Venture Capital | Part 5/7: Investment Committee Meeting

The Art of Making Good Decisions

7 min readSep 30, 2023

This one’s going to be a soft one, just a little peek behind the curtain of what happens in an IC meeting, and stuff that I noticed should be watched out for.

So, what is an IC Meeting?

It’s a meeting where a group of people decide whether or not we should give money to the company, and at what terms.

Participants

All GPs working on the deal
Some independent investment committee members (depending on the size and structure of the firm)
Experts in the field (affiliated with the VC firm)

Structure

It’s super key that such meetings have a specific agenda and a strong sense of what success looks like in these situations.

The flow goes like this —

The company in question presents
The IC asks the company questions
Company drops off
IC discusses the investment opportunity
Everyone votes (Usually green/amber/red)
The final decision is taken & then communicated to the company

It’s ideal for the process to be as scientific as possible

Goal

The capacity to detect the growth potential of innovation is one of the most significant competencies of venture capitalists, and that’s what we try to decide in the meeting.

It’s super key that when an opportunity is discussed, we need to know what the goal is with this investment —

is it to be the 10% in our power law that gives us the returns?
is it for balancing risk in the portfolio construction?
is it to build the right co-investing relationships?
is it to back a great founder who we know will do great one day even if it’s not with this venture?
is it for publicity or to stay true to our thesis/mission?

Discussion Points

This meeting will have an investment memo sent beforehand (minimum 24 hours) and all participants are expected to have read and understood it by the time of the meeting and have pointers ready to discuss.

Usually, discussion points are the following —

Do we love the team?
Do we love the market?
Do we love the idea?
Can we get a good deal?
Are the risks manageable?

Things to keep track of

Since this meeting is key, and the consequences of making a bad decision are massive, we need to keep track of within-meeting dynamics that affect good decision-making. The goal is ultimate decision-making prowess, and the company is only as strong as its most biased group decision.

Power dynamics

Power dynamics — the ways in which power works in a setting — can either sink a meeting and negatively impact relationships for years, or produce more shared power and capacity to get things done.

A lot of the difference comes down to how we attend to power dynamics in meetings, how well we plan our meetings, how well we determine what happens within and outside of meetings, and how well we facilitate at the moment.

In every organization, there are people who hold formal power and informal power.

Formal power is attributed to someone by virtue of their title or position in the organization.
People carry informal power if they have influence over others or their organization, either because of their experience, force of personality or persuasion, unearned privilege, or because they have strong relationships with decision-makers and peers.

Sources of power —

Legitimate: the ability to request certain behaviours of others based on title, roles, or position (elected/ appointed)
Reward: the ability to control the allocation of rewards valued by others and to remove negative sanctions
Coercive: the ability to apply punishment (i.e., peer pressure) or take away items of value
Expert: the ability to influence others based on the possession of valuable knowledge or skills
Referent: the ability to influence others because the leader is admired and respected
Information: the ability to influence based on access to and control over the distribution of information
Ecological: the ability to influence how tasks are organized or the ability to alter the team’s physical environment

Some ways to dissipate power —

Address power — Talk about it, so people are aware and it loses its power
Incentivise dissent — Make sure people are praised for speaking against the people who hold formal/informal power in the room

Groupthink

Groupthink is a phenomenon that occurs when a group of individuals reaches a consensus without critical reasoning or evaluation of the consequences or alternatives. Groupthink is based on a common desire not to upset the balance of a group of people.

The eight traits of groupthink are —

Illusions of unanimity among key decision-makers cause them to doubt their own misgivings.
Unquestioned beliefs lead group members to ignore the potential consequences of the group’s actions.
Rationalization of potential warning signs that should cause group members to question their beliefs.
Stereotyping of contrary viewpoints leads members of the group to reject perspectives that question or challenge the group’s ideas.
“Mindguards” or members of the group who prevent troubling or contrarian viewpoints from circulating among group members. Rather than sharing important information, they may keep quiet or prevent other members from sharing.
Illusions of invulnerability lead group members to engage in unjustified risky behaviours with an overly optimistic hope of success.
Direct Pressure may silence group members who tend to pose inconvenient questions or raise objections that may be seen as evidence of disloyalty.

Ways to avoid groupthink —

Groupthink arises out of a natural pressure for conformity, so the problem can be alleviated by assigning one member to act as a “devil’s advocate,” intentionally raising every possible objection. Since this is an assigned role, the devil’s advocate need not worry about the perception of being opposed to the group.
Group members may avoid speaking out to avoid contracting the group’s leadership. To avoid that problem, leaders should step back from early discussions to allow lower-ranked members to air their views first. After discussion, leaders should consider holding a “second-chance” discussion for any objections that were not raised before.

Prospect Theory

Prospect theory is a behavioural model that shows how people decide between alternatives that involve risk and uncertainty (e.g. % likelihood of gains or losses). It demonstrates that people think in terms of expected utility relative to a reference point (e.g. current wealth) rather than absolute outcomes.

Essentially, Tversky and Kahneman proposed that losses cause a greater emotional impact on an individual than does an equivalent amount of gain, so given choices presented two ways — with both offering the same result — an individual will pick the option offering perceived gains

How to mitigate prospect theory —

Understanding prospect theory can help individuals overcome their biases and make more rational choices.
It also helps to reframe possible outcomes in a way that reduces the impact of cognitive biases. Instead of thinking in terms of gain or loss, you can instead think in terms of the value of expected outcomes, without using the present as a reference point. This can reduce one’s loss-aversion bias.

Active Listening

Most of us talk to talk and listen only to plan the next thing we will say. This is fatal, in an IC meeting, because every person has a unique viewpoint that can be extremely important for the decision to be a sound one. Since we’re looking for intellectual honesty here, making a good decision involves listening deeply to every team member. This is key.

References

This draft is part of a 7-piece series focusing on the inside of the VC industry. It is told by a current VC associate, to help entrepreneurs lift the curtain. The goal is to learn to raise better by speaking the language and giving VCs what they look for. It will include —

Sourcing | Where good founders like to work, play, rest
Pitch Deck | What we look for in Ideas
Initial Meeting | What do we look for in People? On Founder Market Fit
Due Diligence | How Heavy is the Past? — Data in VC, Financial analysis of VC firms
IC | The Art of Making Good Decisions
Deploy | Term sheets
Exit | Ways to do it