Venture Firm Investment Decisions: Unanimous or Majority Rules?

I got a comment/question on yesterday's blog post about this issue and figured it was worth answering.

there was a recent twitter meme about how some VC's require unanimous partner approval and some prefer a dissenting vote (good to have a skeptic in the mix? if everybody likes it is it too obvious?). I wonder how USV views this?

There are actually quite a few models for how VC firms make investment decisions. Our firm does things on a unanimous basis but we never vote. Other firms actually vote, usually by signing an investment memorandum. Some firms require a majority to approve. Other firms require a supermajority to approve. Some firms create deal teams that must be unanimous and then require a simple majority of all partners. And some firms have a managing partner who effectively has a veto over all investment decisions.

All of these models work and they are often a reflection of the firm; its size, the stage of investments they make, the level of involvement of all the partners in the investments, etc.

I am a big fan of the small firm, few partners, one office, unanimous investment decision approach. Unanimous approval doesn't scale. If you have a dozen partners and require unanimous approval, you aren't going to do many  deals. So if you want to have a unanimous approach, you have to keep your partner group small. We've had the two partner model and the three partner model and both work well in this appaoch. I think the four partner model would work equally well. Once you get above five, unanimity starts to create problems.

The reason we like unanimity is that we want an "all for one and one for all" teamwork culture. If a company needs help, we all chip in. That's harder when you have partners who did not support the investment and don't like it. It also avoids the "my deal, your deal" issues. When you have a unanimous approval model, all the deals are everyone's deals.

We don't actually vote. When you know that you have to get everyone comfortable with an investment, you learn to read the room and see the discomfort. You can just drop the opportunity at that point, which is what happens most of the time. Or you can do more work in hopes of turning around the skeptics. That has happened a few times in our firm. By the time the process runs its course, there is no need for a vote. Everyone knows where everyone stands.

When you are raising money from VCs, it is worth figuring out the various firms' processes. You can ask, but I would not ask in the first meeting. It might seem presumptuous. If you get a second meeting, it would be a fair question to ask. You can also guess some things. If the firm is small, it is more likely to be unanimous. If the firm is big, it is more likely to allow dissention in its investment decisions.

I'd like to thank Anthony for posing this question. It is not a topic I've seen discussed online very much. And it is a very important driver of firm culture and identity.