A Memo About Writing Investment Memos
Today: My preferred approach to writing memos, and a few links to go further on each item.
The agenda 👇
How I like my investment memos
Many related links included in the essay
Since VC is my industry and writing is my craft, it should come as no surprise that I’m interested in investment memos. Alas, since most investing happens behind closed doors, it’s long been hard to know how investors effectively design and structure their investment memos. You’ll find a lot on the Internet about assembling pitch decks—not so much about writing good investment memos.
For a long time, the only actual memo by a tier-1 investor that you could check out online is the one Sequoia’s Roloef Botha wrote to advocate an investment in YouTube. That one was made public because it was used as evidence in a lawsuit filed by right holders against YouTube.
Then things started to change—albeit very slowly. Here are two examples:
Sriram Krishnan is as passionate about business memos as I am, and he compiled many of them on his personal website: Memos.
There are more and more people seeking to join the VC industry who are simply teaching each other to write investment memos. See examples here and here.
That’s still not enough for me. For instance, it’s quite hard to find one of those legendary 6-page memos that Jeff Bezos mandated should replace slide decks within Amazon. Still, earlier this year I decided to summon everything I know about strategy and finance and to design the ideal outline detailing everything I’d like to see in an investment memo—and how it should be structured.
MARKET. What I’m looking for here is the “job to be done” (to use a term coined by the late Clayton Christensen). It means understanding who the customers are, what exactly they want, and how much they’re willing to pay for it at the aggregate level. Assessing the size of the total addressable market can be done in different ways (top-down, bottom-up), but the goal here is to narrow things down and acquire a clear understanding of the specific segment the target company aims to serve.
Detailed structure: how large and fragmented is the market; macro trends that suggest where the market is headed; specificities about the particular segment the company is targeting.
Clay Christensen’s Milkshake Marketing (Carmen Nobel, HBS Working Knowledge, 2011)
INDUSTRY. Every market is served by an entire industry, that is, companies that belong to different sectors but nonetheless work together all along the industry’s value chain. What I like to see here is how this whole value chain is impacted by the shift to the Entrepreneurial Age. Indeed, it is the deformation of the value chain and the resulting gaps and frictions that create an opportunity for startups to enter the industry and grab a piece of the value added.
Detailed structure: details about the legacy industry; how new entrants have contributed to deforming the value chain over the years; the gaps and frictions that create an opportunity for the target.
The Five Stages of Denial (me, 2016)
Wholesale Transfer Pricing Power (Tren Griffin, Twitter, 2019)
STRATEGIC POSITIONING. Once you have a clear grasp of both the market and the industry, it’s time to analyze positioning. Strategy is about what a company does relative to other players, and so this is where we should find everything about incumbents, new entrants, and the specific positioning that the target company has embraced as their own. What should be stressed here are the company’s efforts to differentiate themselves from the most direct competitors—whether it’s through the value proposition, the company’s value chain, specific trade-offs that it made along the way, how different activities fit together, or any other elements.
Detailed structure: positioning of incumbents; positioning of other new entrants; positioning of the company itself and how it relates to the others.
No Tradeoff Between Quality and Scale (Babak Nivi, Venture Hacks, 2013)
A Stout Porter: Business Strategy in the 21st Century (me, 2016)
TEAM. Many investors will tell you that it’s the most important part. I would say it is indeed important, but that doesn’t mean it should be on top of the memo. Before I look at a founding team, I want to have a clear view of the market and the industry. Then I can reason as to whether that particular team is up to the challenge. And so it’s only the fourth section that’s dedicated to introducing the company’s founders, their respective roles at the organization, and the culture they’ve crafted while moving forward. It’s also at this point that you should describe the org chart of the company, introduce the executive team supporting the founders, depict the different departments and their respective weight, and detail the company’s plans regarding hiring and expansion once funds have been raised.
Detailed structure: all about the founding team; all about the org chart and current employees; all about future hiring plans.
Relentlessly Resourceful (Paul Graham, Essays, 2009)
The Founder’s Dilemma (my cofounder Oussama Ammar, The Family, 2015)
PRODUCT. There’s no good company without a good product. Echoing the “job to be done” discussion that came earlier, this is where the memo should describe how exactly the product fits what customers want, how it’s distinctive in terms of design and features, and the underlying technology and architecture. Also analyzed in this section is the product’s pricing. What I want to grasp here is a comprehensive understanding of the company’s value proposition. Potentially, there’s a secret sauce to be mentioned, but that’s not mandatory.
Detailed structure: detailed current value proposition; why the product stands out; how it is priced.
