Madrona Venture Group's Investment Decision System
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Madrona Venture Group's Investment Decision System
Madrona Venture Group's process for evaluating new investment opportunities.
SS
S Somasegar
|
DL
Daniel Li

As a senior executive, you get paid to make a small number of high quality decisions... Warren Buffett says he’s good if he makes three good decisions a year.
- Jeff Bezos


At
, we invest in early- and mid-stage (or acceleration stage) startups, and we think about this job in three stages:

Meeting new founders and identifying new technology and business trends.
Following that work with evaluating new companies for investment, and investing in them!
Supporting the growth of portfolio companies after we invest for the long run.

So while Warren Buffett and Jeff Bezos are right that making a small number of high quality decisions is the most important part of the job, most of the work happens before or after we make a decision.
With this interactive Coda doc, you can explore first-hand how we gather and collect feedback at a crucial point in our investment decision process, after the founding team has presented to all of our extended team.
We use the Coda survey to evaluate how far they have come, the work ahead, and how we can contribute to their growth in the future.

The Investment Process at Madrona

We typically work on “deal teams” of two to three investors who are responsible for all research and diligence on a new investment opportunity—everything from getting to know the team, forming a perspective on the market, evaluating the product, and speaking to customers to understand how the product compares to competitors.

During this process, the deal team compiles their research into an investment memo, which includes an investment thesis, an evaluation of the company against a set of key criteria, as well as the benefits and risks of a potential investment. If the deal team believes they have a compelling investment opportunity, they invite the founding team into one of our weekly Monday meetings and circulate the memo ahead of time for Madrona team members to study up before the company presents their story to the rest of the firm.

Immediately after a company presents we hear from the team on their impressions of the company. Ideally we make a decision then and there about an investment. This process is important to how Madrona works in several ways:

Everyone around the table, the extended investment team and the venture growth team, is empowered to share their input and feedback in an open and respectful way.
By having this open discussion, we are continuing to build a culture of listening with an open mind in order to consider all inputs before making a decision.
This decision making timeline enables us to communicate with the founding team in a timely and effective manner about the investment, putting the full weight of Madrona behind that decision. (Some of our friends down the street call this “Disagree and Commit.”)

Historically, making the decision was a manual, in-person process where we went around the room to hear different opinions—and eventually come to a decision. This took a while, and there was concern that ‘groupthink’ would take over. And have you noticed that sometimes the first opinion sets the stage for a discussion of this type? We didn’t want that.

With that in mind, we moved to adopt a Coda survey that quickly gathers perspectives on important investment points. The survey prompts Madrona team members to consider different elements of the company as they come to their own point of view, and the quick collection and presentation of data provides a platform for a getting into deeper discussion. We have been using this method in person for a couple years, and now that we are in the remote work from home situation, it is even more useful to set the conversation and decision making process into motion.

Our Investment Decision System Doc

Our digital aid for making investment decisions is an interactive, two-part Coda doc.

Collecting Feedback

The first part of our doc is a
tab that collects each investor’s feedback after the founding team presentation. Normally, we have each person fill in this survey after a company’s pitch (or our review of the investment opportunity), but before we discuss our conclusions with the full group. This ensures that our feedback authentically reflects all voices and that we capture unbiased opinions from everyone. Each team member will see something like this table below to provide their ratings and feedback about a pitch:
Question
Rating
Feedback
1
Rate the Team
2
Rate the Market
3
Rate the Product
4
Rate the Business Model
5
Rate the Deal Terms
6
Overall Rating
7
If you were writing a "pre-mortem" for the company today, what would be the biggest risks to consider?
Difficult to scale up Ice Juice production and distribution without building a new cold chain
No results from filter
The survey itself is meant to be very quick—we expect feedback can be given in around a minute. Our format has evolved over time, but right now, we ask each person to answer seven questions. Six of them are quick quantitative scores: 1 to 10 ratings on the team, market, product, business model, deal terms, and an overall rating. The last question is qualitative, asking “If you were writing a "pre-mortem" for the company today, what would be the biggest risks to consider?"

Displaying the Results

The second part of our doc is the
tab, which summarizes the survey responses by company. After each person completes the survey individually, we pull up the results on a screen (or screenshare) to view all responses simultaneously.
Created with Highcharts 7.2.2RatingCount of votes12345678910024681012

Because most of the data is quantitative, the group’s sentiment becomes obvious, and we avoid the typical “groupthink” that happens in large meetings where the first person to speak up can strongly sway other people’s opinions.

When we have a founding team come in and present, we already believe there are many reasons to invest, so with the qualitative “pre-mortem” question, we're giving everyone license to talk about where they see the biggest weakness for the company. Do they desperately need a specific role, is there a competitor who might move into the space, are there places where scale could be hampered? Whatever it may be - this helps us think through how we can help them the most. This also informs the feedback we will give to the company.

After reviewing and discussing the results with the full team, the deal team reconvenes to make a final decision and communicate that back to the company.

Conclusion

Over the last few years, every company in the world has invested in digital transformation, and venture capital firms are no different. Everyone wants to be more efficient. With our investment decision system, we build a culture of listening to every voice in the room, and collect more data on our investment process, which reinforce better decision-making over time.

Different types of organizations need to make different types of decisions, but getting better at decision making is something that every organization needs. We would love to hear if this template if useful to you, or how you would edit the template to make it better suit your needs!

Quick Start

Copy this doc to your account (button in top-right)
Go to the
page to customize the questions you want to ask your investment committee (see
table) and list of companies (
)
Select the company you want your group to leave feedback on (in
)
Share this doc with your team and have them start leaving feedback in
!

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