A follow on investment refers to the additional rounds of funding provided to a startup company after the initial investment. As startups grow and expand, they often require further capital injections to meet increasing costs and operating expenses. The follow on funding allows startups to scale up operations, expand to new markets, improve products and services, and ultimately work towards profitability. This article will explore key aspects around follow on investments for startups.
Follow on investment occurs in startup’s growth stage
Startups typically go through multiple stages as they progress, including seed/pre-seed stage, early stage, growth stage, expansion stage and mezzanine stage. Follow on investments usually occur once the startup enters the growth stage, where they have gained some traction and initial success. At this point, startups require capital to build on early wins, invest in technology, hire more talent, and capture larger market share before competitors dominate. This is where follow on funding from existing investors or new investors comes in.
Helps startup achieve scale and sustainability
The primary motive behind follow on rounds is to help the startup achieve scale and sustainability in its business model. With additional capital injection, startups can expand manufacturing capacities, strengthen supply chains, boost marketing budgets, acquire proprietary technologies, and keep enhancing products until there is product-market fit. Furthermore, follow on funding provides startups runway to experiment, pivot if needed, and fine-tune operations until a repeatable and scalable unit economics is achieved.
Signals startup’s progress to industry
From an industry perception standpoint, the ability of a startup to raise follow on investment conveys positive signals about its progress and endorsements from investors. It shows that investors are willing to double down and put in more money after seeing early traction. This builds confidence amongst customers, partners, talent that the business fundamentals are strong. Moreover, fundraising success often attracts media spotlight which further raises the profile of the startup.
Extends runway until a liquidity event
Ultimately, follow on funding is provided to extend the investment runway and give chance to the startup until a liquidity event where exits happen for investors. This liquidity event can be an IPO, acquisition, secondary sale etc where investors can cash out and realize returns. Many startups fail due to lack of capital before they have a chance to fully capture the market potential. Follow on funding bridges this ‘valley of death’ where companies die waiting for profits.
In summary, follow on investment refers to additional funding rounds raised by startups after initial seed/early stage capital, as they enter growth stage and require more financing to achieve scale. It helps cement product-market fit, build sustainable unit economics, gain industry validation, and extend runway until liquidity events.