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Catching Outliers: Committee Voting and the Limits of Consensus when Financing Innovation

Author

Listed:
  • Andrey Malenko

    (University of Michigan)

  • Ramana Nanda

    (Imperial College London, Entrepreneurial Finance; Harvard Business School, Entrepreneurial Management Unit)

  • Matthew Rhodes-Kropf

    (Massachusetts Institute of Technology)

  • Savitar Sundaresan

    (Imperial College London)

Abstract

We document that investment committees of major VCs use a voting rule where one partner `championing' an early-stage investment is sufficient to invest. Their stated reason for this rule is to `catch outliers'. The same VCs use a more conventional `majority' rule for later-stage investments. This evidence points to a model in which voting partners get signals about different project dimensions and superstar projects excel on some dimensions even if flawed on others. In this case, if the distribution of project values is sufficiently heavy-tailed, as for early-stage investments, a champions rule is optimal, while more consensus is optimal otherwise.

Suggested Citation

  • Andrey Malenko & Ramana Nanda & Matthew Rhodes-Kropf & Savitar Sundaresan, 2021. "Catching Outliers: Committee Voting and the Limits of Consensus when Financing Innovation," Harvard Business School Working Papers 21-131, Harvard Business School, revised Nov 2023.
    • Handle: RePEc:hbs:wpaper:21-131
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    References listed on IDEAS

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    Keywords

    Optimal Voting Rules; Innovation and Invention; Venture Capital; Investment; Decision Making; Voting;
    All these keywords.

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