{"id":89193,"date":"2023-08-04T11:59:25","date_gmt":"2023-08-04T11:59:25","guid":{"rendered":"https:\/\/www.ghanamma.com\/2023\/08\/04\/3-reasons-to-maintain-a-follow-on-allocation\/"},"modified":"2023-08-04T11:59:25","modified_gmt":"2023-08-04T11:59:25","slug":"3-reasons-to-maintain-a-follow-on-allocation","status":"publish","type":"post","link":"https:\/\/www.ghanamma.com\/2023\/08\/04\/3-reasons-to-maintain-a-follow-on-allocation\/","title":{"rendered":"3 reasons to maintain a follow-on allocation"},"content":{"rendered":"<p><\/p>\n<div>\n<div class=\"article__contributor-byline-wrapper\">\n<div class=\"article__contributor-byline\">\n<div class=\"contributor-byline__contributor\">\n<p>\n\t\t\t\t\t\t\t<span class=\"byline__author-name\">Champ Suthipongchai<\/span><br \/><span class=\"byline__author-title\" style=\"display: block;\">Contributor<\/span>\n\t\t<\/p>\n<\/div>\n<p>\n\t\tChamp Suthipongchai is a co-founder and general partner at Creative Ventures, a method-driven deep tech VC firm investing in startups that address the impact of increasing labor shortages, rising healthcare costs and the climate crisis.\t<\/p>\n<div class=\"contributor-byline__more-articles\">\n\t\t<span class=\"more-articles-title\">More posts by this contributor<\/span><\/p>\n<ul class=\"more-articles-list\">\n<li>3 mistakes to avoid as an emerging manager<\/li>\n<li>3 ways deep tech founders can climb out of pilot purgatory<\/li>\n<\/ul>\n<\/div>\n<\/div>\n<\/div>\n<p id=\"speakable-summary\"><span class=\"featured__span-first-words\">A venture fund<\/span> maintaining some allocation for follow-on investments is not unheard of. But should VCs do this?<\/p>\n<div class=\"article-block block--pullout block--right\">\n<blockquote>\n<p>\n\t\t\tFollow-on investments won\u2019t ever be the deciding factor in which funds win or lose, but they will continue to distinguish the top decile from the top quartile.\t\t\t\t\t<\/p>\n<\/blockquote>\n<\/div>\n<p>After all, if a company achieves wild success \u2014 the goal of any venture investment \u2014 then the initial investment will always do better than any follow investment.<\/p>\n<p>So, as investors, why don\u2019t we put everything into that first check to maximize the return? The answer to this requires an exploration of venture mechanics.<\/p>\n<h2>Follow-on investments increase the chances of follow-on investment<\/h2>\n<p>Follow-on investments are strategic and can often be the difference between a successful next financing round and your portfolio company going bust. They tell new investors that you have skin in the game and believe in your portfolio company, so they should too.<\/p>\n<p>Imagine you\u2019re a lead investor talking to downstream investors about the \u201cbest\u201d company in your portfolio. You want them to lead the next round and suggest they do so, but when they ask if you\u2019re joining the round, you tell them no.<\/p>\n<p>Even if your reasoning is that you don\u2019t reserve any capital for follow-on investments, you\u2019re not sending a positive signal.<\/p>\n<p>And what they do next . . . well, what do you think you would do in that position?<\/p>\n<h2>There is too much variability to be precise with the runway<\/h2>\n<p>Beyond optics, we find many idiosyncratic risks of venture capital. Besides a once-in-a-lifetime pandemic, you cannot always accurately predict things like FDA approval timelines or supply chain constraints, which means your portfolio company\u2019s runway will likely be shorter than what is necessary to get to its next milestone.<\/p>\n<p>Ultimately, there\u2019s too much variability in how far a funding round will take a company, and even the best efforts to estimate runway are often wrong.<\/p>\n<p>What\u2019s more, even if a company reaches its milestone, a small coffin leaves little room to negotiate a good valuation, leaving earlier investors more diluted than they should be.<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Champ SuthipongchaiContributor Champ Suthipongchai is a co-founder and general partner at Creative Ventures, a method-driven deep tech VC firm investing in startups that address the impact of increasing labor shortages, rising healthcare costs and the climate crisis. More posts by this contributor 3 mistakes to avoid as an emerging manager 3 ways deep tech founders [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[21],"tags":[],"class_list":["post-89193","post","type-post","status-publish","format-standard","category-technology"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v24.2 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>3 reasons to maintain a follow-on allocation - Ghanamma.com<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.ghanamma.com\/2023\/08\/04\/3-reasons-to-maintain-a-follow-on-allocation\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"3 reasons to maintain a follow-on allocation - Ghanamma.com\" \/>\n<meta property=\"og:description\" content=\"Champ SuthipongchaiContributor Champ Suthipongchai is a co-founder and general partner at Creative Ventures, a method-driven deep tech VC firm investing in startups that address the impact of increasing labor shortages, rising healthcare costs and the climate crisis. 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