Follow on investment strategy refers to the strategies and approaches used by startup companies to raise subsequent rounds of financing after an initial seed or angel investment. As startups grow and expand, they require larger capital injections to scale up operations, enter new markets and accelerate growth. Understanding follow on strategies enables founders to map out fundraising roadmaps, target appropriate investors and structure investment terms favorable for the startup’s growth. This article will provide an overview of common follow on strategies such as Series A/B/C funding, strategic investors, venture debt, secondary sales, IPOs and M&As that startups leverage at different stages of evolution. Proper follow on strategy is key for startups to continue raising growth capital amid economic cycles and evolving startup ecosystems.
Targeting Venture Capital for Series A/B/C Funding Rounds
Many startups aim to raise Series A/B/C funding from venture capital firms after successfully completing angel/seed rounds. Series A ($2M to $15M raise) helps startups expand products, enter new markets and grow teams. Series B ($10M to $30M) fuels rapid expansion and Series C ($20M to $100M) funds late-stage growth toward an IPO/acquisition. Startups should identify VC firms that invest in their domain/sector, showcase traction, craft targeted pitches and provide realistic projections to persuade VCs to lead these rounds. Founders must convey visions to scale profitable business models before requesting higher round sizes from VC backers. Startups should also target brand name firms like Sequoia, a16z, GGV who can boost credibility and open doors to strategic opportunities.
Leveraging Corporate Venture Capital and Strategic Investors
Later stage startups should also consider corporate venture capital arms of Fortune 500s and strategic investors in their domains as potential follow on partners. Strategic investors like Google Ventures, Salesforce Ventures provide startups market insights, commercial partnerships, cross-selling opportunities and exits through acquisitions. Startups should identify strategics with complementary technologies, demonstrate synergies in joint offerings and propose commercial partnerships to secure equity investments. Corporate VCs are ideal partners for startups that aspire to be acquired by large enterprises in their verticals down the road.
Alternative Financing Options Like Venture Debt
Beyond equity financing, startups also have alternative options like venture debt from specialty lenders to fund growth without diluting founders. Using projected ARR as collateral, startups can secure venture loans ($3M to $20M) to finance receivables, equipment purchases and operating expenditures. Startups can incorporate venture debt as a follow-on to equity rounds to limit dilution. Debt also provides monthly payments over 12-36 months improving cash flows for capital-intensive growth. However, startups must demonstrate maturity in financial reporting/projections to qualify for venture debt programs.
Facilitating Secondary Sales for Early Investors
Allowing early investors to sell portions of shares through secondary sales helps startups raise follow on rounds. As startups stay private longer before IPOs, early backers seek liquidity events through secondaries to free up capital for new investments. Facilitating secondary sales incentivizes existing investors to re-invest in follow on rounds and attracts new investors who see liquidity options. Startups can negotiate sale terms favorable to the company and existing shareholders. Secondary platforms like Forge, EquityZen, SharesPost enable shareholders to securely sell stakes while providing buyers access to proven private companies.
Preparing for IPOs or Mergers and Acquisitions
The optimal follow on strategy for leading startups is pursuing IPOs to become public companies or selling to strategic acquirers. IPOs allow startups to tap vast public capital markets for expansion, raise brand profiles and create shareholder value through public listings. To successfully IPO, startups must demonstrate multi-year track record of high revenue growth, solid financials and governance. Alternatively, an acquisition by corporations or PE firms can provide quick exits and lucrative returns for founders and investors. Startups should build relationships with strategics, establish value drivers and prepare due diligence to position for M&A.
Follow on strategies enable startups to methodically raise subsequent financing rounds to continue scaling amid evolving startup ecosystems. Targeting appropriate venture capital, strategic investors, alternative financing and facilitating liquidity events are key for founders to extend growth runways beyond initial funding rounds.