Follow-On Financings of Portfolio Companies: Issues for Investors and Start-Up Companies

Abstract

Venture capitalists who invest in the first round of start-up companies eventually have to decide which companies they will continue to fund. A typical investor in these early stages, especially in medical device and bio/pharmaceutical companies, will expect to write off 20% to 30% of all investments. It is a much more efficient use of capital when this writeoff occurs after just one investment, when the dollars at risk are usually modest. In this article, the author describes the issues involved in making follow-on investing decisions and suggests how the process can work more effectively for venture capital partnerships and for portfolio companies.

TOPICS: Private equity, portfolio construction, fundamental equity analysis