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

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