The Secret Sauce to Your Fundraising Tool Kit — The Investment Memo

When founders think of approaching investors during their fundraising process, they tend to put all of their focus and effort into one output document: their pitchdeck. However, even though the pitchdeck is the main document to show venture capitalists why your venture will be the next unicorn, an investment memo can make an even stronger case for you and why investors should allocate their capital into your venture.

Photo by Leohoho on Unsplash

So, what actually is an investment memo?

An investment memo is a document prepared by venture capital investors to pitch your company in front of the investment committee. Thus, the goal of the investment memo is to reflect on your company in all relevant aspects, so that a profound investment decision can be made. For that, investors enrich your pitchdeck data by adding information regarding learnings from expert interviews and previous due diligence process in your space, as well as their general outlook and opinion on market and stakeholders.

The Investment Memo serves as a sort of timestamp for the investor as a summary of all the factors that contributed to their belief to invest, or not to invest, and thus is a reference point for the future. It documents the thinking at a particular point in time and can be helpful as the development and circumstances of the company or market change. The investment memo thus also serves as a learning tool for VCs, should the company not develop as expected.

What’s the underlying problem here?

The creation of the investment memo usually happens after the first couple of days of due diligence, or as soon as the analyst thinks they know enough about your company to present it to their partners. Some VCs also start with the creation of the investment memo after the first two pitch calls, in order to give the Partners a first impression of your venture, depending on how fast the internal investment process is. (Note: Some VCs go from initial contact to money wired in < 2 weeks, some take multiple months)

During this short period of time, only the most relevant and essential questions can be asked. More in-depth questions about product, technology and GTM are usually omitted because there is simply not enough time. Therefore, the VC is forced to answer unanswered questions him/herself. Here, the danger is substantial that fundamental, often technical aspects are not deeply understood or even misunderstood.

It is beneficial for founders to prepare an investment memo when fundraising. Why not create the document yourself, which the VC analyst will want and need to write later anyway, in order to convince his other partners?

Why should you bother?

You should create the investment memo with the same dedication and enthusiasm as the pitch deck. Here, you have the opportunity to intercept the above-mentioned misinterpretations and to provide more detail and insights on relevant aspects than was previously possible verbally in the short interviews.

In addition, the investment memo can even be shared with the analyst prior to the first meeting. By doing so, you allow the VC to read deeply into your company, technology and market environment before the initial encounter and give them the opportunity to ask in-depth questions during the first meeting, thus speeding up and simplifying the process.

Already there the wheat can be separated from the chaff and you can showcase that you also understand the investment process from the investors’ side and are able to put yourself in their shoes.

By creating an investment memo you avoid information gaps and misinterpretations by the VC and you already strengthen your relationship with your potential future investor.

Sounds good, but where do I start?

You should think of the investment memo as a written execution of the pitch deck. Thus, you can also orientate yourself on the structure of your own pitch deck. However, I would like to give you an overview of the questions you should definitely answer in your investment memo.

Each question should be answered for approximately one paragraph. Charts, underlying data and sources should be included in the appendix to validate your main points and to give the VC an insight into your preliminary work.

So, let’s dive into it.

1. Introduction

Here you should describe your venture in the most simple and understandable way possible.

• What problem are you solving and why are current solutions not getting the job done?
• How did you become aware of this problem?
• How can you earn money with the solution and to which extent is it scalable?

2. Product

Now that the VC understands the basics of your business and its origins, it’s time to go into more detail about your product.

• What is your product?
• How does your product look and feel? (Note: Add screenshots of your product to showcase how awesome your UX is or add a link to a product demo)
• What is your USP? (Note: Here is your opportunity to get reeeally technical, talk about your defensible technology for example)

3. Market

Once your company and the underlying technology are understood, it is time to go into, perhaps for some VCs the most important aspect, the market landscape.

• Which market are you targeting?
• How big is your market? (Note: Showcase your calculation for your TAM, SAM and SOM as detailed as possible)
• Why is it a multi-billion dollar market and industry?
• Why will it even grow bigger in the upcoming years?
• How fragmented is your market?
• Which entry barriers are there?
• What does your customer look like?
• Why is that customer not satisfied with the current solution available on the market?
• What does your GTM look like and how will you reach those customers?

