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March 12, 2006

"VC investing by majority vote is a bad idea"

Paul Kedrosky argues that the common practice at VC firms - of requiring unanimity (or at least, majority) among the partners for making investment decisions - is a "dangerous" one.
Consensus in pretty much anything leads to mediocrity, and venture investing is no different. If everyone agrees, and assuming all the partners weren't grown in the same gene pool, then you're probably either doing something staid, or the market is past its peak. After all, you need some risk in venture investing, and when everyone "gets" the deal then too much of the risk is gone.

That's why I'm fond of partner models where unanimity is not only not required, but majorities against you can even be overturned. For example, a couple of flag-waving wild-eyed supporters of a deal might be able to overturn a majority of weak "No"s. When most funds look at their history they often find that those unanimity deals are the ones that return 3x cash, or get bridged into infinity, while the ones where a noisy minority gets its way more often turns into either a flop or a ten-bagger.
Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.