A follow-on investment is a subsequent investment in a portfolio company by an existing investor, typically in a later round. For example, a Series A investor participating in Series B. The capital is used either to maintain ownership percentage through pro-rata rights as the company raises additional capital, or to increase ownership beyond pro-rata in winning portfolio companies where the investor has strong conviction about future returns. It is one of the most strategically important VC activities and the place where good portfolio construction either creates or destroys value over a fund's lifetime.
The two main types: