How Investors Evaluate New Deals

Important Criteria And Template For Investment Memos

The investment memo is an important part of the deal approval and business due diligence process for VCs. Savina van der Straten, from Point Nine Capital, gives a pretty good explanation of an investment memos purpose:

The deal memo is a document we start to fill in whenever we take a closer look at a company. Its main purposes is to make it easy for the rest of the team to get up-to-speed with what the company is and to identify key points which have not been covered yet.

The investment memo is typically written by a junior member of the firm to determine the viability of the deal. This document is generally two pages in length and includes items such as a company’s financial statements, management biographies, a detailed description of the business operations and more. Below is a brief framework of important criteria that’s typically investigated in an investment memo:

Company Overview

• Short and concise description of startup
• The product or service that’s being provided to customers
• Reasons why the founders are doing it
• Who’s benefiting
• The problem that the team’s solving

People

• Who the core team is comprised of
• Combined years of experience across team and industries
• Key advisors that are involved
• If there’s a need to add more expertise to build administrative and financial capabilities
• Identified product development and sales channel partners that are critical to your future success

Business Model

• Pricing
• Revenue sources
• Business strategy
• Customer base and traction channels

Market Opportunity

• Total addressable market
• Served available market
• Target market and most likely buyers
• Where the team is currently focusing their efforts
• Next markets/categories for expansion

Competition

• Illustration of competitive landscape
• Visibility of how team is competing with existing players
• Other companies that could move into the space
• Relationships or technology that’s being leveraged to gain competitive advantage
• Barriers to entry
• How the team’s encouraged early adoption of the product
• Factors (such as competitive price points) that will deter rivals

Deal Terms

• The amount being raised
• Use of funds
• Runway and working capital
• The impact of monthly cash burn with new round
• Record of ownership in Cap Table

Key Strengths/Positives

• Sizable market
• If there’s good customer experience and service
• Upsides of a good business model
• Control over supply chain compared to competitors
• Timing
• Partnerships that will ensure success
• Executive management

Key Risks/Negatives

• Competing against more mature, better funded startups in the same space
• Low barriers to entry
• Unclear what success is driven by
• Whether brand loyalty will overcome the low barriers to entry
• Debatable outlook on maintenance of quality at scale

Financials

• 1–5 year financial forecast
• Traction and growth over time
• Other relevant metrics

Due Diligence Summary and Exit Scenarios

• Industry expert references (tech, customers, peers)
• Likely outcomes for ROI

There are a lot of open sourced deal memo templates available to get a better understanding of the due diligence process. No firm approaches the memo in the same sequence or format. Make sure your own startup considers due diligence as a part of your own internal procress, not just outside investors.