Field Guide to VC Decision-Making
I recently met with an entrepreneur who posed a seemingly innocent question to me: “Can you tell me how your firm is structured and how you make group decisions on new investments?” In response I described how we do things at Flybridge, and he commented that he had heard and observed different processes at other firms. This got me to thinking about the various types of decision-making schemas in practice at VC firms and I decided to write this blog to describe those I have seen. You’ll have to play the matching game yourself as with the exception of Flybridge, I am declining to assign names to the taxonomy.
Webster defines a partnership as “a relationship resembling a legal partnership and usually involving close cooperation between parties having specified and joint rights and responsibilities.” We tend to think of partnerships as collegial groups that make decisions based on equal voices, and unanimous votes. In my experience this is not generally the norm; in fact I think that Orwell’s definition from Animal Farmis more apropos:
“All animals are equal, but some animals are more equal than others.”
In this light, I’d like to share the five varieties I have identified and encourage others to chime with their own additions and comments. As with most situations, your experiences may vary. It is critical to understand WHAT format you are facing, to make sure you put your best foot forward, while at the same time, avoiding wasting your valuable time.
Please note that I do not mean to ascribe a negative connotation to ANY of the forms that follow; decision-making processes can be effective or ineffective in any format.
1 The Dictatorship
This is the second-most predominant form of partnership I have noticed, and likely the oldest. It usually happens this way: One individual starts a firm, raises the money and recruits the initial team. The firm may or may not have his name on the shingle, but it’s abundantly clear that no decision is made without his/her blessing.
It may be difficult to get things done, but at least the path is very clear.
2 The (Galactic) Empire
Closely related to the Dictatorship, borrowing from Star Wars, is this form of hierarchy where there is a king and the heir apparent – and should one veto, nothing is done. But even if Darth Vader says ok, the Emperor can always say no, and like the movie persona, whether in the room or not, his/her opinion is tantamount.
Identifying the Empire can be tricky, but look for titles like “founder” or “founding partner” on the masthead.
3 The Politburo
Perhaps the most popular of the breed, you usually find the Politburo in larger firms, where size and geographic dispersion of the partners, necessitates some sort of representative government structure. Unlike a democracy, those in the politburo are appointed, not elected, and the selection criteria is usually unclear. The challenge of working decisions through a politburo is that the identity of the committee members is generally not well-understood, and in fact, may be disguised by your advocate if they’re not in the club. Leading indicators include needing to hold several successive meetings with partners of the firm, and title distinction for a subset of their team as “managing partner.”
This type of arrangement can lead to factions within the firm, so be careful to make sure your support is broad – you don’t want to wind up on the wrong team.
4 The Collective
Partners in this type of structure operate under the same flag, but exert autonomy for decision-making for some or all investment decisions. While quite rare, recently we have seen the rise of this arrangement around seed investments within many firms – essentially giving a constrained checkbook to each partner to seed a number of very early-stage startups.
The benefits of this structure is obvious – it leads to a very straightforward and streamlined process. The drawback is that it usually brings limited exposure to the rest of the firm, and essentially postpones much of support-building – making follow on rounds harder. It can also result in the firm making multiple-overlapping investments, which is less likely in other formats.
5 The Democracy
In a true partnership; each of the partners of the firm have a vote in the decision to invest in or reject an investment opportunity. One “no” and the deal does not proceed.
The benefit for entrepreneurs of this structure is clear; the path is straightforward, and once committed, you can be certain of broad-based support. Generally, this means the firm will show great care in prohibiting conflicting investments. The drawback is that the process can take longer (especially in larger partnerships) and one poor reaction can sink you.
In the end, the decision-making structure of a firm is a combination of design and evolution. Despite the best intentions, some processes are slow and convoluted. And of course experiences vary by occasion.
In the shameless plug category, we operate as a true partnership and to counteract the “delay” potential mentioned above, we try to mobilize quickly and work with entrepreneurs to create an efficient process that we share with them. It helps that we are a small team (5 partners) and intend to stay around this size. We’ve also created an accelerated seed process that allows us to move fast on deals and react appropriately to entrepreneurs’ needs.