Investment Memos
Why write an investment memo nobody reads?
Sometimes skills learned early in your career become a useful tool years later. Venture capital investing involves a long term perspective and balance of emotions and facts. Developing a written template from which to build an investment thesis is a useful tool for conceptualizing opportunities.
I began my career as an analyst for various investment funds. A majority of a job involved creating detailed investment overviews, better known as investment memos. These tend to be 5-15 pages and provide background on the industry, analysis of the company, and potential exit strategies. Writing these memos was not a particularly exciting part of the job, but it became an important tool for those making the final investment decisions.
I was recently asked how I approach venture capital investments and realized not much has changed, as I still write investment memos. The process of transforming thoughts into written form creates a comprehensive overview of an investment opportunity and reduces the potential for cognitive bias. Writing also helps expose areas of concern or strength as a study by Sieck & Yates in 1997 found writing builds a more complete picture of a decision.
Memo Categories
There is no defined memo format as every investment has a slightly different approach. As an example, the initial structure of our venture investment memos includes the following:
Problem / Market – problem the company is solving and description of the addressable market.
Solution / Product – solution to the problem and how the solution is developed.
Industry overview – discussion of the industry, main competitors, and significant trends.
Management Team – overview of the team, strengths and weaknesses, and why they are best positioned to lead the company and develop the specific product or solution.
Status and Progress – review past and upcoming inflection points for the company such as pending patents, product testing, or customer additions.
Investment Structure – how the investment is designed, are there aspects to the structure such as voting rights, anti-dilution, or board options.
Recommendation – investment thesis, what could go right / wrong, exit strategies and timing, and areas to monitor post the investment.
A Memo for One?
It may seem odd to put in the effort of writing an investment memo if nobody else reads it, but venture capital investing involves a longer term perspective so necessitates a methodical process. Building a repeatable venture investment methodology also involves understanding and interpreting trends, so capturing company and industry specifics over time with investment memos provides reference points for anticipating how future puzzle pieces of an industry may eventually fit together.
Consider taking a few minutes to write out your own thoughts when evaluating an investment, you may be surprised how it helps clarify the decision process.
Updates
For those newer readers, I encourage you to look back at some of our prior posts as we tend to cover a wide range of topics. We are also evaluating options to give our readers an ability to participate in some of our deals, so expect additional details over the next few months.
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