What Happens After you Click 'Invest'?
The TLDR
If you are building a diverse portfolio of early-stage tech-scalable investments (aka, not writing 6-figure checks directly into startups), you likely won’t be able to make follow-on investments to preserve your ownership percentage.
That “pro rata” right is usually reserved for the biggest investors or folks *super* close to the company. But that might be ok, because both math and experience are starting to show that “following on” might not be the best strategy for individual investors. 👀
Tell me more
Many VCs have the strategy of “following on.” This means they invest in a subsequent round of fundraising—usually at a higher valuation—to maintain their ownership of the company and avoid dilution.
At first blush, this sounds smart. Dilution sounds bad. Maintaining an ownership position in companies that look like they might be winners sounds good. It’s not always so clear-cut, though.
Eyepopping Data
There are very specific reasons VCs follow on that absolutely make sense (more later). But angels are not small VCs.
AngelList analyzed all the investments made on their platform over the past 10+ years. Their takeaway was, that for early-stage tech investing, individual angels should NOT follow on. They coined the term “infinite regret” to describe what can happen if you follow-on instead of making a net new investment. What if that new startup is the Power Law winner? Miss it, and you’ll have “infinite regret”.
That’s big talk!
Recent posts from Harry Stebbings looking across the industry suggest that doubling down on Series A and Series B “winners” may also be a false flag in pursuing the best financial outcomes - even for VCs! This is provocative stuff and makes people uncomfortable.