VC: Public Decision Rule

1. Description
  1. A public decision rule is a stated threshold or set criteria when an investor will invest. Often the decision rule will include some flavor of Follow Only. For example, participants in a particular program or school who raise $X from other investors will be eligible for $Y investment from this fund.
2. Benefits
  1. Create Distance or Objectivity. For situations where the investor is part of a larger organization or otherwise serves the founders, there can be worries about perceived bias or favoritism in the investment decision. By creating a public decision rule, the hope would be to reduce the number of investments made for non-investment return reasons.
  2. Reduce Pressure on Investor Staff. Even in cases where the investment team would not be making choices for non-return reasons, there could be pressure on the team based on prior relationships or interactions that they may not enjoy. By providing the team with a public decision rule to point to, it can reduce the pressure on them.
3. Trade-offs
  1. Possible Negative Selection. It is possible that the most attractive investments will already be filled before the founder asks for the trigger of the Public Decision Rule. It can depend on how it is structured but particularly if it is a Follow Only type rule, then the investment round could already be full.
  2. No Positive Selection. The GP faces a risk of adverse selection of not being offered the very best deals which can be much of the upside of VC.
4. Examples
  1. Venture of America
  2. Perhaps Ben Franklin Technology Partners? (Please correct me if you know?)

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