No founder wants to write a ten-page investment memo. But founders who only pitch with a slide deck (often, without context and sent via email) put their storytelling in the hands of the VC.
As a founder, you want to connect the dots and help investors visualize the market opportunity.
Below, we highlight elements for writing an investor or fundraising memo with specific examples from notable venture capital firms.
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VCs Write Investor Memos, Founders Should Too.
Nearly every VC drafts an investment memo as part of the due diligence process. By writing the deal memo themselves, investors test their understanding of the company and understand how it maps to their investment criteria. They look to:
- expose gaps in their research
- prove they know enough to get the rest of the team up to speed on a deal
Founders who first write an investment memo get to create the narrative. Their work seeds the VC’s draft and offers plug-and-play memo elements for the internal deal review. Perhaps you have a nuanced market problem or solution, clearly articulating that with detailed prose (including useful examples) can improve a VC’s understanding.
But a pitch deck – especially one that is received cold or passed on without context by a network referral – can’t do this.
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How VCs Use Memos
Nextview’s David Beisel notes that almost every VC commits to the memo writing discipline. Some firms use memos as content fodder for investment announcements. Others write lengthier, confidential, and internal memos. Bessemer goes so far as publishing internal memos for their portfolio investments. Seeing (and mimicking) productive memos is also a smart tactic to drafting your own investment memo.
Put yourself in the seat of a venture analyst drafting this memo–they are searching for storylines and performance signals to present.
If you deliver these simply, transparently, and consistently, you improve the odds that an investor focuses on what matters–and uses your story, in your language. A pitch deck (by itself) is inadequate to share this story.
Further, the investment memo as a means to share “story”–which we all gravitate too anyway, is widely appreciated. So much so, that some funds draft their own memos to attract LPs!
Look at Earnest Capital’s lengthy memo targeting prospective investors. Clearly, they believed their unique thesis deserved a richer explanation–à la an asset like the memo.
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Best Practices for Writing an Investor or Fundraising Memo
Investment memos follow a similar construct and there is no compelling reason to deviate from convention for the sake of being different.
Weaving interesting stories within the general memo templates that VCs both follow and are accustomed to is wise. While there’s no cheat code to fast-track publishing, here is a guide to get started.
Start with a Compelling Executive Summary
Example: Sequoia Capital
Sequoia Capital emphasizes a concise yet complete executive summary in memos.
Best Practices:
- Highlight the Opportunity: Provide a quick snapshot of the market opportunity and how your business plans to capture it.
- Summarize the Business: Briefly explain your business model and unique value proposition. If you have compelling metrics, surface them early – don’t wait until the end of the memo and risk losing your reader.
- Create Interest: Make it intriguing enough that the reader wants to continue.
What Doesn’t Work:
- Being Too Vague: “We have a unique business idea that will change the market.” Avoid neutral, uninspiring words that don’t specify the nature and scope of change your business, product, or service will generate.
- Watch Out For: Lack of specificity and overused clichés. In general, works like transformational, disruptive, future-proof, and category-defining have lost their meaning.
Outline the Problem and Solution
Example: Andreessen Horowitz
Investor memos at Andreessen Horowitz use story to delineate the problem and then the solution.
Best Practices:
- Define the Problem: Describe the problem in clear terms, targeting specifics. Remember, a genuine problem is different from a market alternative.
- Propose the Solution: Articulate how your product or service solves this problem, including key features and benefits. Describe the promised, future reality once your solution is in play. To the extent possible, capture real word examples of change by your early customers.
What Doesn’t Work:
- Undefined Problem: “People need our product.” Prove how and why your solution is in demand. If you’re a former operator and started your company based on a persistent problem you once experienced, lead with this. Use emotion to draw readers into the problem, if appropriate.
- Watch Out For: Failing to clearly define and quantify the problem leaves investors unconvinced of the necessity for your solution. If impact is behavioral, explain how likely consumer or corporate behavior shifts are accretive to your solution.
