Who should serve on your corporation’s investment committee?

You may have heard the idiom that the camel is what would result if a horse were designed by a committee. Corporate investment committees are often what results when a committee is designed by a committee. Like the camel, investment committees — also known as “ICs” in the world of corporate innovation — can feature lumpiness, poor temperament, and even spitting.

The corporate IC plays a crucial role in the external innovation deal process, however. Depending on the purview of the committee, this can include transaction approvals for multiple types of investments: (1) acquisitions, (2) business development deals, (3) funding for internally incubated new businesses, and of course, (4) corporate venture capital (CVC) funding.

In my experience guiding the structure, launch, or ongoing management of more than 15 corporate venture capital programs, poor design and selection of the IC is one of the most glaring weaknesses that plague CVC programs. Participation on the investment committee can become a political aspiration or expression of status, overshadowing the fact that serving on the investment committee is a job that requires specific training and expertise.

How can corporations get this right?

For starters, corporate decision makers need to understand the purpose and function of the investment committee, which is to embody service and not express power or prestige.

The primary role of the investment committee is to enforce the business plan (or “charter”) that has been agreed upon by senior leadership for the corporate investment function. The IC is an oversight or governance body whose job is to help ensure the team that does the work is as effective as possible on behalf of the corporation, and that the best decisions are made with the information that is available. It’s important to remember that the IC itself hasn’t done the work, and lacks the first hand knowledge of the working team members who evaluated the investment opportunity.

The first step is to ensure that the corporation has adopted a logical charter that’s aligned with the overall strategy of the business. A good charter provides “guard rails” that greatly simplify decision making by establishing objective criteria for what’s in scope.

For example, if our charter prescribes that transactions should be blue, triangular, and no more than 5 centimeters wide, the decision committee can quickly raise concerns about deals that are orange, square, or 10 centimeters wide. This is simple pattern recognition and application of rule sets. In the world of corporate venture capital, the committee evaluates conformance to criteria like sector fit (which measures strategic relevance), stage (which captures risk), and geography (which approximates the ability to work effectively together), and other standard investment factors.

If a deal that matches the majority of agreed upon criteria is brought to the committee, the deal should be approved. The committee should challenge the team that prepared the investment recommendation with questions to ensure likely potential problems have been anticipated, and that the pricing of the transaction compensates the corporate investor for the risks to be undertaken.

If a deal is brought to the committee that materially diverges from agreed upon criteria, that opportunity should receive extra scrutiny. The burden is on the investment working team — not the IC — to justify why an exception to the rules might make sense.

This sounds straightforward, but even when the charter is clear and aligned with corporate strategy, the process is often complicated by staffing the committee with personnel who are unqualified for the job.

In my experience, the following types of participants create problematic dynamics on the IC, clogging decision-making and frequently preventing the corporation from acting in its own best interest:

• Scientistswho bring relevant product expertise but can’t evaluate a business opportunity. It’s critical to keep in mind that as investors, we are buying a piece of the startup’s business, not the product or service, and not the technology. While the product, service, and technology are important, these factors are secondary to evaluating the business opportunity itself. Scientists who aren’t oriented to evaluate the business merits of an investment can still play a valuable role by serving on an advisory board or science committee instead.
• Business unit leaderswho take too narrow a view of the corporation and can’t usefully opine on each opportunity. Especially in larger conglomerates, business unit operators may bring a very specific lens to the investment committee. In effect, they take a selfish view of what would benefit their P&L only, lacking a perspective on the needs of the larger organization. The views of a P&L operator can be extremely useful to the investment committee when relevant; so these team members should be invited to champion specific deals when they have expertise.
• Naysayerswho want to keep too tight a control on decision making and actively disempower the investment team. While playing “devil’s advocate” is essential for evaluating the risks of any deal, naysayers champion bureaucracy and fear, sitting with crossed arms and seemingly unhappy no matter what they hear — potentially even disagreeing with themselves if it serves the function of blocking a deal. If the governance board does not have trust in the competence of the working team to evaluate investment opportunities, the investment working team should be replaced. But naysayers who simply want to halt progress for sport have no productive role on the investment committee.

These challenges can be overcome by following best practices in structuring and staffing the investment committee. In my opinion, ICs should be set up with no more than five voting members, to facilitate ease of scheduling meetings and to ensure an agile decision making process. As noted, it’s fine to invite guests and observers as participants in committee meetings.

Each corporation’s committee should determine its own ideal voting rules. In some organizations, the CEO participates and might hold a veto. Many ICs require a majority vote for approvals. Some organizations decide by consensus and defer to strong conviction on the part of the investment working team, which is the most productive and culturally constructive model I’ve personally experienced, in both corporate and institutional venture capital.

To inoculate against potential challenges in staffing a corporate investment committee, here are my five qualifications that should be required of every member of the IC:

1. Fiduciary Mindset

Experience serving as a fiduciary, including having served as a founder or board member of private or public companies, is essential to setting the right tone on the IC. The job of the investment committee is fundamentally representative in nature. Those who view themselves through a lens of stewardship and service have the best disposition for the task.

2. Financial Skills

Investments are also financial transactions at their core. Choose investment committee representatives with the ability to make financial decisions and evaluate equity, especially as demonstrated by prior venture capital transaction experience. The IC job includes not just new investments, but also monitoring portfolio company performance and allocating reserves. Ultimately, the investment committee will be respected and effective if its members collectively have financial authority and expertise.

3. Strategic Fluency

The investment committee must ensure adherence to fund investment mandates and sector focus areas. This requires a company-wide perspective on what’s strategic and important. Fluency with CVC program objectives, rules, and “guard rails” facilitates agile decision making. This also requires IC representatives to consider not just what helps the corporation today, but what will allow the company to continue to thrive in the future.

4. Availability

Investment committee members are useless if they don’t show up. Availability and interest to meet as needed, when provided sufficient notice and concise materials, is a requirement of the job. The organization needs to act when there is opportunity, and speed is important in corporate venture capital decision making.

5. Willingness to Trust

Finally, the IC should extend trust to the team who does the hands-on work. The committee is a governance body, not a working team. The IC should demand rigor and provide feedback to the working team to ensure thorough diligence, empowering those professionals to grow in their capabilities and confidence.

While the bottom line task of the IC is to approve or deny transactions, the best investment committee processes I’ve seen are Socratic in their approach and ultimately do approve the majority of investment recommendations brought for a decision. This emulates the norms of institutional venture capital in a way that will help CVCs fit in with the rest of the industry, while also protecting the interests of the corporation.

By stepping back to ensure the corporate investment committee is staffed by those with the right skills and temperament, your organization can set a rational path to navigate through the often unforgiving landscape of corporate venture capital.

First published on Medium