I remember the first time a VC asked me for our follow-on plan. I was a young founder, running my first company, MovieLaLa. We were burning cash, hitting milestones, and starting to think about the next round. The question seemed simple enough. But I gave the wrong answer. I didn’t realize it was a loaded question—a test. I learned the hard way that in venture capital, the subtext is everything.
I’ve sat on both sides of the table since then. As a founder, I was often in the dark, trying to decipher signals. As an investor with over 200 angel investments in companies like Anthropic and OpenAI, I learned the unwritten rules of the game. Now, I’m pulling back the curtain on follow-on investing to show you what’s really happening when your VC sends you that document.
They have a playbook. It’s time you had one too.
Your Round is Just One Piece of a Giant Puzzle
Founders see their company as their entire world. A VC sees your company as one line item in a complex portfolio. Their primary job isn’t to make your company succeed; it’s to return their fund. This is the most important truth you need to understand. Their follow-on decision isn’t just about you. It’s about their entire portfolio construction.
A typical $100 million fund might make 25 seed investments of around $1.5 million each. That’s $37.5 million deployed. They reserve the other $62.5 million almost exclusively for follow-on rounds in their breakout companies. Why? Because venture returns aren’t a bell curve. They follow a power law. A few big winners drive all the returns. The VC’s job is to identify those winners early and double, triple, or even quadruple down on them.
When they’re deciding whether to give you more money, they’re asking themselves a few questions:
- Is this company a potential fund-returner? Can this company realistically grow big enough to return a significant portion of our entire fund? If you’re a solid business but only have a 5x growth potential, they might pass in favor of a riskier bet that has 100x potential.
- How does this affect our ownership targets? VCs need to maintain a certain percentage of ownership to make the math work. If a new, high-profile fund wants to lead your next round and dilute existing investors, your current VC might have to write a bigger check than they’re comfortable with just to maintain their stake. Or they might get squeezed out.
- What’s our opportunity cost? Every dollar they put into your company is a dollar they can’t put into another, potentially faster-growing portfolio company. You aren’t just competing against the market; you’re competing against your VC’s other investments.
I once had to pass on a follow-on for a company I loved. The team was great, the product was solid. But they were in a slow-moving industry. At the same time, another one of my investments was showing explosive, category-defining growth. I had to make a cold, calculated decision and put the capital where the growth was. It was brutal, but it was the right move for my fund.
The Signaling Risk is Real—and They Use It
"Pro-rata rights" might be the most misunderstood term in venture capital. As a founder, you probably think of it as a good thing—a sign of your investor’s commitment. It’s not. It’s a weapon. And it can be used against you.
Your pro-rata right is the option for an investor to maintain their ownership percentage by investing in a subsequent round. If they own 10% of your company and you raise a new round, they have the right to buy 10% of that new round. When your lead investor doesn’t take their full pro-rata, it sends a powerful—and negative—signal to the market.
New investors will immediately ask, "The people who know this company best are pulling back. What do they know that we don’t?" It can crater a fundraising round before it even starts.
VCs know this. They won’t always tell you they’re not participating. Instead, they might play games. They might say, "We’re supportive, but we want to see a strong new lead come in first." That’s code for "We’re not committing until someone else validates this round." They use their pro-rata decision as leverage to see what the market thinks of you.
My co-founder and I at RemoteTeam (which we later sold to Gusto) faced this exact scenario. Our seed lead was a smaller fund. When we went to raise our Series A, they loved what we were doing but didn’t have the capital to lead the round or take their full pro-rata. It created a huge headache. Other VCs were hesitant. We had to work twice as hard to prove the business was strong on its own merits, independent of our seed investor’s signaling.
The Syndicate is a Herd
Very few investors make decisions in a vacuum. A venture round is a syndicate—a group of investors who are all looking at each other for cues. The lead investor sets the tone, but the party-round investors matter too.
When it’s time for a follow-on, the lead will often call the other major investors to gauge their interest. This isn’t a friendly chat. It’s a coordinated dance. They’re trying to build consensus and share the risk. If one or two smaller investors drop out, it’s not a big deal. But if the lead is hesitant and other major investors are also quiet, the whole thing can fall apart.
As a founder, you need to manage this process proactively. Don’t just talk to your lead. Keep your other investors updated. Make them feel like insiders. When you have good news, share it with everyone. When you have bad news, be transparent. You want them all to be champions for you when the time comes.
One of the smartest founders I ever backed did this brilliantly. He had a monthly email update that was legendary. It was brutally honest and incredibly detailed. He included KPIs, team updates, and a section called "Where I Need Help." By the time he was ready to raise his next round, his investors were practically fighting to get in. He had managed the syndicate perfectly.
The Rise of the Secondary Market
Here’s something most VCs are only just starting to talk about openly: the secondary market. For years, the only way for an investor to get a return was through an IPO or an acquisition. That meant waiting 7-10 years, sometimes longer.
Now, there’s a booming secondary market where investors can sell their shares to other funds long before a traditional exit. This is changing the game for follow-on investing. A VC might decide to follow on in your Series C, not because they believe they’ll get a 100x return from an IPO, but because they think they can sell their position in the secondary market in 18 months for a quick 3x.
This creates a different set of incentives. An investor focused on a secondary sale might push you to grow at all costs to make the numbers look good for a near-term flip, even if it’s not the right long-term strategy for the business. They might be less patient and more focused on vanity metrics.
As a founder, you need to ask your investors about their strategy. Are they long-term partners, or are they looking for a quick flip? There’s no right answer, but you need to know who you’re getting into business with.
Your Playbook for the Follow-On Conversation
Okay, so the deck is stacked against you. How do you fight back? You can’t change the rules of the game, but you can learn to play it better.
- Start the Conversation Early. Don’t wait until you have 3 months of runway left. Start talking about your next round 9-12 months in advance. Ask your lead investor about their follow-on strategy. Ask them what milestones they need to see to feel confident about participating.
- Know Their Fund Economics. Do your homework. How big is their fund? When did it close? How many investments have they made? This will tell you how much dry powder they have left and how important your success is to their returns.
- Build a Parallel Process. Never rely on your existing investors to fund your next round. Go out to the market and build relationships with new VCs. A competitive term sheet from a new investor is the best leverage you can possibly have.
- Control the Narrative. You are the one telling the story of your company. Frame the conversation around your vision and the progress you’ve made. Don’t let the conversation get bogged down in minor details or missed projections.
Ultimately, follow-on investing is a negotiation, not a partnership discussion. Your investors are your partners right up until the moment you ask for more money. Then, they are on the other side of the table. Your job is to be prepared, understand their motivations, and negotiate from a position of strength. Stop being in the dark. It’s time to level the playing field.
Frequently Asked Questions
What's the most common pushback you get on this?
People often push back by citing exceptions or edge cases. And they're usually right that exceptions exist. But building a strategy around exceptions rather than patterns is a losing game for most founders.
How can I apply this thinking to my own situation?
Start by identifying the core principle behind the opinion, not the specific example. Then ask yourself: does this principle apply to my context? If yes, test it in a small, low-risk way before going all in.
How has this view evolved over time?
My thinking on most topics has changed significantly over the years. Early in my career, I held many conventional views that experience proved wrong. I try to update my beliefs when the evidence changes.