PS#057: The Investment Committee – Context, Purpose, & Preparation
Over the past year, I’ve broken down all types of frameworks and processes that can be used to better understand a potential investment opportunity.
From finding the deal to structuring the investment to imagining the potential exit opportunities, it all represents different, but nonetheless important, pieces of the puzzle.
However, I still haven’t given you the full picture.
Today, we’re going to start discussing the investment committee process.
The context.
Once an investment team is ready to recommend an investment, they will present the opportunity to the fund’s investment committee.
The investment committee (“IC”) is typically made up of senior investors of the firm, who decide which opportunities the fund will pursue.
Depending on the firm and fund mandate, they could be highly selective, only doing a few deals a year, or high volume, deploying capital across a number of startups.
The form and function of the IC will also depend on the VC firm and fund mandate. The number of members can vary from fund to fund. Some firms may require unanimous approval from its IC members, while others only require a majority vote. Even the participants for the investment committee can vary with some firms having the startup present to their ICs, while others only include only the firm’s investment team.
However, even with all those variations, all venture capital firms require some form of investment committee approval before pursuing the deal.
The purpose.
This begs the question… Why do VC firms utilize this structure?
It’s an important question.
Even more importantly, understanding these reasons will help aspiring investors prepare, present, and ultimately acquire approval for their investment opportunities.
There are generally five reasons VC firms leverage an investment committee in their decision-making process…
Fund Alignment
Resource Allocation
Consistent Evaluation
Experience & Expertise
Accountability & Documentation
Let’s talk about each of these in a bit more detail…
1. Fund Alignment
Venture capital firms often have specific investment strategies, focus areas, and objectives.
The investment committee ensures that potential investments align with the overall strategy and mandate of the fund. This alignment helps keep the investment team focused on their areas of expertise, preventing any deviation from the envisioned portfolio construction.
2. Resource Allocation
Venture capital is a highly risky asset class.
Proper portfolio construction allows VC firms to manage this risk by diversifying their investments across a range of companies, industries, and/or stages. The diversification helps reduce the impact of any single investment failure on the overall fund, while increasing the likelihood of successful investments that can generate significant returns.
The investment committee is responsible for reviewing each individual investment within the context of the broader fund, prioritizing capital for the most promising and strategically relevant opportunities.
3. Consistent Evaluation
As I’ve mentioned previously, venture capital is really an industry of processes.
Keeping these processes consistent over time is a key part of making smart, even-keeled investment decisions. As we’ve all seen over the last few years, markets can be highly volatile. The swings of a bull and bear markets can make long-term investing difficult.
The investment committee helps maintain a consistent evaluation process, ensuring proper and thorough due diligence across all of the fund’s investments.
4. Experience & Expertise
The investment committee structure allows a firm to scale and leverage its most valuable resource – the expertise and experience of its senior investment professionals.
In most cases, these senior investors have been reviewing investment opportunities for many years (if not decades), looking at hundreds (if not thousands) of different startups, transactions, structures, markets, etc. They have a wealth of industry experience and expertise that should be included in the ultimate investment decision.
5. Accountability & Documentation
As investors, we need to hold ourselves accountable for our investment decisions.
The investment committee provides a structure for this accountability, requiring a thorough diligence process, documented investment materials, a diverse set of perspectives, and an open discussion around the opportunity.
This not only helps maintain the integrity of the investment process, but also creates an opportunity for investors to learn and improve.
The preparation.
Alright, now that we’ve set a bit of the context and purpose of the investment committee process, we can start digging into the preparation.
Preparing for investment committee involves two key pieces…
Creating investment materials
Building consensus with key decision makers
In the next few issues, we are going to discuss what goes into these two aspects of IC preparation. We’ll walk through the details of the investment materials (i.e., what’s included) and how to properly communicate your investment recommendation to the key decision makers on the investment committee.
