• The Boise Angel Alliance

Angel Funds and Follow-On Investments: Navigating the Biggest Challenge in Investing

The “Follow-On” Decision is widely regarded at the biggest challenge in angel investing.¹ In early-stage investments, discipline surrounding whether one should invest beyond initial funding or continue providing capital during the life of the startup can fundamentally impact whether or not the investor generates impressive returns beyond their “break-even” point. Investors will offer different ideas regarding this decision, but there is one common thread that weaves its way throughout the entire conversation: participating in an angel fund allows investors to work through these steps using a collaborative approach - ultimately increasing one’s odds in making the right decision for the startup, investment fund, and local economy.

It is important to note the importance of recognizing when to make the first investment in a company. There are advantages both to investing early and investing after the startup is more established. The factors of equity and risk tend to operate in opposition to one another, so timing is crucial. Typically, providing capital for a company that is younger and less established allows for investors to likely obtain more equity, which could result in higher returns in the long run. These early-stage investments carry with them a higher level of risk. With strong vetting and deliberate decision-making, early stage investments can offer these high returns at a much higher frequency, but the reality still stands without much, or any history of profitability, growth potential, or the quality of the startup’s leadership, these early investments carry with them a higher risk of loss. In truly early-stage situations, the pre-money valuations of the company have a higher probability of being inaccurate. This can result in overspending on equity with a company that has less potential than the investor initially believed.

Later-stage investments can be more established and predictable. Investors have more knowledge about the company’s leadership, and trends can begin to be recognized indicating the likelihood of long-term success. Later-stage investing tends to be more costly, and opportunities to receive a greater stake in the company’s equity may have already been passed on to the earlier investors. These decisions are truly challenging to make alone. There is an upside in joining a team of investors in an angel fund, as the team can collaboratively gauge the potential risks and upsides of a decision. Fund members can keep each other in check and increase the potential of making the best choice for yielding a higher return.

The next important factor in the Follow-On Decision is deal leadership. The one most essential thing for the investor to keep in mind during this process is that they must keep their head on straight. Angel investing is about two things: the mission, and results. If a deal simply is not going well, the investor must be willing to step away. Roger Ehrenburg, a contributor for business insider, likes to separate this task into three initial categories that he calls “Simple, Not Simple, and No, Sorry.”¹ His second dimension is deal leadership, and the decisions manifest themselves in these ways:

  • Simple, Deal Lead: In situations where relationship is strong with a startup’s management, and the company is performing well, angel investors would do best to begin discussing an additional round of financing. When the company can benefit from additional financing and there is opportunity to gain greater equity, the decision is straightforward. Follow-On.

  • Not Simple, Deal Lead: When the company has had some hiccups along the way, but the startup’s overall management team seems credible and relationships with the company are strong, there may be hesitancy with the decision. Investors would do well to strike a balance of aiding the company, while still managing the potential risk-exposure. While it’s a case-by-case basis, make sure the pros outweigh the cons and the opportunity for exit is still present before committing.

  • No, Sorry, Deal Lead: If there are deep-seeded issues with the company’s management and direction, then the decision is even harder. Investors would do well to do protect their capital, while aiding the startup if success and recovery seems plausible or probable. This is a very important decision. While challenging, it’s important that investors recognize that just because they can follow-on, doesn’t mean they should.²

  • Not Simple, Not Deal Lead: In another situation similar to above, hiccups in the company’s direction paired with not having an opportunity to lead the deal, investors may be best off finding ways to invest less, while still aiding the company’s growth as to make the best use of the funds and equity already obtained.

  • No, Sorry, Not Deal Lead: If the company is outright struggling and isn’t allowing the fund to pursue deal leadership, it’s time to play damage control and stay away from the follow-on.¹ This stage is about aiding the company to protect your investors.

These factors are one model to help aid in the decision of whether or not to say yes in the follow-on decision. Gauging each of these risks, factors, and situations is a tall task for investors. When paired with the responsibilities of due-diligence, other investments they’ve made, and still attempting to exercise opportunities for the pursuit of higher returns, these factors can simply become too much for solo investors. This is a benefit of joining an angel group.

With many decisions that hold high stakes in an investor’s potential of return, joining a fund has upside. With shared responsibilities of due-diligence, gauging the quality of a startup’s leadership, and working together with like-minded investors that ultimately come from different fields of expertise with varied strong-suits, an angel fund can take much of the stress out of what is often regarded as the greatest challenge in investing, the follow-on decision.


[1] Ehrenberg, Roger. “The Biggest Challenge In VC Investing - The ‘Follow-On’ Decision.” Business Insider, Business Insider, 18 Apr. 2011,

[2] Harroch, Richard. “A Guide To Venture Capital Financings For Startups.” Forbes, Forbes Magazine, 29 Mar. 2018,


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