Investment Committee Voting and the Financing of Innovation

DEPARTMENT OF ECONOMICS AND DECISION SCIENCES

Speaker : Ramana Nanda

Professor at Harvard Business School

Videoconference

Abstract :

“We provide novel evidence on voting practices used by the investment committees of prominent venture capital investors in the US. 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.”