You may have heard the idiom that the camel is what would result if a horse were designed by a committee. Like the camel, investment committees – also known as ‘ICs’ in the world of corporate innovation – can feature lumpiness, poor temperament and even spitting.
The corporate IC plays a crucial role in external innovation, however, providing transaction approvals for corporate venture capital (CVC) funding.
In my experience, guiding the structure, launch, or ongoing management of more than 15 CVC programs, poor design of the IC is one of the most glaring weaknesses of CVC programs. Participation on the IC can become a political aspiration, overshadowing the fact that serving on the investment committee is a job requiring training and expertise.
So, how can corporations get this right?
For starters, corporate executives need to understand that the purpose of the IC is to enforce the business plan (or ‘charter’) that has been agreed upon by senior leadership. The IC is an oversight body whose job is to help ensure that the best decisions are made with the information that is available. A good charter provides ‘guard rails’ that simplify decision making, establishing objective criteria for what’s in scope.
If a deal that matches the majority of agreed upon criteria is brought to the committee, the deal should be approved.
If a deal is brought to the committee that materially diverges from agreed upon criteria, that opportunity should receive extra scrutiny.
This sounds straightforward, but the process is often complicated by staffing the committee with participants who can clog decision making:
- Scientists who bring product expertise but can’t evaluate a business opportunity. As investors, we are buying a piece of the start-up’s business, not the product or service. Scientists can play a valuable role by serving on an advisory board instead.
- Business unit leaders who take too narrow a view of the corporation. These team members should be invited to champion specific deals only when they have expertise.
- Naysayers who actively disempower the investment team. While playing Devil’s advocate is essential for evaluating the risks of any deal, naysayers champion bureaucracy and fear. Halting progress for sport has no productive role on the IC.
These challenges can be overcome by following best practices in structuring and staffing the investment committee. In my opinion, ICs should be set up with no more than five voting members, to facilitate ease of scheduling and to ensure agile decision-making.
Each corporation’s committee should determine its own voting rules. In some organizations, the CEO participates and might hold a veto. Many ICs require a majority vote for approvals.
Some organizations decide by consensus and defer to strong conviction, which is the most productive model I’ve personally experienced, in both corporate and institutional venture capital.
Consider five qualifications for every member of the IC:
1. Fiduciary mindset. Experience as a fiduciary, including having served as a founder or board member of private or public companies, sets the right tone on the IC. Those who view themselves through a lens of stewardship have the best disposition for the task.
2. Financial skills. Investments are financial transactions at their core. Choose representatives with the ability to make financial decisions and evaluate equity, especially as demonstrated by prior VC transaction experience. Ultimately, the committee will be respected and effective if its members collectively have financial expertise.
3. Strategic fluency. The investment committee must ensure adherence to investment mandates and sector focus areas. This requires a broad perspective on what’s strategic. Fluency with CVC program objectives, rules, and guard rails facilitates agile decisions.
4. Availability. Investment committee members are useless if they don’t show up. Availability to meet as needed, when provided sufficient notice and concise materials, is a requirement. Speed is important in venture capital.
5. Willingness to trust. Finally, the IC should extend trust to the team who does the hands-on work. The IC should demand rigor and provide feedback to the working team to ensure thorough diligence, empowering those professionals to grow in their capabilities.
While the bottom-line task of the IC is to approve or deny transactions, the best investment committee processes I’ve seen are Socratic in their approach and ultimately do approve the majority of investment recommendations brought for a decision.
This emulates the norms of institutional venture capital in a way that will help CVCs fit in with the rest of the industry, while also protecting the interests of the corporation.
Scott Lenet is co-founder and president of Touchdown Ventures.