VCs Do the Least Work on Their Largest Check

The follow-on decision is probably one of the most important decisions a VC makes, and probably the least discussed.

The purist in me says the answer is obvious: run a seed-only, low-cost-basis strategy. No follow-ons at all. Simpler and in theory it might be the best-returning approach in venture. Invest early, get in at the lowest valuation, focus on multiples.

But it’s not really possible. Founders read your absence as a lack of conviction. Skipping your pro-rata sends a signal that can hurt the very company you believe in. So you follow on, partly for reasons that have nothing to do with whether it’s a good investment.

At a lot of firms, the follow-on is automatic. The pro-rata goes out by default, framed as conviction. But a follow-on is a new investment. Should it get the same scrutiny as any other opportunity, or does the fact that it’s already yours earn it a lower bar? The problem is existing investors are arguably ill-equipped to evaluate it.

We’re all good at judging companies at the stage we invest, at least we hope. But the follow-on is often a later-stage decision priced on ARR and metrics, a version of the business we’re not the expert in. The new investor coming in is. They underwrite that stage fresh.

By the time the follow-on comes around, I’m also not an investor evaluating an asset. I’m a teammate evaluating a friend. The board meetings, the late night texts, the pivot I lived through. I find it hard to be objective about the learnings, and impossible about the founder, because somewhere along the way I moved from across the table to their side of it.

You’d think the answer is to send it to your partners. But they’re compromised too, and it could be in either direction. They know the company through my updates and a forwarded email, so they overindex on the few things they’ve heard. There’s no clean set of eyes inside the firm.

As an industry we spend 80% of our energy agonizing over the initial seed check, the small one, and maybe 20% on the follow-on. Even though the follow-on is often the bigger dollar commitment. The effort runs inversely to the money at risk. We do the least work on the largest check, because it’s already ours and it feels safe.