While no two VC firms make decisions the same way, there are a few models which have developed based upon several constraining factors.

In an ideal world every partner at a VC fund would spend considerable time evaluating each startup that they invest in. This would enable the fund to benefit from the diverse perspectives and experiences that the various members of the partnership bring to bear, ultimately enabling the partnership to make better investment decisions.

However, evaluating a business takes a lot of time and is an accretive process. As a partner learns more about a company they are more likely to uncover investment risks. As a result, it is critical for there to be continuity in the due diligence process – VCs want the same person digging deeper and deeper. If every partner was trying to become a specialist on the same company, the firm wouldn’t be able to evaluate many companies.

Given all of this, in a world where the only goal is to make the absolute best investment decisions every time, it would be optimal for every partner of a VC fund to focus all of their time on the same deal until they are ready to invest. Unfortunately, that’s not realistic because each venture fund needs to deploy a target amount of capital in a given time period in order to meet their investor’s expectations. In order to meet these expectations, partnerships collectively need to evaluate numerous businesses at any given time. As a result, in order to make enough high quality investments in a given time period firms “divide and conquer”.

This dynamic has led to the creation of a few different decision making models which I have described below.  It is worth noting that not every fund’s decision making model will fit cleanly into one of these categories, however, this framework should give entrepreneurs a way to think about how a fund’s decisions are made (see Disclaimer):

• The Union: In small firms (typically no more than 5 partners) one partner will lead the due diligence effort, but provide frequent updates about their finding to help all of the partners remain relatively knowledgeable about the deal as the lead partner learns more. When the due diligence phase is complete the partnership requires a unanimous (or close to unanimous) vote to approve investment.
  Pros: This model enables the partnership to leverage the diverse experience of the partners to make better decisions.
  Cons: This requires a significant amount of time from the partners who are not leading the due diligence effort.
• The Federacy: Firms that are too large to use the consensus model, because it is too time consuming to keep all of the partners up to speed, may opt to give individual partners decision making power. While the partners inevitably leverage the advice of each other, they have more autonomy in making their own decisions.
  Pros: This enables larger partnerships to operate dynamically, making decisions more quickly with fewer man-hours.
  Cons: The value of the diverse experiences of the partnership is not fully leveraged, as few of the partners have spent a significant amount of time evaluating each investment.
• The Democracy: Some larger firms try to maintain a consensus model, whereby a voting mechanism is used to make decisions. However, unlike the Union model in small firms, partners who are not leading the due diligence effort typically know less about the business opportunity in larger partnerships. Rather than being tangentially involved in the due diligence process, non-lead partners rely on a presentation from the lead-partner to determine whether or not they want to make an investment.
  Pros: This enables the wisdom of the group to be tapped when it’s time to vote.
  Cons: The firm’s investment strategy tends to become less risky, which can lead to missing some of the more cutting edge opportunities. It typically takes longer to fully understand the value proposition and business model underlying some of the more cutting edge companies. As a result, a relatively short presentation of the company may not be sufficient to sell partners who have not been thinking about the business for several weeks.