The deal memo is an essential document for venture capitalists when considering an investment deal. Typically, after hearing a pitch, a VC will put together a memo to document their thought process around the deal. This document is vital for several reasons:
It provides an opportunity for the VC to think critically about the investment and put their thoughts down in a living document.
It helps the firm understand that partner’s perspective on the deal and can also serve as a template for all investments.
Because it is a documented investment approach, firms can look back on these memos to find patterns in investment decisions that have worked and haven’t allowed them to improve their decision-making processes.
Today we will walk through some tips when writing the deal memo, and I will also provide some additional resources around them.
What to Include in the Deal Memo
The good thing about a deal memo is that you can find much of the needed information in a company’s pitch deck and due diligence. Some firms have deal memos between 5-10 pages, and others will try to be more concise and have around 2. For firms that focus on the very early Seed stage, their memos will likely be shorter as they have less data on a company and minimal traction. I recently wrote a blog post on what to look for in startups, which will help accompany this guide. In general, the information you will include in a memo is the following:
Company Vision: What is the company ultimately trying to achieve?
Problem: What is the specific market problem the company is trying to solve?
Product: How is the company trying to solve this problem?
Founders: Who is trying to solve this problem, and why are they qualified?
Team: Who have the founders surrounded themselves with, and why are they qualified to solve this problem?
Market: TAM, Go-To-Market, etc. For more information on this, you can read the blog post I wrote about it here.
Business: Includes traction and other metrics achieved by the company. I wrote a blog post to guide you on these calculations here.
Deal: How big is the round? Who else is investing? Who are the previous investors? Capitalization Table Analysis is crucial here.
Risk Analysis/Expected Return: Will this company provide the returns we expect for our fund?
This list is a brief overview of what to include in a deal memo, but if you want to get much more detailed, I encourage you to read our other blog posts on this topic. This Medium post is also beneficial for going into more detail and providing details on each of these separate bullet points.
Not only do investors write memos, but it is highly encouraged for founders to do this practice as well. This practice helps a founder put themselves in the investor’s shoes, and in doing so, can tailor their pitch to an investor and increase their chances of raising a successful round. Also, what investor isn’t going to appreciate a founder doing part of their work for them? Y Combinator recommends this approach and has a founder memo guide here.
Deal memos rarely see the light of day, but famed VC firm Bessemer Venture Partners has made their memos open to the public, which you can find here. I highly recommend you read through some of these to understand a VC’s investment process and get some ideas to write your own.