Revealing the Secrets of Climate VC Funds' Investment Committees
Investment Committees Demystified and Insider Tips to Finding Startups That Stand Out 🚀
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VC funds are pretty secretive, especially when it comes to their investment committees. VCs can be pretty shy about their decision-making processes.
Needless to say, it can make us feel pretty blind from the outside 🫣
So I thought of sharing some info on those "obscure" practices and giving some stats and tips to help Fund Managers find those diamonds in the rough 💎
The basics
The pitches usually start with the analysts and associates at a fund, and then they make their way to the big decision makers, usually the partners sitting on the investment committee (IC).
This is why the IC members are so important for any VC fund, because they are the ones calling the shots.
Now, there's no one-size-fits-all when it comes to investment committees, but here are some industry stats to get a clearer picture.
📊 Let’s use stats to set some benchmarks
Based on industry stats from the British Venture Capital Association:
VC decisions are usually made in two IC meetings
Typical IC has 4 to 6 members but can be 3 to 10 (more in larger funds)
Around 80% of IC meetings are held before issuing term sheets
76% of Funds operate consensus decision-making or voting
Less than 10% use a scoring system — most vote ‘YES’ or ‘NO’
22% of funds insist on Startup Founding teams presenting to their IC
100% of larger funds have a chair of the IC, but smaller funds general don’t
🟢 🔴 Is there a clear voting process?
Disagreements over which companies to invest in are common in the game of investing. Therefore, funds must establish a clear voting mechanism for every investment decision to sort out disputes.
There are several options available, such as a unanimous vote, a simple majority, or a points system.
A unanimous voting system might slow down decision-making in a six-member IC. But unanimous or points system might make sense in a three-member IC.
That brings me to some fundamental tips.
⭐ Tips For Fund Managers on How to properly structure your IC to optimize for success
Diversity of opinions: Since VC is mostly about interpreting signals, it helps having diverse people around the table who can bring a fresh perspective from their experiences, particularly past-entrepreneurs that don’t come from the finance or consulting world.
Fight off confirmation bias: A useful but sometimes pernicious effect of working on an investment opportunity is that Investors build bonds with the startup’s Founders. It’s useful because they will sit on the Board for years to come and hopefully provide advice in dire times. Trust is a critical parameter. BUT, it also comes with Confirmation Bias. And ICs should be platforms to fight off confirmation bias.
Hunting for Outlier deals: whatever you do, don’t forget the MOTHER OF ALL RULES —> optimize your decision making to identify the outliers!
Invest in Weird and Edge cases: searching for outlier startups means seeking weird and edge cases. They generally deviate from the norm and operate in unexplored or unique markets, or taking a completely new approach to an existing problem.
Avoid politics. Lobbying for deals, or creating alliances might boost your personal agendas, but it’s often at the cost of TRUTH, and damages culture and performance.
Examples of NO GOs: “I vote for your deal so you will vote for mine”, or “I have your back so you have mine”.
Since consensus-based decisions tend to rule out the weird and contrarian deals, are there any mechanisms to consider to unearth disruptive startups?
🦄 How to Identify the Next Unicorn by Challenging Conventional Wisdom
Discovering the Next Unicorn is your top priority, so you may want to consider special rules or exceptions to unleash the power of contrarian thinking:
Last Word Vote - some IC members might have some special voting powers like having the last word in case of a tie. These powers reflect the team's power dynamics. But watch out, unequal contexts can be a reason why people leave.
Veto Power- Similarly, some members may have veto power to block an investment.
Silver Bullet or “Wild Card” - each IC member might have a "silver bullet" to invest in a deal even if the rest of the team is against it. Usually, the number of bullets is limited to 1-2 per fund, allowing for unanimous decisions while granting individuals the ability to do contrarian deals.
Scoring Systems - Some funds prefer to make decisions based on scores rather than votes. Each IC member assigns a score that must meet a certain threshold. Scoring can also act as guidelines rather than actual voting systems, and the scoring method can vary widely from fund to fund.
CONCLUSION
In conclusion, to discover outlier startups that drive financial and impact success, foster contrarian thinking and encourage outlier cases.
Remember to select the appropriate IC members who possess macro-thinking, a holistic view of the startup lifecycle, and strategic thinking skills.
Each investment decision should stand on its own merits, so don't counter-balance previous decisions.
Take risks, push boundaries, and remember that we're all in this together.
Let's raise the bar by sharing what works and what doesn't. Together, we can drive serious impact 🎯
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That's all for this Saturday. Simple insights in 5 minutes.
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