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

71 Pages Posted: 16 Jun 2021 Last revised: 12 Apr 2024

See all articles by Andrey Malenko

Andrey Malenko

Boston College; European Corporate Governance Institute (ECGI)

Ramana Nanda

Imperial College Business School; Harvard University - Entrepreneurial Management Unit

Matthew Rhodes-Kropf

Harvard Business School - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

Savitar Sundaresan

Imperial College Business School

Date Written: April 11, 2024

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 a greater degree of consensus is optimal otherwise.

Keywords: optimal voting rules; venture capital; committees; innovation

Suggested Citation

Malenko, Andrey and Nanda, Ramana and Rhodes-Kropf, Matthew and Sundaresan, Savitar, Catching Outliers: Committee Voting and the Limits of Consensus when Financing Innovation (April 11, 2024). Harvard Business School Entrepreneurial Management Working Paper No. 21-131, Available at SSRN: https://ssrn.com/abstract=3866854 or http://dx.doi.org/10.2139/ssrn.3866854

Andrey Malenko

Boston College

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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1000 Brussels
Belgium

HOME PAGE: http://www.amalenko.com

Ramana Nanda (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Harvard University - Entrepreneurial Management Unit ( email )

Boston, MA 02163
United States

HOME PAGE: http://www.people.hbs.edu/rnanda

Matthew Rhodes-Kropf

Harvard Business School - Entrepreneurial Management Unit ( email )

Soldiers Field Road
Rock Center 312
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Savitar Sundaresan

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

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