- Short Description:
- For those firms that Double Down on Winners, in order to avoid the trade-off of Follow-on for Love or Self-Protection, some firms have different people who make the decision on follow-on vs. the initial investment.
- Benefits:
- The decision on Information Not Relationship: Since the partner responsible for follow-on investment decisions spends less time with portfolio companies, they are able to make decisions with the benefit of information the firm has but without possibly being clouded by closer relationships with the management of the portfolio companies.
- Protect Relationship: GPs who are on a board or close with a CEO/founder can keep the relationship close and supportive without the overhang that the same person will be judging the firm’s next investment in the company. The GP can also “blame” or point to the other partner as the source of any bad news.
- Focus: partners who are sourcing, selecting, and winning new deals get the benefit of increased focus as does the partner who is only looking at follow-on.
- Trade-offs:
- Harder to Integrate: some argue it is harder to integrate all of the information the firm has into the decision, as the partner focused on follow-on may not have spent time with the founders/CEOs.
- More Pressure to Invest: if someone’s whole job is to invest follow-on dollars, then it will likely put even more pressure to invest the money into existing portfolio even if it would not be justified purely from a return perspective.
- Examples:
- Floodgate is said to follow this model
Portfolio Construction: Separate Partner for Follow On
