So, you’ve pitched to a VC, they’ve drilled into your business fundamentals and… they like you. Happy days — but you’re not over the finishing line just yet.
Now the decision on whether or not to offer you a term sheet goes upstairs, to the investment committee (IC). They’re the difference between bagging that funding round and having to return to the pitching roadshow.
But what goes on behind those closed doors? How do they reach a decision? And who makes the final call? To find out, Sifted spoke to VCs from LocalGlobe, Seedcamp and Octopus Ventures.
What is an investment committee?
The IC is the group of people at a VC firm who decide whether or not to back a startup.
“Broadly, investment committees serve two purposes,” says Alliott Cole, managing director of multi-stage VC Octopus Ventures. “Firstly, to make a decision on whether or not to invest into a business and secondly, to ensure that the process around making this investment decision has been adhered to properly and documented correctly.”
ICs meet regularly — usually weekly, often on a Monday — and meetings can range from general updates on how the investment process is going to final decision-making sessions, which can include pitches from founders. Meetings can last an hour or two, and happen both online and in-person.
Who sits on an investment committee?
While the whole committee is involved in the decision-making process at some VC firms, others break the committee into smaller groups to decide the fate of a deal. For multi-stage funds that analyse a wide variety of startups, individual funds might have their own ICs; equally, they may have a firm-wide IC to oversee every decision. It varies from firm to firm.
- Octopus’s IC is made of 13 people — including the firm's partners and the most experienced members of the wider investment team — of which at least four are involved in a decision on any new investment, says Cole.
- At early-stage VC Seedcamp, the full investment team of six take part in every IC meeting and have a say in every deal. Seedcamp also has a network of advisors — often operators — who sometimes feed into the decision-making process.
- Seed-stage VC LocalGlobe has 12 people on its investment team, and three to five tend to sit on the IC for any particular deal. Sometimes the firm will bring in someone external — like an operator with experience in a certain market — to help make a decision.
What happens at an investment committee meeting?
While the exact format of an IC meeting varies depending on the firm or stage of the deal in discussion, they tend to involve the lead investor of a deal trying to convince the other committee members that the fund should invest in the company.
At LocalGlobe, the investment team meets for a couple of hours every Monday to discuss their dealflow. “We talk about where we're at with our conviction, how far along the process is and what sort of due diligence we’ve done,” says investment partner Emma Phillips. “We use those sessions as a chance for the rest of the team to really push us on areas of due diligence and market sizing that we might have not thought about.”
Most deals involve founders meeting several investors from early on, she adds. “We don’t have one big generalist meeting [with the entire IC] at the end of the fundraising process with a startup, but like bringing in other members of the IC into meetings throughout as it gives the founders an opportunity to get to know the wider team.”
Occasionally, LocalGlobe will invite founders in to do one final pitch to three to five members of the IC. “These sessions are another run through of the pitch, but we’ll be very specific with what they should go deeper on if we have outstanding questions,” says Phillips. Those final pitching sessions tend to happen if the startup is in a sector the lead investor is less confident in or there are question marks around a founder’s ability, she adds.
At Octopus, the IC meets weekly. “Discourse and disagreement are really important and we encourage this,” says Cole. “In fact, at the earlier stages of investing if everyone is in agreement, it’s a signal that we’re either too late to the market opportunity or we don’t understand the risks.”
To minimise the potential of bias and “groupthink” when making a decision, Octopus’s IC members vote on whether or not to proceed with an investment before sharing their opinions on it, Cole adds.
Seedcamp’s IC meetings happen after the lead investor has met and built a relationship with a founder. They consist of a 45-minute meeting where founders get one final chance to pitch their startup to the entire committee, either in-person or virtually.
Each committee member scores the startup based on a number of criteria, including the uniqueness of the team, where exactly the company has a real "edge", how well-timed the proposition is and the size of the market, says Felix Martinez, principal at Seedcamp. The investment committee then gets together for a “deal review” meeting, where the team shares their thoughts with the lead investor.
How does it make decisions?
For Octopus, which invests in startups from pre-seed to growth, the decision-making process of an IC depends on the stage and size of the deal.
“At Series A there may be lots of gaps in information and a lack of data to support the recommendation to invest, so it’s really healthy to have a lot of discourse,” says Cole. “It would be strange if everyone on our investment committee believed that we should invest, so we look for advocates and detractors.” If the deal has at least two advocates, the startup gets a term sheet.
At later stages, where there’s far more money at stake and the IC has lots more data and market information available, a deal needs consensus across the board. “If there is one detractor, we won’t make the investment,” says Cole.
At LocalGlobe only the lead investor needs to have conviction in a deal to get it over the line. “Everyone on the IC feeds in their opinions, but the whole reason we’ve built a diverse team is so we have different insights into industries, outliers and founder potential,” says Phillips.
“We call it 'crossing the Rubicon' once a decision has been made, and from that point the entire team fully gets behind that decision,” says Phillips. “There’s no ‘I told you so’ if something goes wrong, because we work in a high-risk industry and a lot of companies don’t ever achieve what we’re hoping they will.”
All the members of the IC at Seedcamp have a chance to feedback their thoughts during the deal review meeting, but ultimately if the lead investor has conviction in a startup, a deal can go through.
“We’re firm believers that conviction-driven investing is the best way to spot outlier companies at the stage at which we invest, meaning everyone in the team is empowered to build their own conviction and champion a company,” says Martinez.
If the decision is a no, it’s back to the drawing board for the startup. But if the investment committee greenlights the deal, it’s term sheet time.