#27: Follow-On Investments – Required or Optional?
At its core, the question of follow-on participation often reveals different understanding of Corporate Venture Capital. Investing purely for strategic intent (in narrow or broader definition) and financial discipline. In practice, it reveals fundamental differences in approach, mandate, and strategy.
This decision sits at the intersection of two forces: delivering strategic value to the parent company and achieving attractive financial returns. While financial VCs treat follow-on investments as a core part of their playbook—doubling down on winners to maximize fund returns—CVCs often face a more complex assessment. The dual mandate of most CVCs means that decisions are rarely binary and often contextual.
From my perspective, a well-defined internal guideline, rather than rigid rules or ad-hoc decisions, helps. A framework for decision-making that blends strategic relevance, financial attractiveness, capital availability, and governance. Below are some key considerations that should inform follow-on investment decisions in CVC:
1. Financial Attractiveness
Sometimes, the case for follow-on investment is straightforward: the company is performing exceptionally well, and continued participation offers strong financial upside. Exercising pro-rata rights (or even going beyond) can enable a CVC to capture outsized returns even for strategically motivated CVC units. Returns from a few breakout companies can significantly strengthen a CVC’s credibility and influence within the corporation, provide funding for future investments, and reinforce the unit’s long-term viability.
Participation in later-stage rounds may also offer more favorable risk-return dynamics given the existing information advantages. While financial return may not be the primary goal for all CVCs, financial success/ startups successful development and strategic success are often correlated.
2. Signaling and Market Confidence
Follow-on participation sends a strong and visible signal to the market. It conveys investor confidence, stabilizes the cap table, and often reassures new investors. New investors, and the broader ecosystem watch closely who supports the next round during due diligence process. Existing investors know the company beside the founders the best and hence it can provide validation to other new investors. Their continued support often provides much-needed reassurance for new investors evaluating the opportunity.
For CVCs, especially when pro-rata rights are available, opting out without clear rationale can raise concerns about commitment or misalignment. That’s why many CVCs treat the first follow-on roundafter the initial investment as a default “yes,” assuming no significant deterioration in company fundamentals or strategic fit. Beyond that, future participation becomes increasingly situational.
3. Use of Funds and Milestone Progress
Not every startup and follow-on round deserves support. A disciplined assessment of the company’s milestone progress, use of funds, and go-forward plan and market environment is critical.
First it includes evaluating whether the startup has achieved the milestones it originally set from initial / last investment round —such as product development, customer acquisition, revenue/ARR growth, market growth, etc. Beyond historical performance, attention must shift to the use of funds going forward. What specific outcomes is the company targeting with the new round of capital? Is the round sized appropriately for the goals?
This becomes especially important in bridge rounds. The key question is “What’s on the other side of the bridge?”. A bridge should lead to something specific: a strategic partnership, a commercial inflection point, a clear Series B term sheet, or an Exit — not just prolongating survival.
4. Strategic Fit and Strategic Value
Startups evolve, particular in the early phase and not always in the direction of their original strategic alignment of a Corporate Venture Capital. Before following on, CVCs must ask: Does the startup still align with the parent company’s roadmap?
Sometimes, the value in a follow-on is not only about maintaining ownership per se, but about preserving access and certain rights, which are strategically important. Participating in follow-on round can mean continued board representation, information rights, and strategic influence or reduce risk of loosing it in the future. Particularly when the startup becomes a vendor, co-development partner, or future acquisition candidate. In these cases, a follow-on can serve as a strategic positioning move, not just a financial one.
5. Capital Planning and Portfolio Management
CVCs operate often under strategic capital allocations (or annual budgets) approved by the parent company. These constraints mean that even high-potential follow-ons must compete with new investment opportunities like in traditional venture funds.
This makes capital forecasting/ planning essential by mapping expected follow-ons alongside new dealflow to allocate “dry powder” wisely. Classifying portfolio companies (e.g. hold, follow-on investment, exit, etc), can help manage expectations and support more transparent internal decision-making.
6. Governance and Compliance
Follow-on decisions can sometimes trigger internal governance hurdles, particularly for CVCs embedded in large, regulated or publicly traded corporations. Compliance, reputational risk, and potential conflicts must be evaluated. For smaller follow-on investments, it might not be economic to participate given required governance process.
In some cases, even external factors might play a role, such as (new/updated) regulation, which could come in effect when conducting a follow-on investment.
7. Investor Dynamics and Relationships
Follow-on decisions also impact your relationships with founders and co-investors. If a lead investor or consortium is encouraging all existing investors to participate, a CVC opting out without clear communication risks damaging trust and reputation.
Participating in follow-ons can also build goodwill, preserve deal flow from top-tier funds, and strengthen long-term strategic relationships. Conversely, a sudden withdrawal may be interpreted as a negative signal—even when the decision is purely internal.
Final Thoughts
Follow-on investments are neither categorically required nor entirely optional. A framework and decision criteria helps to navigate such decision. An active portfolio management is recommended with a view on each position.
Clear internal communication, rigorous portfolio planning, and early engagement with founders are key. Startups should never be surprised by a CVC’s follow-on position, especially if the answer is “no.” By managing expectations in advance, CVCs can preserve trust, maintain transparency, and continue to be seen as reliable and value-adding investors.
A well-managed follow-on approach not only increases investment discipline, it also helps elevate the strategic credibility and operational maturity of the CVC unit itself.
Disclaimer: The views and opinions expressed in this post and under my Corporate Venture Capital newsletter are solely mine as the author and do not necessarily reflect the official policy, position, or opinion of my employer. Any content provided are my personal views and not investment advice. Large-language-models might have been used in some sections to improve wording.