The investment memo is probably one of the most important pieces of work that a junior investor produces. It’s the whole reason why we were hired - to some degree at least.
Even though it’s an important part of the job, there isn’t much writing out there on the topic. There are plenty of templates & examples (see the BVP memos), but not much that tackles the process behind writing one.
So, I’m going to break this newsletter into two sections. Section one will be an overview of my writing process, and in section two I’ll share a few lessons I’ve learned over the years.
Section One - My Writing Process
There is no industry standard template for investment memos. I’ve seen everything from 15+ page research reports to simple 1-page summary sheets. We have probably gone through two or three irritations of format at the firm I’m with now. It always evolves as you continue to learn.
No matter the format, my process always starts with organizing my thoughts. By the time I’m writing a memo I’ve had several meetings with the founder, done some market / competitive research, talked with customers, and reviewed the data room. I need to first organize all this data into one place.
I’ll always start with a blank Word doc sectioned off with the common headings you might see in a memo (problem, solution, market, team, etc.). I’ll add / remove headings as needed for the particular deal I’m working on, but starting with a blank slate lets me build from the ground up. Rather than trying to fit things into pre-determined boxes.
The next step is to go through all my notes & documents related to this company. I’ll start adding information in bullet-point form under each section just by copying & pasting text. Right now I’m not concerned about flow, or even how it looks. I only care about getting the information organized.
Then comes the tedious part. I run through the document several times revising, sorting, adding / removing content. Until I have an outline I’m happy with.
From there, it’s just a matter of outlining my thoughts & information in a readable way. If your firm has a template you need to use, now is the time to start writing and filling it out.
I tend to start this “outlining” process early on while I’m still diving deep into a few areas and actively meeting with the founding team. I find that organizing your thoughts in this way helps you identify 1) what areas you are light on detail, as well as 2) what areas you have more than enough information on. It helps you prioritize.
Section Two - Key Lessons
I’ve written well over a dozen memos in my career so far. Some of them led to investment, and others never made the cut. Every time I go through this process there is always a new learning, which usually has nothing to do with the investment itself. But rather, a lesson about communication, clarity of thought, quality of research, etc,. Let’s dive into a few of the big ones:
Lesson 1: Don’t add length to make yourself feel better about an opportunity you are unsure about
It’s easy to find comfort in a nice long piece of research. I have found that when people aren’t sure about something they tend to add more detail, an extra chart, another section, etc., and I’ve been guilty of that myself.
A longer memo doesn’t change the quality of the investment opportunity. Focus on what matters the most, and if that’s not enough to get a deal done, then so be it.
Lesson 2: Communicate the key thesis clearly and concisely - up front
Every investment has one or two things that really matter. A key inflection point somewhere in the next 12-18 months that will signal early success (but not total success). Identify what this point is, and why you think the company will make it there.
Lesson 3: Just because you commit to writing the memo, doesn’t mean you have to commit to the deal
Maybe halfway through writing you realize that the opportunity isn’t quite what you thought. That’s ok. It’s better to pass than to pitch an investment that you aren’t thrilled about.
This ties into the pressure that junior investors often feel to make investments. Building a track record is important, but a track record of poor investments doesn’t help anyone (especially when you know why they were poor). There will always be another opportunity - and another memo.
Lesson 4: What are the things that keep you up at night about this deal?
No company is perfect. Maybe they have a high burn rate, part-time co-founders, IP risks, you name it. If you haven’t passed already - why is this risk worth taking?
Be upfront about these challenges and suggest a few ways to mitigate the risk. Knowing a company has a high burn rate means you don’t get to be surprised when they come to you for a bridge. But it also doesn’t mean that you can’t make the investment.
Lesson 5: Believe in the deal yourself
If you don’t fully believe in the opportunity then your memo will show that. In my experience, the opportunities that you have full conviction in are the ones where it’s just so obvious to you what the right decision is.
A nice test for this is asking “Would I put my own money into this company?”. If you wouldn’t put your own money into it - why are you suggesting we put someone else’s money to work?
Relevant Reads
Charles Hudson, Managing Partner at Precursor Ventures, wrote an interesting blog titled: Finding the Right Burn Rate for Pre-Seed Companies – The Relationship Between Burn Rate and Graduation Rate for Our First 150 Pre-Seed Investments - Link
The team over at Weekend Fund have been writing a great newsletter for emerging fund managers. For the Junior Investor, their insights on fundraising for first & second-time funds might be of interest: Link
Next Time
I’ve always been a bit skeptical of the hot trends in VC. Whether it is Web3, AI, Crypto, etc., I think a big part of it was that I never really found a way for those technologies to impact my life in a meaningful way.
I will admit, however, that some of the new AI tools (particularly Google’s Bard) have made an interesting impact on my role as a Junior Investor.
So next time, I’ll share the ways that I have been leveraging AI to generate insights faster, as well as make my job just a little bit easier.
Peer Group
We’re about to kick off the first Junior Investor Peer Group here at The Associate. It’s an opportunity for investors to come together & share a current challenge as well as receive feedback from the group.
Right now, I have the capacity for about 3-5 more investors. The only criteria is that you are a non-partner investor at an active venture capital fund.
If you're interested in joining, just reply to this email & let me know!