Here are some of my thoughts; although I’m very interested to hear what others opinions are, too!
First, here are some resources that shaped my own opinion:
1 – Follow-On Funding: A Dilemma for Angel Investors by David Rose
2 – Study: Returns to Angel Investors in Groups – see slide 10
3 – AngelList study on How Portfolio Size Affects Early-Stage Venture Returns – suggests that the more early-stage investments you make, the higher your anticipated return. And so moving some of that allocated capital to later-stage (i.e. follow-on) deals, in general, would suggest a potential decrease in returns.
Overall, instead of trying to answer the question “Should I invest in a later round of a company that I already invested in” – which could lead to falling for the sunk cost fallacy or endowment effect (you value things that you already own more than you would if you didn’t own them) and investing more when you really shouldn’t be, I try to flip it on its head.
To flip the endowment effect on its head, I would ask this: “If I didn’t already own shares in this company, would I invest in the most recent offering price based on the information I have?”
Ideally, I try to look at each offering independent of past offerings that I participated in.
Granted, you still need to take information gathered (such as progress since the last round, valuation, maybe new info you’ve gathered from being on the company’s emails) into account; however, I don’t necessarily look at it on a pro-rata basis of “since I already own shares, I should invest again to try and maintain a constant share percentage.”
As with anything, consider the opportunity cost. Let’s say you’re deciding whether to invest another $100 into a company you already own. Do you think investing in that company’s current offering is a better opportunity than investing in another deal that you found? If yes, then it’s perfectly OK to follow-on with another investment. If not, that’s OK, too.
Just my two cents!