Short answer

• Australian VCs handle follow‑on rounds the same way most early‑stage VCs globally do: they allocate a portion of the fund as “reserve” capital for follow‑ons, exercise pro‑rata (or pro‑rata-plus) rights when negotiating term sheets, decide follow‑on participation through investment committee approvals, and either lead, co‑invest, or syndicate additional rounds. They also increasingly use co‑investment vehicles and continuation/side vehicles for larger late-stage commitments or secondary purchases.

What “follow‑on funding” means here

• Follow‑on funding = additional equity (or equity‑linked) investments into a portfolio company after the initial investment (seed → Series A, A → B, etc.), or purchases of existing shares (secondaries).

How Australian VC funds typically structure follow‑on capacity

• Reserve allocation: Funds set aside a percentage of total capital for follow‑ons at close. Typical ranges:
  • Seed/early‑stage funds: ~20–40% reserved for follow‑ons (often toward the lower end for very small funds).
  • Growth/later‑stage funds: may reserve less relative to initial deployment, or use separate growth vehicles.
  • Numbers vary by fund strategy and vintage; founders should ask the VC what percentage is reserved for follow‑ons on a per‑deal basis.
• Pro‑rata and preferential rights: Term sheets normally include pro‑rata participation rights so the VC can maintain ownership percentage in future rounds. Lead investors may negotiate enhanced rights (e.g., “pro‑rata plus” for anti‑dilution or top‑up rights).
• Investment committee approvals: Follow‑on cheques are subject to the fund’s investment committee or partner approval process, not automatic — especially for material new rounds.

Modes of participation

• Lead the round: The VC may lead and set terms if it wants to keep or increase ownership and maintain control.
• Follow as syndicate partner: Participate at the round’s price without leading, often to protect ownership.
• Co‑investments / sidecars: For larger late rounds, GPs invite limited partners (LPs) to co‑invest via sidecars or special purpose vehicles (SPVs) so the fund doesn’t overconcentrate exposure.
• Continuation/side vehicles for late rounds or secondaries: To avoid exceeding reserve limits or fund concentration rules, GPs sometimes roll the company into a continuation vehicle or create a new vehicle for large late‑stage checks or to facilitate secondary purchases.

Decision factors that influence whether a VC follows on

• Traction and metrics: growth, unit economics, ARR, churn, margins.
• Valuation vs. last round: whether the price makes sense for continued ownership.
• Capital efficiency and dilution: how much capital is needed versus dilution impact.
• Syndicate availability: whether other reputable investors are participating.
• Fund concentration & portfolio strategy: stage of fund life and remaining capacity.
• Board influence: If the VC has board seats, it will usually be more inclined to support follow‑ons.
• Exit prospects and time horizon.

Legal and practical mechanisms that matter to founders

• Pro‑rata rights in the shareholders’ agreement: preserves the VC’s right to participate; detail whether transferable.
• Anti‑dilution protections: if present, these affect later rounds.
• Pre‑emption rights for new issuances: standard in Australian cap‑table agreements.
• Notification and offer mechanics: shareholders’ agreement typically sets timing/notice for pre‑emptive offers.
• Tag/drag rights and liquidation preference: continue to govern outcomes at exit.

Tax, regulatory and fund‑structure considerations (brief)

• Use of SPVs and co‑investment vehicles is common; these have tax/administrative differences but are standard practice.
• Australian regulatory oversight (ASIC, managed investment regime) is not normally a direct limiter on follow‑ons, but fund managers must respect their investment mandates and LP agreements.

What founders should expect and do

• Ask the VC early how much they have reserved per deal and whether they intend to lead later rounds.
• Clarify pro‑rata rights, any rights of first refusal, and how follow‑ons are approved.
• Keep existing investors informed and provide transparent metrics so they can make timely follow‑on decisions.
• If a VC can’t follow, expect them to help source syndicate partners or warm introductions to later‑stage investors.
• Negotiate guardrails (e.g., limits on dragging into overpriced rounds) if you’re concerned about conflicts.

Common variations seen in Australia

• Smaller local seed funds may have limited follow‑on capacity and therefore rely more on syndication or co‑investments.
• Larger domestic and international VCs operating in Australia often make larger follow‑on commitments or bring LP co‑investments.
• Some managers create separate growth vehicles or continuation funds for late stages—especially when the initial fund’s mandate or concentration limits would otherwise prevent a large late check.

Bottom line Australian VCs use the same toolkit as VCs elsewhere: reserve capital, pro‑rata rights, investment committee approvals, syndication and co‑invest vehicles, plus occasional continuation structures. The practical difference is mostly scale (smaller funds = smaller reserves) and greater reliance on syndicates and co‑investment for larger late rounds. If you’re a founder, ask each investor up front how they plan to support future rounds and get the follow‑on mechanics in writing.