Quora Answer: How Do Venture Capitalists Make Investment Decisions?

The following is my answer to a Quora question: “How do venture capitalists make decisions, and for what reasons?” 

Are you asking about the philosophy of the choices, or the decision making process itself?  Venture capital is a high-risk business.  The vast majority of startups fail, for a variety of reasons.  For a venture capitalist, they need to consider, should the startup fail, is there anything to salvage, or is there a possibility of mitigating tax exposure elsewhere using this loss?  Among a hundred startups invested in, how many do they need to succeed, and to what level of success, within what specific period of time?  These are the considerations they need to consider before committing to the next investment. 

The process, however, is relatively straightforward.  Someone from the investment committee and his team, meet a founder.  The founder and his team give a proposal or presentation.  This may be one meeting, or if there is interest, a follow-up meeting after some due diligence is conducted.  Further queries are put forward about the company, the technology, and the team.  Once the investment team is satisfied, they make a proposal to invest in the startup.  They negotiated the equity stake, the exit, their interests in further rounds of funding.  Once that is agreed, the proposal is taken to the full investment committee to vet and approve, or disapprove.  In most venture capital firms, this final process is largely a formality since they would have been appraised of the negotiation process, and were heavily involved in the due diligence and analysis process.