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April 20, 2011

In starting NextView, one of the things I was looking forward to doing was crafting our own decision-making process for the firm.

Making wise decisions is very important in venture (duh) and being able to balance speed, collaboration, and diligence is easier said than done.  Luckily, my partners and I have worked at four different venture funds, and were able to draw from the experiences of:

  • Small and large partnerships
  • Single-office and bi-coastal partnerships
  • Multi-stage and multi-sector firms
  • First time funds and heritage funds
  • Highly structured and loosely structured firms

I believe that we are at an advantage in that we are a small team of three equal partners, have only one office, and are very focused both from a stage and sector perspective.  We’ve developed a process that fits this context, and it will probably continue to evolve as we gather more data on the efficacy of this approach. 

We want to share some of the details of our process so that entrepreneurs that meet us know what to expect, can interpret our actions clearly, and can keep us honest if we stray too far from this.  This should continue to evolve over time, but we’ve been doing a variation of this for the past 12 months, and I think it’s been working well.

Basic Process

We aren’t entirely rigid in our process of evaluating an investment opportunity, but we do try to be efficient and transparent in our intentions.  Below are the basic steps to expect if an entrepreneur is talking to us about a potential investment, although they may not happen in exactly this order. 

  1. First Meeting: At least one of us meets an entrepreneur and hears about their project.  It is often a formal pitch, but it could also look fairly different (an open ended discussion, a demo, phone call, etc)
  2. First Partner Discussion: We talk about the potential investments on each of our radars as a team.  We set aside time once a week to do this, but if an opportunity is moving quickly, we will call an ad-hoc meeting or call (not too difficult with a team of 3).
  3. Blink Vote: This is a minor innovation that we developed to create more efficiency and to help each partner better focus their time. Whichever partners have seen the company will describe it to the team in enough detail to develop a reasonable opinion of the opportunity.  Sometimes, a deck will be circulated beforehand.  Based on this shallow level of information, we will do a “blink vote” to share our gut instincts with one another.  I’ll discuss our voting methodology further below, but the basic purpose here is to gauge the team’s enthusiasm for the company, so that the person advocating for the investment knows where everyone stands and what risks need to be addressed.  The goal of this is for the person advocating for the investment to really be able to “speak for the firm” when representing our interest in a deal.  What you don’t want is for an investor to tell an entrepreneur “I love this” and then hear later “but I couldn’t get my partnership over the hump”.  We want entrepreneurs to know that whatever message they get from one partner incorporates the sentiment of the entire firm.
  4.  Due Diligence: Based on this vote, the partner who is leading the investment internally will decide whether or not to engage in due diligence.  The other partners will support this process, but there is one person who is primarily responsible.  We’ll also discuss as a team what diligence needs to be done and what risks need to be investigated for us to move forward with an investment. During this time, an investment memo is created. This memo summarizes the opportunity, the work that has been done, the risks, and other important components of the investment.
  5. Meeting the Partners: As a small firm, it’s less important for us to do formal “partner meetings” in the classic sense.  It is important for us to have each partner hear the story and get to know all the teams we invest in.  This may look like a partner meeting pitch, it could be 2 separate meetings with the partners individually, or something in between. 
  6.  Final Decision: At some point, if the lead partner is interested in pursuing the investment, we will do a final vote.  Based on this vote, the partner will try to commit to the investment and/or proceed to negotiate the final details of the deal.  If there is a material change during this time, the partnership may revisit the final decision.

Voting

Not all firms employ a voting process.  I find that it’s helpful to vote because it forces a concrete decision and normalizes feedback.  As mentioned above, we vote twice when evaluating an investment opportunity, once close to the beginning and again near the end.  Our voting process at NextView is highly subjective.  We’ve found that trying to apply too much science to what is fundamentally a subjective science is fruitless and a poor use of time and energy.  Instead, we apply different gradients of sentiment around a particular investment:

  1. I love it
  2. I like it
  3. I support YOU
  4. I hate it

A couple points on these:

  •  “I support you” means that the partner has legitimate concerns about the opportunity, but trusts the diligence and enthusiasm for his partner to make the right decision and make the investment successful.  An “I support you” can arise for many reasons – concerns about a market size, a mixed gut reaction to the entrepreneur, unfamiliarity with a particular market, etc.
  • Our partnership does not operate on a pure consensus basis.  Historically, the most successful investments have been the most controversial ones within a partnership.  We’ve seen this ourselves in our own experience and heard about it anecdotally from many other firms.  The bar for proceeding with an investment is 2/3 support (although for a large investment, we do require full support).  However, “support” just means anything better than a “I hate it”.  Although it seems like the bar is low, we take our partners opinions very seriously, and you can believe that we feel a lot of pressure and need a ton of conviction to lead an investment that has 2 “I support you” votes.
  • We use a language of support at NextView because we think it’s critical that even though we allow for dissent and even though one partner is “leading” an investment, we are all equal owners of all the companies that we invest in.  Even if we make an investment that I voted a “I hate it” on, once the investment is made, I am 100% behind it and will do whatever I can to help the company (and help my partner look like a genius).

A final word on voting – our blink votes are just that.  Blink votes.  Opinions change, and hopefully we are reasonable enough to be persuaded by data.  Our final vote should be much more informed and based on multiple rounds of diligence on the critical challenges identified during the blink vote.  But we use the exact same language in the two votes.

Time Expectations

We designed our process to be diligent but efficient.  The time from first meeting to final decision can be very short, but it can also be long depending on the circumstances.  In either case, we try to be transparent with entrepreneurs why we are taking a longer time – sometimes we need to learn more about a market, or get to know the founder better, or just have to invest more time in diligence. 

Typically, we can get from first meeting to final decision within 2 weeks.  If we push, we can get it done in a few days. But our typical preference is to get to know founders before they are in formal pitch mode (more on that later) so it’s actually hard to really give a good time estimate.  The most recent two investments we made were with entrepreneurs we’ve known for years, and businesses we’ve seen from an initial inkling of an idea many months before formal fundraising began.  

Miscellaneous thoughts:

  • We have a lot of friendly meetings with entrepreneurs to hear about their projects and provide feedback.  We try to keep these casual, and to the extent we are able, we try to take off our investor hat for a moment and try to speak objectively to these entrepreneurs based on their own best interests.  We will often ask entrepreneurs to “tell us when you are fundraising” at which point, we’ll shift our stance a little bit.  Often, we’ll help the entrepreneur craft their fundraising process and introduce them to other investors. 
  • Don’t ask us how you scored in our voting.  That’s not something we share with entrepreneurs, and frankly, isn’t important.  We will be straightforward about the internal sentiment on an investment while it is going through our process, and after an investment is made, you have the full support of the partnership.
  • Occasionally, the person who is first introduced to an investment is not the person who ends up leading it.  There are several reasons for this, but they mainly come down to domain knowledge and capacity.  We’ve seen this happen at other firms – in some cases, it is handled well, but often, hand-offs end poorly.  We have done 2 handoffs in our first 12 investments at NextView.  We try to make these happen within the first 2 meetings with a company – usually at the blink vote.  We allow for this because we know that sometimes, great companies will cross the path of the wrong partner.  But we make the handoff happen very quickly so that there is a clear owner and advocate for an investment through the decision-making process. 
  • Author robchogo
  • | Filed under regular

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Lee Hower




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