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

Andrey Malenko (), Ramana Nanda, Matthew Rhodes-Kropf () and Savitar Sundaresan ()
Additional contact information
Andrey Malenko: University of Michigan
Matthew Rhodes-Kropf: Massachusetts Institute of Technology
Savitar Sundaresan: Imperial College London

No 21-131, Harvard Business School Working Papers from Harvard Business School

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 more consensus is optimal otherwise.

Keywords: Optimal Voting Rules; Innovation and Invention; Venture Capital; Investment; Decision Making; Voting (search for similar items in EconPapers)
Pages: 76 pages
Date: 2021-06, Revised 2023-11
New Economics Papers: this item is included in nep-cdm, nep-ino and nep-pol
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