2021
Working Paper
HBS Working Paper Series

Investment Committee Voting and the Financing of Innovation

By: Andrey Malenko, Ramana Nanda, Matthew Rhodes-Kropf and Savitar Sundaresan

Format:Print
| Language:English
| Pages:54

Abstract

We provide novel evidence on voting practices used by the investment committees of prominent venture capital investors in the U.S. A substantial share of these VCs use a voting rule for seed and early stage investments where a single `champion' is sufficient for the entire partnership to make an investment, even if other members are not as favorable. However, the same VCs migrate to more conventional `majority' or `unanimous' voting rules for their later stage investments. We show theoretically that a `champions' model can emerge as the optimal voting rule when outcomes follow a sub-exponential distribution (resembling the investments of early stage VC), but also requires that partners have sufficiently common objectives to prevent strategic overchampioning for pet projects. More traditional voting rules are robust to overchampioning but are more likely to systematically miss the best early stage investments.

Keywords

Optimal Voting Rules; Innovation and Invention; Venture Capital; Investment; Decision Making; Voting

Citation

Malenko, Andrey, Ramana Nanda, Matthew Rhodes-Kropf, and Savitar Sundaresan. "Investment Committee Voting and the Financing of Innovation." Harvard Business School Working Paper, No. 21-131, June 2021.