Driving High Performance Corporate Venture Investment Committees
IC representatives should demonstrate trust in their investment teams to deliver impact against the CVC charter
About a decade ago, a friend became a founding partner of a small corporate venture capital fund (“CVC”) for a company with a well-known brand, and he would frequently complain to me about one of the most frustrating parts of his job: pitching investment opportunities to his startup investment committee (“the IC”).
He described a collegial environment that was relaxed and fun, but also believed that some of the decision-makers in his firm showed up unprepared, were not really listening to the facts of each investment opportunity, and ultimately made determinations based on whim and not on the work he believed he had diligently conducted.
Picture any earnest corporate venture capital investment team preparing to recommend an investment in a startup, having conducted what is likely more than 100 hours of work to validate the deal, quaking with uncertainty about what will transpire in the IC meeting despite the conviction that the investment is in the best interests of the corporation.
In my role supervising multiple corporate venture capital funds and serving on many of these investment committees, I’ve seen this scenario play out occasionally. From the perspective of the investment team, sometimes the meeting goes well and the deal is approved, and sometimes there is a surprise “buzz saw” on the investment committee that derails the corporation’s ability to act in its own interest.
Of course, there are plenty of times when an investment opportunity should be declined, even after lots of work. Sometimes deep in diligence, facts are uncovered that reveal the startup is fundamentally not what the entrepreneurs represented. That’s why due diligence is an essential part of the venture capital discipline.
Nevertheless, it’s incredibly demotivating to an investment team that is working hard on behalf of a corporate parent when they cannot connect the dots between the quality of the work that has led to their conviction, and what their investment committee will actually decide.
Let’s reframe the pitch to the investment committee:
Is it really a request for capital? The senior executives on the IC are being asked for money for projects all the time and are likely fatigued by yet one more demand, but is that the case here?
I would say “no,” because in every professionally managed corporate venture capital program I have overseen, there is a budget for investments that has already been approved by company leadership. Unless the cash position of the parent company has changed dramatically for the worse — which does happen occasionally — the cash allocation has been set aside.
The request to the IC is not for money. That request has already been made and approved. The request is to validate that the specific investment opportunity being proposed accurately reflects the strategic and financial objectives that have been delineated in the CVC charter, and that the deal is the best available choice among relevant alternatives at the current time.
The CVC charter functions as the business plan for the corporation’s strategic investment fund or program, and in my opinion, no CVC should be operating without a charter that has been reviewed and approved by all key stakeholders.
I developed the following framework for use with Touchdown Ventures’ corporate partners to help new investment committee representatives understand their role. As my own job includes serving on these investment committees together with senior corporate executives, I’m not performing the day-to-day work of the investment team. So I built this framework based on my own requirement to respect the expertise and direct insights of the people who are actually doing the work. If I don’t communicate that I trust them, the result can be a lack of motivation to do the job.
The framework outlines the role of the IC based on three stages “at the bottom of the funnel” after a deal has been determined to be potentially suitable for investment. This model assumes a regular investment committee meeting cadence, often once per month or twice per quarter, but it can be adapted to whatever meeting schedule is used by the IC. Some investment committees simply meet on an ad-hoc basis, as needed. At Touchdown, we typically seek to progress these deals from the qualification stage (after a first call) to an investment committee decision in about 60 days, to be decisive and respectful to entrepreneurs.
Preliminary Diligence
The preliminary diligence phase typically consists of approximately ten hours of work, at which point the investment team is identifying the key risks that should be investigated thoroughly during full diligence. Sometimes the investment team is able to disqualify deals quickly during this stage, saving tens of hours of work.
This is an appropriate time to preview the deal with the IC and solicit their input on what risks could derail the deal from their perspective. IC members may be able to suggest contacts inside the corporation who have expertise that can be leveraged as part of the full diligence process.
Most of all, previewing the deal eliminates surprises for the investment committee, so that they never feel pressure to approve a deal on short notice. Since many IC meetings are about one month apart, this gives the IC time to stop and think and help direct the activities of the working team that reflects the governance role of the IC. In my opinion, corporate ICs should very rarely — if ever — be asked to approve an investment the first time they are hearing about an opportunity. Any exception to this rule should be truly extraordinary.
Full Diligence
As noted, full diligence can frequently consist of more than 100 hours of work by the CVC investment team. Now the team is conducting hands-on research and analysis of financial and operational aspects of the startup investment opportunity, including product, market, technology, intellectual property, financial performance, projections, and many more aspects of the startup’s results and plan.
