Inside the Investment Committee: How VCs Actually Make Decisions

A Silicon Valley investor with more than thirty years of decisions behind him told me something I haven’t been able to shake. Every single great investment his fund ever made was one where there had been furious debate — and at least one partner was vehemently against it.

He is not alone. When I ask VCs how they might improve their partnership’s decisions, most confess they don’t know. But one theme recurs with striking consistency: whenever everybody agreed, that was a bad sign. Unanimous enthusiasm rarely got fulfilled. And the cases where all partners were confident, after full diligence, after the memos, that this was a deal to avoid produced quite a few painful misses.

It turns out there is hard evidence behind the intuition. This intuition is so important that it became a founding block behind one of the nine principles of The Venture Mindset: Agree to Disagree. But to get there we need to understand how these investment decisions get made in the first place. It is worth the detour, because all of it is usable. By the end you will know who writes the memo that pitches your company while you are not in the room, when the partnership actually votes on it, and where to spend your energy, on your biggest critic or on your top supporter.

During diligence, most investors write investment memoranda. No regulation requires this and no contract compels it, yet nearly everyone who does it will tell you it produces better decisions.

The reason starts with a structural fact: most investment decisions are made in groups, not by individuals. These groups are called Investment Committees, and in a typical VC firm all general partners are members. One partner leads the deal, communicating directly with the management team and holding more information than anyone else in the room. The memo is how that asymmetry gets partially closed. By laying out the factual background, articulating the views, and identifying both the positives and negatives of the investment, everyone can prepare for a discussion by meeting. (We spend quite a bit of time on investment memos at our Stanford MBA VC class, and I will devote more articles specifically to it, stay tuned!)

A good memo explains the logic of the investment and positions the deal against other opportunities and existing portfolio companies. It usually carries the financial data and return projections.

Another valuable function is retrospective. By recording who supported the deal and who objected, the memo becomes evidence. If the investment sours, going back to it reveals the missed flags and the reasoning errors, patterns that can improve future decisions. If the deal was passed and became a spectacular success, investors pore over it trying to understand what they missed so they don’t repeat the mistake.

Why not simply remember how the decision was made? Because human memory doesn’t work that way. It is reshaped by subsequent events and colored by emotion. An objective statement you write before the outcome was known is worth vastly more than anyone’s recollection afterward. Think of the investment memo as a time capsule from a version of you that didn’t know how the story ended.

Who writes them? It varies, but more often than not the job falls to juniors, such as VC associates. Writing a detailed memo is an excellent way to start diligence and learn the craft.

Founders, this is worth acting on. Someone in the VC firm is writing a memo about you, and when the committee meets, that document pitches your company while you are not in the room. Make the author’s job easy. Send clean metrics, answer objections in writing before they are raised, and ask the deal lead directly what the committee’s main concern is. You are effectively co-authoring the memo, whether you know it or not. Consider an option of sending a draft memo (of course, you need to know how they are written!)

Here is an example: some Silicon Valley VC firms follow a three-tier investment memo practice, in which different kinds of memos are produced at different points in the deal funnel: