PS#061: The Investment Committee – Lessons Learned
So far in my career, I’ve been fortunate enough to be involved in many deal processes, which means a whole lot of investment committee meetings.
Today, I’d like to share some of the biggest lessons learned from my investment committee processes to-date. Things that I wish I had known beforehand and things that I just didn’t think about until I actually experienced them.
My hope is that these lessons will save you some pain down the road.
Without further ado, let’s dive in.
Not all investments get approved.
Actually, most investments don’t get approved.
Most investment opportunities don’t even make it to the investment committee. That’s the nature of this industry. We pass on hundreds and thousands of opportunities for the select few that fit within our fund’s defined strategy and mandate.
So, that’s the first part of this lesson – you will get rejected. You might follow all of the strategies that I provided and still get rejected. That’s OK. It’s part of the game.
The second part of this lesson is recognizing the secondary and tertiary effects of that rejection. If not handled appropriately, these rejections can trickle down to your reputation and relationships in the market.
That’s why it is so, so important to transparently communicate your fund’s process to entrepreneurs and remain in touch with the investment committee throughout diligence. Keeping both of these parties well informed will help you maintain your reputation and relationships, even when the investment opportunity doesn’t go your way.
Remember, IC members often haven’t been in the weeds.
I’ve mentioned this a few times throughout this series, but it bears repeating.
Building a clear, concise, and coherent narrative for an investment is just as important as being thorough in diligence. You may have done hundreds of hours of work on the company, but your IC only has your updates and the materials for their decision making process.
It’s your responsibility to make the case for the investment.
I encourage you to have conversations with your IC members (and others on the team), solicit feedback and constructive criticism, and think through any potential questions that could arise.
Be open to criticism and advice.
Honestly, I’ll take this a step further – seek it out.
As I discussed in the last issue, informal conversations to better understand the investment committee’s concerns is an important step in receiving approval for your deal.
From a first principles perspective, these are experienced, talented investors that can help you build a “steel man” from your “straw man.”
I can’t recommend this enough. Seek out criticism and advice. It will help you build a stronger investment case AND help you become a better investor.
Be prepared for follow-up requests.
For the most part, I’ve discussed how to get a deal approved or how to respond when your deal is not approved. Sometimes, however, the outcome is not just a straight “yes” or “no.” In some cases, there is actually a bit of a middle ground.
A lot of investment committees will make follow-up requests. They may provide approval contingent upon certain deal terms changing or pending further diligence in a certain area. In other situations, they may ask you to do these items before they are comfortable making a decision.
This is not uncommon.
You should prepare yourself for this eventuality, which means trying to better understand if the IC will have these types of requests (i.e., informal conversations), giving yourself time to complete these requests, and maintaining an open, transparent dialogue with founders around the reasons (and timing).
A recap on the investment committee process.
Before we go, I’ll leave you with a quick recap of the items we covered in this series. It includes…
Hopefully, helps shed light on the overall process and how you can best excel as an aspiring investor.