The Butter Thesis (Nick Grossman, Union Square Ventures, 2019)
GO-TO-MARKET. Probably the most important section in the memo. You’ll find that there are patterns here (consumer, enterprise, two-sided businesses) since go-to-market is increasingly becoming a science rather than an art. But what I really want is focus on the details: What approach did the founders implement to discover their market and reach product/market fit? What customer segment have they been serving up to now? And how do they plan to expand and upsell in the future, once funds have been raised? Remember Babak Nivi’s view that the ability to scale is what distinguishes successful ventures from failing ones: “The best products require unique means of scaling. The delivery of the best products is tied into the product itself” (from his seminal article that inspired our founding The Family).
Detailed structure: how the go-to-market has been so far; how the company plans to expand in the future; the details about executing this expansion.
Do Things That Don’t Scale (Paul Graham, Essays, 2013)
Thoughts on Total Addressable Market and Go-to-Market (Elizabeth Yin, Twitter, January 2020)
ECONOMICS & FINANCIALS. My cofounder Oussama usually prevents early-stage founders from talking to me because I tend to jump to strategic conclusions while those founders should be busy building their product and discovering their first customers. But at later stages, strategy really matters: how do you position your company so as to race ahead of competitors and generate increasing returns that become a “moat”? My view is that the best tool to visualize a company’s potential returns is what is known as a “flywheel” (a system of positive feedback loops—see Kevin Kwok and Alex Danco on that one). In addition, I like information about unit economics (which are a way of putting detailed figures on the flywheel) as well as a financial overview of how the company has been doing and where it’s headed. Cash efficiency matters here—a key predictor of success for European startups, always remembering that “corporate happiness is positive cash flow” 💵
Detailed structure: the company’s flywheel; data-backed details about unit economics; detailed financials to date.
In Search of Scalability (me, 2016)
The Merits of Bottoms Up Investing (Brett Bivens, Venture Desktop, February 2020)
RISKS. This is a section that’s both necessary and important, but it tends to be shorter and a bit repetitive. Most risks to fast-growing ventures are the same: failing to expand beyond their domestic market; being confronted with an adverse regulatory context; failing to scale up operations and people to the level where you can expect a high return on invested capital; failing to raise their next round due to the ups and downs on venture capital markets. Obviously, this should all be put in context.
Better Get Used to Those Bubbles (me, 2016)
Why Founders Should Take More Risk (Pete Flint, NFX, January 2020)
POTENTIAL EXITS. This is also rather standardized, since options for exiting a venture capital investment usually fall into clear categories: an early acquisition by an incumbent in the industry; a later-stage acquisition by a large tech company; an investment by a large private equity firm once the venture is nearing or has reached profitability; an initial public offering. You can provide some context and conditions for every one of these options given the particular deal under consideration.
A FEW OTHER THINGS. All memos should be completed with several additional sections such as: an investment return profile (summary of where the target stands in terms of potential returns); a term sheet (obviously); a disclaimer; a list of documents provided by the company itself.
What do you think? Do you have other examples in mind? What were the best memos you’ve encountered in your investing career?
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I’ve pulled together all the inv memos I can find here: https://www.alexanderjarvis.com/venture-capital-investment-memo-collection/
I’ve blogged on startup memos such as Rippling, Airbase and I think 2 others as well. I personally do not like them for startups, but for a few reasons.
Thanks for sharing Nicolas!
Very interesting information.
I would like to emphasize the difference between Market and Industries, which I think is superimportant, and source of so many mistakes by entrepreneurs (at least in healthcare and life sciences, my industry).
John Mullins (LSB), author of "The New Business Road Test" and "Getting to Plan B" (with venture capitalist Randy Komisar), explained it this way (which was very useful for me to understand the difference):
Market and Industries: what is the difference?
• A market consists of buyers (people or organizations, and their needs), not products.
• An industry consists of sellers (typically organizations) that offer products that are similar and close substitutes for one another.
Why is the market-industry distinction important?
• Because judgements about the attractiveness of the market one proposes to serve may be very different from judgments about the industry in which one would compete.
• The questions asked to assess market attractiveness are different from those for industry attractiveness (a point easily obscured when words like “sector” and “space” are used indiscriminately or carelessly in the opportunity assessment process.
Market = Buyers (→ Demand)
Industry = Sellers (→ Supply)
Mullins states that the mistake #1 that entrepreneurs make is that they "get blind-sided by the attractiveness of the market":
The entrepreneur gets enamoured of the market (how big it is and how fast it is growing)
o Data from market research
o Talk to potential customers
But, what about the industry?
o Is this an industry in which I really want to compete?
o And in which I can compete?
o Do I have a chance to maintain sustainable competitive advantage over time?