PS#058: The Investment Committee – Materials
In the last issue, we set the scene for the investment committee process.
Now, it’s time to discuss the preparation.
As I mentioned, preparing for an investment committee includes two key components…
Creating investment materials
Building consensus with key decision makers
Today, we are going to start with the first one – creating investment materials.
For this part, not only are we going to discuss what’s included, but also a framework for thinking through each piece of the puzzle.
Let’s get started.
Why do firms create IC materials?
Fortunately, I’ve had the opportunity to put together a lot of IC materials.
Whether it’s for a new investment or a follow-on transaction, they are all designed to serve the same purpose – providing a concise, comprehensive view and recommendation for the investment opportunity in question.
At a high-level, your investment materials should provide…
Overview of the opportunity
Summary of diligence
Compelling vision (or story)
Investment recommendation
Next steps for the opportunity
Let’s look at this in a bit more detail.
1. Overview of the Opportunity
First and foremost, the investment materials should present an overview of the opportunity.
Most IC members are not involved in the diligence process and have very little context on the opportunity. It’s your job as an investor to make sure all of this information is presented clearly and concisely to help facilitate a thorough investment committee discussion.
2. Summary of Diligence
Second, the investment materials serve as a summary of all of the work, diligence, and analysis the team has done for the investment.
Proper diligence takes a lot of time, effort, and resources. There’s a reason funds have teams dedicated to running the investment process. IC members simply don’t have the bandwidth to be involved every step of the way. It’s our responsibility to perform this analysis and summarize the key takeaways in a concise and efficient manner.
3. Compelling Vision (or Story)
Alongside the summary of diligence, the materials are designed to present a compelling vision (or story) for the company over the long-term.
Venture capital is a power law industry. We are looking to invest in startups that can become big, successful companies in a relatively short time frame. In order to do so, we need to demonstrate that there is a big opportunity and corresponding vision that the startup is pursuing.
4. Investment Recommendation
All of this underlying work leads to a documented investment recommendation from the investment team.
As VCs, it’s our job to have an opinion. Based on the information and analysis that we have at our disposal, we need to have an opinion on how to proceed with the opportunity. This may include whether we want to invest, how much we’d like to invest, what the structure would be for the deal, whether we are leading or following, who else is participating, etc. We need to be thoughtful and comprehensive to make sure we are presenting the full picture to our investment committee.
5. Next Steps for the Opportunity
Finally, and most importantly, the materials help facilitate discussion around next steps for the opportunity.
Every investment has its own peculiarities and nuances. Depending on the opportunity, these next steps may be different. There may be more diligence to perform or specific requests from your investment committee. We may be leading or structuring the transaction, requiring us to receive approval to start legal diligence and negotiations. On the other hand, the deal may already be in place and we are trying to move quickly to participate. And, of course, in some cases the decision is to pass on the investment opportunity.
As you can see, there are a lot of different scenarios. It’s critical that we discuss those situations and decide as a firm how we will proceed.
So, what’s included?
Great question.
As a disclaimer, there are all different types and styles of investment committee materials. Each firm has its own nuances, analyses, and formats that they prefer.
With that being said, most investment committee materials include some assortment of the following…
Executive summary
Investment thesis
Investment criteria
Investment structure
Company overview
Management team
Problem & solution
Market opportunity
Competitive landscape
Go-to-market strategy
Customer base
Sales pipeline
Performance to-date
Summary of diligence
Key risks
Financial analysis
Ownership & dilution
Returns & scenario analysis
Milestones for next financing
Next steps
Depending on the firm, it can be quite the list. Even further, the sequence, order, and level of detail for all this will vary depending on the stage, opportunity, and situation.
In the next issue, I’m going to structure and organize this list into a framework that I think works well for presenting your investment opportunities to the investment committee.
