An investment memo is a boring document, typically written by analysts for VC fund partners to justify their investment decisions. But, if approached properly, it can become a great analytical tool that helps make informed decisions, as shared by Elena Mazhuha, Partner at Ukrainian seed-stage venture capital firm Flyer One Ventures.
At my fund, every partner brings a memo to the investment committee. Each member reads it, we talk, and then decide whether to invest. One vote against and the deal falls through.
The memo does most of the convincing, so it better be detailed but also concise (~3,000 words). Our practice: a deal lead usually writes the memo, while interns and analysts actively participate in due diligence and in writing some separate parts of the memo.
If you’ve just started leading or proposing deals to the investment committee, consider the Flyer One Venture approach to writing investment memos.
- Short description. It introduces a startup to everyone on the investment committee. It includes an overview of what this company builds and its vision — what it wants to achieve. Overview and vision.
- Pre-parade vs. pre-mortem. This part describes all the good things that can help a startup succeed and, separately, all the bad things that can kill it. We write the main thoughts and then prove them with numbers and facts.
Ask yourself, "What could make this company successful?" and write it down. Then, ask yourself, “What could kill this company?”
Exciting things: Motivated founders with domain expertise and solid background, fast and efficient growth, good product metrics, product-market fit, convincing defensibility, etc.
Potential killers: Reliance on one client, potential large competition, broken cap table, lack of defensibility, of focus, of necessary expertise, and of market knowledge, etc.
- Basics. We gather all the technical info in one place. It includes a founding year, a website link, social media accounts, a pitch deck, a cap table, and the offered deal details. In our memos, this part looks like a table within the document.
- Team. This is the most important part at F1V: it introduces the founders to the committee. What experience makes them good entrepreneurs? Previous exits, a job in the same industry, strong skills in a particular area, or personal strengths — all should be here.
This is also where VCs express their opinions about the founders. At our fund, we look for energetic, ambitious, and motivated entrepreneurs. We rely on a deal lead to recognize these qualities.
This part also mentions the number of employees, their location, and the description of the key hires. If the co-founders worked together in the past, we talk about it here.
- Problem and solution. Here, we go deeper into the pain a startup solves and how exactly it solves this problem. It’s the second most important part of the memo.
Two-three paragraphs have to concisely prove that the company’s solution of the problem is more effective than those on the market; and that it develops painkillers — not vitamins.
Reading the rest of the memo without a clear understanding of the problem and the startup’s solution to it is like watching Game of Thrones starting with the Red Wedding.
- Product overview. Ideally, after reading the memo, everyone on the committee understands how the startup’s product/service works from the customer perspective. If VCs can’t describe the customer journey here, it means they don’t understand how the product really works.
In addition to the “customer journey,” we also write a brief summary of the startup’s core features and a demo (video tutorials or screenshots work well).
The final sentence — product roadmap for 6-12 months. It helps better understand the next steps after the round, and how VCs can help the startup achieve those milestones.
- Market and competition. Good VCs know the context: the market conditions and the startup’s position within them. This section starts with a description of the market, including its size, growth rate, and core drivers.
The startup will tell VCs about its main rivals on the market — who does what, how large they are, and what they’re doing differently. But we also do my own research on competitors to double-check what the founders said.
Defensibility comes hand in hand with the market research. An investor, like the founders themselves, should be able to clearly explain why customers would stick with the startup.
The last bit here: We check the number of IPOs and M&As in this industry over the last 5 years to see who typically acquires whom. It’s not possible to forecast an exit over the next 7 years, but we like to understand the investment landscape and predict if the startup will have difficulties raising money at later stages.
- Business model and traction. This bit describes how the company makes money and shows its metrics over time. Business model: subscription models, transaction fees, licensing, etc. Traction: historic financials, unit economics, contracts and their characteristics (e.g. term, ACV, upsell potential, and so on).
After looking at the financials and traction, early-stage investors recognize if the company can use the money effectively and grow. VCs also see areas where they can help the founders.
- References. Investors want to know better who they’re dealing with and to see the big picture. That’s why a deal lead collects references from at least 3 sources (better >5): the company’s current customers, previous or currently interested investors, and former colleagues.
Talking to clients, we try to understand the product’s benefits (time and money saved) and defensibility. We use The Mom Test approach, asking open-ended unbiased questions that focus on the problems and needs of customers.
Talking to former colleagues, my fund’s favorite question: “You’re assembling a team of stars. Will you pick this person?”