At this stage, the role of the investment committee is to ensure that they, as decision-makers, understand the risks and upside of the proposed transaction by asking clarifying questions. The IC should feel empowered as “professional interrogators” and avoid accepting superficial answers. While every venture capital investment is made with imperfect information, the job of the IC and working team together is to be thorough and dig deep. Not every risk can be offset, but the goal is for every risk to be understood.
The IC and working team should be communicating in such a way that the investment thesis behind the potential investment and the characteristics of the transaction match the CVC’s approved investment charter.
In an ideal scenario, full diligence is “mid flight” in the next investment committee meeting following the preliminary diligence preview described above, and the investment team is not yet seeking investment approval. As illustrated in the chart above, however, sometimes the full diligence and terms stages happen in the same meeting, especially for startup opportunities with oversubscribed investment rounds.
Terms
During the terms stage, the investment team is seeking investment approval. At this point, the majority of diligence has been concluded and the working team should be able to articulate why “the pros outweigh the cons” of a specific investment amount at a particular valuation.
The role of the investment committee is to review the work that was done and ensure no obvious aspects of diligence were neglected, and that the risks they identified during the preliminary and full diligence phases have been investigated, if not addressed. Again, no deal is perfect, and some risks will need to be assumed when investing in startups.
The role of the IC during the full diligence phase should continue through the terms stage, too. So if additional diligence has shed new light on existing risks or identified new risks, those should be considered. The investment committee should also re-check the assumptions about the opportunity relating to why the deal matches the charter. The charter should include a portfolio model to ensure that the pace and financial allocation of investments does not exceed the target annual budget that has been approved for the CVC.
At this point, if there are no major red flags and everyone agrees the investment matches the charter, the deal should be approved.
To recap, here are five ways the investment working team can help the investment committee fulfill its role:
- during the preliminary diligence phase, preview investments at least a month before seeking approval so there are no surprises, except under very rare circumstances
- encourage IC representatives to help direct the approach in full diligence so their questions are addressed — this helps ensure the work is thorough
- during full diligence, objectively illustrate deal risks and upside, so that the discussions between the working team and the IC focus on whether the potential benefits outweigh the risks of the deal
- proactively illustrate and how and why a proposed deal matches the charter and has the potential to deliver strategic and financial returns
- upon seeking approval at the terms stage, provide backup material on the depth of work that was conducted to validate the opportunity
All of this reflects what I’ve previously written, that I believe there are five main qualifications for serving on a CVC investment committee:
1. Fiduciary mindset — those who view themselves through a lens of stewardship and service have the best disposition for the task
2. Financial skills — choose investment committee representatives with the ability to make financial decisions and evaluate equity, especially as demonstrated by prior venture capital transaction experience
3. Strategic fluency — the investment committee must ensure adherence to fund investment mandates and sector focus areas
4. Availability — IC members are useless if they don’t show up
5. Willingness to trust — the IC is a governance body, not a working team
To this last point, if the IC determines in good faith that the work was thorough and the investment opportunity matches the charter, the job of the committee is to approve the deal. If the membership of the IC respects the expertise of its investment team, it should recognize that the people who did 100+ hours of work have more information about the deal than they do. It’s the job of the IC to “check the work” of the people who actually did the work, and to ensure the most impactful strategic needs of the parent company are being addressed by the proposed transaction.
As my co-founder David Horowitz points out in his article about why it’s valuable to include an outside representative on the corporate venture capital IC, this is also how the corporate board of directors functions in relation to the management team. The board doesn’t run the company, the board provides oversight and sets strategy.
Of course, if the IC lacks confidence that the investment team is competent, or believes that the investment team is not acting in the best interests of the CVC’s parent company, the logical conclusion should be to replace the investment team.
If the team is fundamentally good but the work wasn’t sufficiently thorough on one specific investment opportunity, by all means, send the team back to answer more questions, address risks that were not adequately covered in diligence, and further understand potential upside scenarios that align with corporate strategy.
Occasionally the IC may determine that the work was thorough and the deal matches the charter, but the individuals on the committee are nevertheless left with a “nagging feeling” that the investment opportunity still is not quite right. What should the committee do then?
This is a signal that there is something may be wrong with the charter, and it should be revisited, reexamined, and likely amended, with the approval of all the key stakeholders who implemented the charter in the first place. Sometimes this is just the team on the investment committee, but more frequently in my experience, there is a broader group of executives whose opinions should be reflected. In my opinion, reviewing the CVC charter every 18–24 months is a healthy exercise to ensure the CVC is focusing on what matters to its parent company.
Just like the role of a board of directors or board chair is a governance role and not an operational role, so too is the job of the corporate venture investment committee.
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Scott Lenet is President of Touchdown Ventures, a Registered Investment Adviser that provides “Venture Capital as a Service” to help corporations launch and manage their investment programs.
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