Do investment committees know if an early-stage investment is a good one?

Investing in something early is investing in a whisp of smoke. The patterns are hard to see and constantly moving.

How can it be possible to read a description of that smoke on paper and then decide to take a risk on an investment?

I’ve been on many investment committees and a servant to many more. Here’s what can happen on investment committees looking at early-stage opportunities:

  • The paperwork burden becomes substantial because the entire decision is on those pages. I have seen 50+ page memos per decision x multiple decisions in a meeting. Investment memos become longer and longer as committee members ask for more and more information. They believe that a ‘perfect memo’ holds all the answers.
  • Decisions take a long time to make, often needing multiple passes from the committee. This could be months. Time kills deals.
  • All this assumes that long memos are read, which they often aren’t.
  • Often decisions are made based on individual committee members’ biases and experience. A loud initial voice can send an opportunity to the trash if the rest of the room doesn’t understand the space and has 10 minutes to decide.

All this can default to the mediocre and be demoralising for teams working on opportunities without improving the quality of the decision making.

It is easy to get here.

Keeping the decision-making at the top, with a thorough due diligence and documentation process, can feel like the most robust process.

Some organisations have the additional fear that someone might ask them to justify their decision five years later, and they want to be able to bring out the documentation to show the process was thorough.

But investment committees are critical.

The answer isn’t to immediately disband all investment committees. A great committee sharpens the sword of the investment team and leads to better decisions.

But how do we do that?

#1 — Focus on a brilliant process

Are we asking the right questions? Are we learning as a group to make faster, better decisions? Has a thorough process been run?

#2 — Have ‘skin in the game’ on the investment committee

The work done by the investment team is data for the decision, especially if they are a sherpa rather than a gatekeeper.

  • They have probably seen the investee team operate over time — they understand how they will build strength and remove risk.
  • They will be helping remove the risk and build the strength over time. They will believe that this can be done if they are still bringing the opportunity to IC.

These voices need to be part of the decision as well as servants to the process.

#3 — Use the knowledge, experience and networks of the committee

Bring all opportunities to the investment committee for an early look. This is an opportunity to surface weakness in the opportunity and areas where the team can build strength before it comes for a decision.

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Phil Morle

Phil Morle

Deep tech VC — Main Sequence Ventures. Ecosystem builder. Maker. Director. Startup Scientist.