![]() ![]() Most Venture Capital firms are partnerships with more or less equal voting rights among GPs (a point I dive into below). Investment Committees Matterĭespite the bickering and occasional murderous thoughts, well-run ICs help VCs attain multiple objectives. If anything, recent practices put even more pressure on investment committees, now split not only along a go/no-go line but also torn between partisans of the way as they had always been, and what seemed, for a moment, the new way of doing things. Term sheets make sure that the VC firm will not spend too much time and resources if the partners can’t agree on basic terms with the startup’s FoundersĪlthough the VC market’s bubble led to time compression, as new entrants started to deploy capital frantically, late-stage players put in place industrialized processes to invest at a never-before-seen pace, and even established firms came under pressure not to miss the next decacorn (ten times the size of a unicorn), the deal funnel remained firmly in place.Due diligence, first exploratory and then confirmatory, once the IC sanctioned the spend, serves the purpose of preparing the IC memo and confirming that the “house is in order”.Management meetings, recently transformed into informal coffee meetings, are designed for VCs to gather hard data but also interpret signals on the quality of the Founding team-the most significant investment decision criterion at the early stage.Three minutes and twenty seconds, on average, according to DocSend Pitch decks allow investment professionals to make a go/no-go decision in a few minutes.Warm introductions and referral networks help VCs get qualified deal flow, which means more time allocated to promising opportunities.Many practices of Venture Capitalists become clear once you understand the role the IC plays in the deal funnel, starting at the top: It’s the Cerberus of the Venture Capital world. The investment committee is the ultimate gateway opportunities must go through before a VC firm commits more time and, eventually, money. Even top-of-the-crop startups have a very low probability of getting funding, as a recent YC analysis showed. Overall, studies show that a fraction of investment opportunities reach the IC level (the analysis shows 9% of considered opportunities, but how many were received?), and only one in ten are realized. The VC deal funnel I show in the webinar shows all the steps in the process and the associated probability of success for startups raising VC funds. ![]() (VC firms typically have a top-heavy structure, which is why it’s so hard to get a job in Venture Capital). In contrast, early-stage VC firms receive thousands of opportunities every year, with less manpower to sift the deal flow. It was common to spend six to nine months almost full-time to structure and realize an operation. Those we spent more resources on would take weeks, if not months, to diligence. When I started my private equity career in LBOs financings over 15 years ago, we would typically study a few dozen opportunities every year. ![]() Why Do IC Meetings Exist?Īmong the other transaction-related investment practices, Venture Capital is unique in the abundance of deal flow analysis it requires. I’ll get back to these dynamics later in this post. Moritz, who’s long been the co-head at Sequoia, was ideally placed to witness, and participate in, such intestine wars. The great challenge at venture partnerships is that the principals must refrain from killing each other. The primary reason behind the secrecy is that investment committees are the VC firm’s battlefield, where egos fight for more power and money. There is much more involved than being right or wrong about potential opportunities–Bessemer’s Anti-Portfolio has popularized the misses of even elite VC firms. Yet, for reasons I detail in this post and the companion webinar, VCs are usually shy to provide details about their internal decision-making processes. We now live in the opposite situation: so much content is produced by industry players, including VCs themselves, that it’s become necessary to curate the best of the crop. When Harvard professors Paul Gompers and Josh Lerner published their book The Venture Capital Cycle in 1999, not much was understood of the asset class. VC firms’ investment committees are one of the last bastions of secrecy in an industry that has opened considerably since the veil started being lifted at the end of the 1990s. ![]()
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