Backing a winner twice

Most of early-stage investing is about picking the right company. Far less gets said about what you do once one of them starts working.

This summer we followed on in our two fastest-growing companies, both of which we first backed last year. In this week's video, I break down why going back into a winner is a different decision from the first cheque, and how I know when it's worth it.

When people picture a venture portfolio, they imagine the first cheque: finding the company, backing the founder, getting in early. That's the part that gets the attention. But some of the most important decisions come later, when a company you already own is clearly working and you have to decide whether to put in more.

This summer we made that call twice. Research Grid and Aeon were both companies we first backed last year. Both have since been marked up, with new investors coming onto the cap table at higher valuations. So when the chance came to follow on, we took it in both.

The instinct for a newer investor is often the opposite. You back a company, it goes up on paper, and that feels like the win. You start looking for the next new thing rather than putting more into what you already have. But concentrating into your winners is how the maths of a portfolio actually works. One or two companies drive the returns of everything else, and the earlier you can tell which ones they are, the more it matters to build your position while you still can.

There's a second reason that matters more than people expect: ownership. As a company raises again, your stake gets diluted unless you follow on. If you have real conviction in a business, protecting your ownership through later rounds is how you make sure a great outcome actually moves the needle for you, rather than being watered down round after round. 

Following on isn't automatic. It only makes sense when your conviction has genuinely grown, not just the valuation. The question isn't "is it up?" It's "do I believe in this more now than I did when I first wrote the cheque?" With both of these, the answer was clearly yes.

Knowing when to double down, and when to hold your capital for something else, is one of the harder skills in a portfolio. I go through how I think about it in this week's video.

When one of your companies raises at a higher valuation, don't just log the paper gain and move on. Ask whether your conviction has grown, not only the price. If it has, look at whether you can follow on to protect your ownership before the next round dilutes it. The winners are where returns come from, and getting in early is only half of backing them well.

Knowing when to double down, and where to put your next cheque, comes down to judgement. Understanding which businesses have the potential to deliver lasting returns, and when the conviction is there to invest further.

Helping investors sharpen that judgement is something we’re passionate about at Arāya. It’s why we’re delighted to introduce the new Arāya Substack.

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Warmly,
Rupa

P.s. When you're ready, here are 3 ways I can help: