As mentioned in my earlier post, there is a significant asymmetry of information between an entrepreneur and a venture capitalist. Given this, how exactly does an investor make a decision to invest in a high risk venture, with typically significant negative cash flows and a high risk long term return? There are different approaches followed at different firms. While some firms believe that if the proposed investment is so good as to gain an immediate consensus among the participating memebers, then there is no looking back on the decision to invest in that firm (though how much & when to invest is often a much debated topic). However, in most of the traditional VC firms, the voice in debate is proportional to the carried interest. A VC firm operates in partnership mode - a partnership of experts from multiple fields wherein a VC focusses. The experts get a greater percentage of the capital gains on investments and are typically the deal champions and therefore have a larger say in the decision making process.

Please feel free to comment.

This entry was posted on Tuesday, March 4th, 2008 at 3:22 am and is filed under Decision making at VC firms. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.