What is an investment memo?

There has been a sharp downturn in venture capital fundraising since 2022. In 2024, venture capital firms raised only $76.1 billion, the lowest since 2019. Furthermore, the number of new funds launched was the lowest since 2014. These facts directly reflect fundraising challenges prevailing in the venture capital market.

These trends are probably a result of increased investor caution and limited liquidity, which is a consequence of an inability to exit startups funded at inflated valuations during the zero-interest-rate period.

This article will review the components of an effective investment memo, share sample memos, and offer guidance on how to write your own captivating and credible investment memo.

What are investment memos?

Investment memos are meant to provide a comprehensive evaluation of an investment opportunity to potential investors. They are typically written by private equity and venture capital firms and shared with potential limited partners.

In addition to company valuation, this typically includes a description of the business model, an assessment of market dynamics, an evaluation of the management team, a deal description, and a summary of risk factors.

Some of the common components of investment memos are as follows:

Executive summary

The executive summary provides a brief description of the company, its valuation, the investment rationale, potential returns, and risk factors. Most prospective investors will read the executive summary and decide whether they are interested enough to continue reading. So, it is best to keep the executive summary concise and engaging. In this section of the investment memo, it is extremely important to strike a balance between transparency, persuasiveness, and readability.

Business model description

This section should provide a comprehensive yet succinct description of how the business delivers value to users or customers and how it monetizes this value. To start with, you must describe the company’s products and services. This is especially important if the company operates in a relatively unexplored niche. In the case of tech startups, presenting user growth and engagement data can help readers understand the company’s growth trajectory.

If you have data about paying users, presenting it will help readers evaluate the commercial viability of the company.

As part of the business model description, you must also describe the production process, the unit economics, capital expenditure requirements, and key production dependencies and vulnerabilities.

Market description

Five things that you must include in the market description of an investment memo are:

• Market size
• Market growth rate
• Market structure
• Regulatory risks
• Economic moats of the target company and its competitors

If a company operates in multiple markets, you must mention each market’s size, growth rate, and the company’s market position. If direct competitors exist, you should mention the overlap in offerings, comparative strengths and weaknesses, and reasons for picking the target company over competitors.

Regulatory actions can effectively derail a company’s operations. Therefore, investors would be interested in knowing if the industry has any stringent requirements and how the company is addressing these requirements.

Economic moats such as strong intellectual property rights or network effects can have a significant influence over a company’s competitiveness. So, you must present an evaluation of whether the company is advantaged or disadvantaged in this aspect.

Financials and forecasts

Many investors would argue that financial history and forecasts are the most crucial components of an investment memo. Even if a company’s business idea seems interesting and the market is projected to grow, investors are likely to pass on the opportunity.

The kinds of financial statements you need to provide depend on the type of investment fund you are managing and the nature of your investors. For instance, if your investors are focused on startups, sharing income statements and financial forecasts might be sufficient, as these investors typically prioritize cash flow projections.

In contrast, private equity investors are likely to expect more comprehensive reporting, including balance sheets, given the frequent involvement in restructuring.

Additionally, if employee compensation is the company’s largest expense, you should include headcount projections as well.

Scenario analysis

In the introduction for this section, you can mention the probability of the worst-case scenario as well as the payout in the most likely scenario. Then, you should attach a table comprising descriptions of different scenarios as well as each scenario’s exit values, exit proceeds to the investment company, probability, duration, internal rate of return (IRR), and return multiple. Then, you can conclude this section with weighted averages of duration, IRR, exit proceeds to the investment company, and return multiple.

Management team

Many startup investors, especially those focusing on early-stage startups, believe that venture capital investing is about investing in people rather than investing in companies. Other investors would also want assurance that the right kind of people are at the helm. So, you should discuss the quality of management in your investment memo.

Specifically, you should discuss the personality, management style, relevant experience, and education of the management team. It is also important to discuss the board composition and whether your investment company will be able to secure board positions.

Risks

Any factors that could impact the company’s operations, growth rate, or competitiveness should be described briefly. The exposure to these risk factors should also be evaluated and presented. Furthermore, you must outline any current or planned risk mitigation measures.

Typically, you would need to discuss risks related to team composition, as well as the financial, market, legal, and technological aspects.

Deal details

Finally, you should mention the pre-money valuation, the investment amount, the resulting equity ownership, and the expected dilution. If there are other significant participants, you should mention the amount they will be investing. You can also comment on whether voting rights and downside protections are sufficient to recover the capital in most scenarios. You should also mention the nature of upside provisions.

Conclusion

In the conclusion section of the investment memo, you should share a candid and brief evaluation of the investment opportunity and the company’s growth potential. Ideally, you should avoid overselling the return potential or overemphasizing the risks, as either extreme will negatively impact your credibility and affect your ability to onboard investors.

Investment memo samples

Investment memos are typically not shared publicly. Instead, they are reserved for trusted, potential limited partners. Investment firms may avoid sharing memos publicly to avoid divulging the structure, language, and investor engagement strategies refined over the years. These are key elements that could offer valuable insights to competitors.

To put things into perspective, in late FNFT2021, Sequoia Capital auctioned its YouTube investment memo as an NFT 16 years after the memo was created.

Hence, it is shared by Bessemer Venture Partners (BVP), one of the oldest venture capital firms in the US, and is a valuable resource. The memos for investments into Shopify, Pinterest, Twitch, Yelp, and LinkedIn are interesting reads.

How to write investment memos?

To craft a compelling investment memo, you should incorporate the following aspects:

Storytelling

Simply presenting relevant information is not enough. You must help the intended readers connect the dots through storytelling. While reading your investment memo, the readers should develop a sense of excitement regarding the investment opportunity. To achieve this, you should highlight the opportunity’s appeal, which could be either high potential returns or the chance to bring transformative technology to the forefront.

Transparency

Veteran investors are likely to become skeptical when you are not being fully transparent. Hence, opacity will undoubtedly affect your ability to secure funds for the investment opportunity.

Furthermore, omitting key details, accidentally or deliberately, from your investment memo can lead to friction during the investment period. Investors may feel blindsided by delays or underperformance. This is likely to diminish credibility and make it more difficult to secure support for future ventures.

Clutter-free presentation

Once you have crafted a compelling and candid draft of your investment memo, the next step is to present it in a well-designed format. You should focus on improving readability rather than eye-catching design elements that can sometimes be distracting. After all, your chances of securing funding depend on whether your investment analysis is clearly understood by the investors.

Additionally, text may not always be the most effective medium for conveying information. In certain cases, you may rely on graphs and charts.

Decipher valuation insights hidden in data with Eqvista!

No matter how compelling a business may seem, investors are typically cautious about entering overvalued companies. Hence, the effectiveness of your investment memo hinges on your ability to convey accurate valuation insights.

Eqvista’s detailed valuation reports can provide vital support in this effort. Our seasoned valuation analysts can help you craft a compelling and trustworthy valuation summary that improves your chances of securing funding. Contact us to learn more about our services!