval conditions.

What decisions should a follow-on memo support?

It should support a go, no-go or more-evidence conclusion and explain the fund-level and company-level reasons for that conclusion.