It was with interest that we read of a recent study by the BVCA Venture Capital Committee into the constitution and processes of Investment Committees as we know clients approach these in different ways and for new fund managers getting the correct balance can be a challenge.
The BVCA wanted to reveal the inner workings of an IC and enable people to have a better understanding of what the body does. As a result they collated 10 basic points and common benchmarks:
1. VC decisions are usually made in two meetings, more for buyouts/late stage
2. Typical IC has four to six members but can be three to 10 (more in larger funds)
3. Around 80% of IC meetings are held before issuing term sheets
4. 76% of firms operate consensus decision-making or voting
5. Less than 10% use a scoring system – most vote ‘yes’ or ‘no’
6. IC documents are usually in Word (90%), but some use PowerPoint
7. Papers can be eight to 130 pages long – a huge range. Average is 32 pages
8. 22% of firms insist on management teams presenting to the IC
9. 100% of larger funds have a chair of the IC, but not all smaller funds do
10. Two IC meetings is typical, but several have more steps
Despite the benchmarks the study found that there is no “magic formula” that works for all firms. The committees are more of a tool that allows for the discussion of specific topics in an environment where in depth knowledge and experience can be drawn from the committee members. Whilst most firms will already be doing a lot of things right, it is clear when firms have thought about it and prepared and adapted accordingly to address their strategy, approach or personalities.
A further result of this study are the following 10 findings that the BVCA came across most commonly:
1. Firms have a clearly documented process, but rarely is it perfect
2. Speed of process is an area of focus
3. Inclusive and open debate is good – IC is not a tick box
4. Papers are too often submitted late or at short notice
5. Many are trying to reduce length of the final paper
6. In person or via video leads to better discussion than via phone
7. Mixed success of using external committee members
8. Succession planning is an issue at several firms
9. Lobbying outside of IC is poorly regarded
10. Detailed minutes of meetings are an important record when looking back at exit
NCM work with many new managers and, together with their compliance advisers, can assist in ensuring they have a robust IC processes in place and ensure they recognise that this can (and indeed, should change) over time as board membership changes and depending on where the fund is in its life cycle.