The idea of a “follow-on” investment is seductive. You raise once, then your existing investors top up your next round. Easy, right?
Not quite.
Follow-ons often create dependency, valuation traps, and dilution spirals that smart founders do not see coming.
What Founders Get Wrong About Follow-ons
1) They Reduce Market Tension
If an insider leads your next round, you might skip building a broader investor pipeline. Without external market pressure, you lose pricing leverage.
2) They Mask Deeper Problems
Sometimes follow-ons are a patch for weak metrics, not a reward for traction. You might postpone hard truths until it is too late.
3) They Dilute Without New Signal
Follow-ons usually come with the same terms or worse. No new investors means no new momentum or signal in the market.
Smart Ways to Handle Follow-ons
1) Treat Follow-ons as Optional, Not Default
Always run an external process. If your insiders re-up, great. If not, you are not stuck.
2) Create External Interest Regardless
Even if you expect an insider-led round, keep updating outside funds. Build FOMO. Run mini-processes.
3) Use Follow-ons to Compress Timelines
Follow-on money can help you skip a formal round, but only if it comes with clean terms and does not cap future upside.
Related Reads
FAQs
1) What is a follow-on round?
It is when existing investors re-invest in your next funding round, often at new terms.
2) Are follow-ons good or bad?
They can be helpful, but dangerous if they reduce external interest or create misalignment.
3) Should I let insiders lead my next round?
Only if they offer market-level terms and you have validated outside demand.
4) Can follow-ons hurt future raises?
Yes. VCs may question why no new investors joined, especially if terms were not competitive.
5) How do I structure smart follow-ons?
Run a parallel external process. Keep terms clean. Preserve leverage.