Detail the Market Opportunity
Example: Accel Partners
Accel Partners emphasizes understanding, visualizing, and explaining the market opportunity.
Best Practices:
- Identify Target Market: Pinpoint your target customer and the market size. Be aggressive, but realistic. If your market sizing effort lacks rigor, better to avoid it altogether. You don’t want a curious investment pressing on a flimsy number.
- Analyze the Competition: Identify competitors and outline your competitive advantages. Describe who else solves this problem and the tactics that the incumbents or upstarts deploy. As well, explain why these approaches are __________ (inferior, incomplete, unnecessary, prohibitive, etc.)
- Provide Growth Projections: Back up your claims with data and potential market growth insights.
What Doesn’t Work:
- Generalizing the Market: “Everyone will want our product” or suggesting that no real competition exists. In most cases, this is simply not true. In some cases, the presence of competition validates the opportunity.
- Watch Out For: Lack of segmentation and understanding of the target market can lead to unrealistic projections and a lack of trust.
Showcase the Team and Culture
Example: First Round Capital
First Round Capital cares deeply about team dynamics, and considers the culture, backgrounds, and unique attributes of the founding team.
Best Practices:
- Highlight Key Team Members: Detail the relevant qualifications and experiences of the core team.
- Express Company Culture: Define the values and culture of your company and how they contribute to success. If you’re early stage and haven’t built these, don’t manufacture values for the sake of the memo.
- Show Team Synergy: If possible, demonstrate how the team has successfully worked together in the past.
What Doesn’t Work:
- Inadequate Team Introduction: “Our team is very talented.” Similarly, showcasing irrelevant experience may just distract your VC readers.
- Watch Out For: Lack of details about team qualifications and experience may make investors question the team’s ability to execute the vision.
Provide a Clear Financial Projection and Ask
Example: Kleiner Perkins
Kleiner Perkins is known for its appetite for financial metrics and a defense of what funds will be used for.
Best Practices:
- Detail Financial Projections: Provide a clear breakdown of revenue projections, expenses, and key financial metrics.
- Include Performance Metrics: Including churn, ACV, CAC, MRR, and revenue drivers.
- Address Gaps Proactively: If required, call out traction issues proactively, and explain the what and why behind underperformance. Then, offer examples of how your team is solving these.
- Explain the Use of Funds: Outline exactly how the investment will be used to grow the business.
- State the Ask: Make a clear request for the investment amount needed, including terms and equity being offered.
What Doesn’t Work:
- Unclear or Incomplete Financials: “We will make a lot of money soon.” In many cases, multi-year projections aren’t worth the paper they’re written on. Be prudent about how far out you project, and be able to rationalize anything longer than the upcoming few quarters.
- Watch Out For: Vague or overly optimistic projections without concrete plans can deter serious investors.
Use Visuals and Supporting Documents
Example: Bessemer Venture Partners
Bessemer incorporates visual aids, designed graphics, and add-ons to make their memos more engaging.
Best Practices:
- Include Charts and Graphs: Use visuals to represent complex data in a digestible format.
- Attach Relevant Documents: Add supporting documents like market research, customer testimonials, or technical specifications. If these are interesting, but not necessarily essential, consider using an Appendix.
What Doesn’t Work:
- Overwhelming with Visuals: Using too many graphs without clear explanations. However, if you have to type too much to explain a graph, then the visual is likely not conducive to a memo or pitch deck form. Visuals should be able to stand alone, and generally, should relay one clear concept.
- Watch Out For: Overuse or poor quality of visuals can confuse or mislead. Ensure that each visual adds value and is easy to interpret.
Conclusion
Writing an investor or fundraising memo requires a careful balance of enthusiastic storytelling and attention to detail. By employing common memo elements used by top venture capital firms, you can craft a convincing memo that resonates with potential investors.
Remember, your investor or fundraising memo is often the first in depth look an investor has into your company. It must not only inform but also inspire confidence and excitement about the potential ahead.