4. Competitive landscape

Now that you have explained your product and market, it is essential to understand why one of your competitors (yes, everyone has competitors, no matter how innovative and disruptive you are) has not implemented this solution.

• Who are your competitors?
• How do you stand out? (Note: You can showcase all competitors using a classic competitor matrix. Pick your closest 5 competitors and go into more detail through a side-to-side comparison)
• How do you plan on dealing with your competitors and how will you handle copycats?

5. Traction and Metrics

Now it’s time to show that all the things that sound so good on paper also work in practice and meet real demand. It is important that you provide data and evaluations for all statements that support them. Please make it visually appealing.

• What have been your most important milestones so far?
• How do you measure and track those milestones and your most important KPIs?
• What are your revenue drivers?
• What does your sales funnel look like?
• What are the main takeaways from your financial planning (e.g. CAGR, capital requirement, margins, break-even, etc.)

A great overview of relevant KPIs can be found here and here by Andreessen Horowitz.

6. Timing

It is almost certain that the VC was already pitched a company in the past, which had a similar idea and ambitions as you. At that time, the VC decided against an investment, perhaps because they felt that the market was not mature enough. Here’s your chance to overcome this reservation.

• Why is now the perfect time to invest?
• Why wouldn’t this have worked a few years ago?
• Why will it be too late a couple of years down the road?
• What macro-economic effects do you see today and in the near future that could influence the market?
• How will you change the status quo and the market environment?

7. Team

It’s no secret that the team is the most important factor in the investment decision of an (early-stage) venture. Product & business model can be adapted by a strong team, however, even the best product and business model cannot be executed by a weaker team. Here, it is essential to show what qualities you & your team bring to the table, and why exactly these are critical to success.

• Who is the founding & executive team? (Role, background, expertise)
• Who are your key hires? (Role, background, expertise, incentives such as ESOP, VSOP)
• How do you plan on attracting talent?
• What does your Cap Table look like?
• Why do you have insights into the market that nobody else has?
• Why do you have better market access than your competitors?
• Why are you the right team for this idea?

8. Roadmap & Use of funds

It is essential for a VC to understand where the invested money will take you and in which stage you will be in when you need/want to raise a follow-up financing round.

• Which are your next milestones?
• How do you plan on reaching those?
• Which could hinder you during the process?
• How much are you raising?
• What’s your company valuation? (Note: Always, always showcase your calculation and how you validate that valuation. Just throwing a number out there will always raise eyebrows)
• How have you financed yourselves so far?
• How do you plan on investing this funding? (e.g. XX% in product development to develop XX and launch in XX months. XX% in personnel in order to …)

9. Exit Scenarios

It’s important to show that you can think far ahead. Even if you don’t have to deliver anything tangible here yet, it’s a plus to show that you’ve already dealt with this topic in your early years.

• IPO (Avg. Enterprise Multiples)
• Names of some public companies in your space
• M&A (Avg. Enterprise Multiples)
• Table of a few recent M&A transactions in your space

10. FAQ

In the last section, you have the opportunity to answer questions that have come up more than once in previous investor meetings and do not fall into the brackets above.

So, with this guide, all central questions around your company, which can be reflected by you, should be answered in-depth and to an extent where the VC feels comfortable pitching your venture to their partners and making a profound investment decision.

Note: Besides the above-mentioned topics, the VC will also write about the fit of your company to the investment thesis and the focus of the fund, as well as potential conflicts of interest with portfolio companies.

I hope I was able to provide you with a useful guide to creating your investment memo and show you why it’s worth the effort.

Feel free to contact me via LinkedIn if you have questions regarding fundraising and M&A in the venture space or are in need of some kind of support.

About us:

At Trustventure, we offer entrepreneurial solutions for venture capital backed companies with “CFO-As-A-Service”. We advise high-growth ventures during fundraising rounds, transactions and the implementation of growth processes & after-investment strategies.

Thank you,

Konstantin