What is an investment memo?

Entrepreneurs heading early-stage companies and startups often need to participate in fundraising to bring their ideas to life. They tend to look to angel investors and venture capital firms to raise the money for marketing, fulfilling purchase orders, and building solid teams.

However, the entities with the money to fund your business aren’t going to go into the investment blindly.

That’s where investment memos come in. They help investors through decision-making by providing details about your new business that investors value.

What is an investment memo?

Investment memos are often referred to as "deal memos." These memos share your investment thesis with core details about your business and its market. Investment memos are essential tools for:

• Entrepreneurs: Entrepreneurs use investment memos as tools for fundraising, giving them better odds of getting the funding they need.
• Investors: These memos allow potential investors to perform due diligence and make wise investment decisions.

Nine key components of an investment memo

Your investment memo should include nine key components. Those components include:

1. Company overview: Clearly outline your business model, the milestones you have achieved, and those you plan to achieve.
2. Team: Include bios of core team members.
3. Valuation metrics: Valuation metrics should be carefully thought out, representing where your business stands today, its revenue, business loan requirements, and market opportunity.
4. The problem: Clearly describe the problem your business solves.
5. The solution: Clearly explain how you solve the problem.
6. Market size: Show investors the overall market opportunity based on market size.
7. Product development: Explain what stage of product development you’re in.
8. Sales and distribution: Further details on current sales and distribution channels.
9. Pitch deck: A slide deck offering easy-to-consume information about your company.

Best practices for writing an investment memo

As you write your investment memo, you should keep the following best practices in mind:

• Be honest: You never want to over-promise and under-deliver with investors.
• Be realistic: You know your company can grow to be a billion-dollar corporation, but it’s more important for investors that you provide realistic projections.
• Be transparent: Don’t try to hide data; it will only leave holes in your memo that will lead to investors questioning the validity of your investment.
• Think like an investor: Think about what investors want to see as you write your memo.

Example of a successful investment memo (and why it worked)

Airbase's highly successful investment memo helped the company raise $60 million in 10 days. Click here to check it out. Here are the factors that made the memo successful:

• The author didn’t focus on nuances investors don’t value.
• The author understood that not every investor would see their vision.
• The author was transparent and shared their story.

The do’s and don’ts of seeking investors

As with any other process, there are right ways and wrong ways to attract the funding you need. Key "do and don’t" areas are described in detail below.

Types of funding

• Do: Take time to learn about the different types of funding available, and choose one that works well for your business.
• Don’t: Blindly accept funding just because it’s available.

There are several different types of funding to consider. Those include:

• Non-dilutive funding: This type of funding is typically a loan and doesn’t require you to give up equity.
• Venture debt: Debt that’s offered by VC firms. You may be required to give up some equity.
• Mezzanine funding: A hybrid of debt and equity funding.
• e-commerce financing: Funding specifically designed to meet e-commerce needs.
• Equity financing: The process of selling a percentage of your company.
• Microlending: Access small amounts of money when you need it.

Valuation

Your company may make billions of dollars in revenue in the future, but it’s not there yet. Investors pay close attention to valuation metrics; if your valuation is too high, you won’t get a deal. Low valuations may also scare investors off. Make sure your pricing is reasonable, given the current state of your business.

Y Combinator

Y Combinator is a group that many consider to be the graduate school for startups. Consider participating in the program and taking the Y Combinator approach to developing your investment memo.