Investment decisions at Connect

In the world of venture capital, our success is determined exclusively by the success of the companies we back. It’s as simple as that.

The process of investing in a startup differs from almost any other investment category in the sense that it is a two-way street: founders have a choice as to who they raise capital from. As a VC partnership, we need to both decide which companies we want to invest in (‘picking’) and then also successfully invest in those companies (‘winning’).

This post is primarily about picking, as it is the single most important thing we do as startup investors.

On this same theme we recently wrote about the Connect investment thesis — the lens through which we assess companies. And we also wrote about how we apply this thesis in practice. The post below is a continuation of this theme and unpacks how we actually go about making our final investment decisions as a partnership.

Note: the feedback we hear from founders is that VC partnerships are often seen as opaque and their investment processes are a black box. We wrote the below because we believe providing more transparency to you as founders can only be a good thing. We want you to know how we operate, what you can expect from us, and more importantly, why we do it the way we do.

We have a small and equal three-person partnership: Pietro, Sitar, and Rory. At Connect there is always one partner ‘championing’ an investment but we then work together to reach a final decision. We are unanimous in this decision — one for all and all for one. We believe this is best for our partnership but more importantly it is also better for founders, you don’t just get one partner at Connect with high conviction, you get all of us! The process we’ve honed to make this partnership decision is outlined in detail below.

Our investment process is built around three core values that aim to reduce bias and improve decision-making:

1. Independent thinking — approaching each decision as an individual contributor
2. Cognitive diversity — creating space for different points of view
3. Intellectual humility — a willingness to change our minds based on new information

Our process needs to be fast — our most recent decision was one week from our first meeting with the founder to the final investment offer — but it also requires significant time and effort from each of the Connect partners. We’re ok with that — we’ve designed everything we do at Connect around our high conviction, high support, seed-stage investment model. As a firm we only make 8-10 investments each year so every decision, every founder and every company makes a huge difference to our eventual success.

To take a company through our investment committee process, it must first be championed by one of the partners. To get to this stage, a partner must reach a high level of conviction. Depending on how much time the partner has spent thinking and researching this market (and the speed of the founder’s fundraising process) this can take anything from 1 week to 1 month.

Once this high conviction threshold has been reached, the partner championing the investment — also known as the ‘lead partner’ — will coordinate and oversee two meetings:

• a meeting between the partners and the founder(s) (“partner meeting”)
• a separate meeting between the three Connect partners where the final investment decision is made (“investment committee”)
  From the moment of conviction, we move as quickly as possible to get the founders a final decision (and term sheet) within days.

Connect’s five-step decision-making process:

The memo is designed to get all partners to a level of knowledge where we can have the most valuable conversation possible with the founders.

We structure the memo by design in two sections:

• the first section covers an objective summary of the opportunity (team, market, product, GTM, competition, proposed investment terms etc.)
• the second section outlines the partner’s thesis for why they want to make the investment and is intentionally more subjective

You can think of the two sections as the mind and heart, or what we see (today) vs. what we believe (about the future).

The memo, company deck, and any other relevant material are read by the partners before step 2, meeting with the founders.

We always set aside a two-hour time slot for the meeting between the founders and the Connect partners. It might sound long but we find that we always use the time, it takes the pressure off rushing through answers, allows for the most valuable discussion, and also plenty of time for the founders to ask us the questions they need to make their own decision. We find this format to be much more powerful than a dry one-way pitch.

The partnership always comes away from this discussion having learned a lot, and we want the founders to feel the same way.

Here’s where our process starts to deviate from the market norm. After the partner meeting we do not discuss the opportunity. We’re literally banned from talking about it until the investment committee meeting which we always schedule for the following day.

This 24hr gap is very intentional. We’re normally buzzing with ideas, energy, and opinions straight after meeting with the founders. We desperately want to jump straight in and talk about it but we’ve found that this scheduled pause gives us permission to step away from the heat of the moment and process our thoughts.

This stage is really useful for creating the space for more independent thinking (see step 4), whilst also helping to reduce forms of bias (e.g. recency).

Each partner answers a specific set of questions, providing both qualitative and quantitative written answers.

This process is completed independently without any input from the other partners. It forces each partner to do their own thinking and articulate it in writing. It helps us to reduce forms of social bias like groupthink (or champion bias / sunflower management).

The structured list of questions helps to create a level playing field so that we don’t automatically focus only on the things we are excited by (an attempt to reduce confirmation bias). The quantitative scoring method for each question (1–5, with no 3’s allowed) is not actually used to reach any decision, or indeed compare one investment to another, but instead to elicit the relative differences between partners and help focus our subsequent conversation (step 5).

We all read each other’s write-ups. This creates a quiet space to really hear, and understand, our collective thinking before a group discussion. By writing something down, assigning a number to it, and then comparing notes, the process is no longer about who can deliver the quickest, loudest or most eloquent argument.

The partnership comes together for an investment committee meeting. Typically this is an hour but we’ll take as long as we need to have the conversation and make a final decision.

Given the breadth and depth of our research, we come to this meeting incredibly prepared and with a very clear understanding of each other’s position, and our own.

If there are areas of disagreement then we already know what they are and we focus our time on really discussing what matters.

If there is clear alignment on making the investment then instead of debating whether it’s a ‘yes’ or ‘no’ for the duration of the meeting, we can spend time answering the following questions:

How can we provide the most helpful feedback to the founders?

How can we help make the post-investment plan as strong as possible?

How can we make the most compelling offer to founders and ‘win’ the deal?

Whatever the result, we always want to provide detailed and helpful feedback to the founders.

By this point, we might have spent weeks getting to know the founders and their business and we want everyone’s time spent to be worthwhile.

When we make an investment offer, we use our collective feedback to create the strongest plan and maximum alignment for our new partnership with the founders — what’s the optimal investment amount, what are the right milestones before the next funding round, who are the best angels and co-investors to bring into the round, what is the best go-to-market plan etc.

But if we decide not to make an investment offer, we still think it’s crucial to provide not only a detailed summary of why but also our view on how to address the issues as we see them. If a company gets this far in our process, we are very confident they have an amazing opportunity ahead of them and we want to help them execute as best as possible.