An investment memo is a very useful tool to help collect your thoughts in advance of an investment decision. It’s basically a document that summarizes the important factors which help inform an investment decision.
In the context of a startup, these factors include a minimum of the team, the market, traction (if the company has it), and the investment terms. It can also include case-specific factors like likely future expansion areas and regulation.
Rather than invest solely based on consuming the information presented by the company you’re evaluating, the advantage of investing based on an investment memo that you prepare is that it forces you to articulate your understanding of the company. Doing so may help you identify weaknesses in the argument you’re trying to make which may lead you to reconsider your conviction in the investment, holes in your knowledge which you need to go back and address, or alternative approaches to areas like the team, market, and investment terms which you may want to discuss with the company.
In terms of format, investment memos tend to come in the form of Word documents or Powerpoint presentations. I prefer written text because it promotes substance over style and forces you to articulate your thoughts at the level of depth enabled by sentences rather than the more superficial level which results from using bullet points.
And an investment memo doesn’t need to be long. If you’ve done your research and thought about the startup at length, 2 to 3 pages of crisp text written in half a day is all it takes.
The resulting improvement in the rigor of your thinking and the quality of your investment decision makes the time investment well worth it.
I was recently speaking with another investor about how successful our companies are at recruiting.
At the surface, one might expect a company’s recruiting success to be tied to the strength of their brand and the financial offer they make to candidates. Traction is a pretty good proxy for the former and the combination of profitability (or a lower net burn rate) and funding are good proxies for the latter. And this is indeed broadly the case. Companies with more traction and a better net funding position are more successful at recruiting.
However, during our talk we also identified several outliers in our portfolios. Specifically, some companies were punching well above their weight by attracting a level of talent that’s difficult to justify by looking only at their traction and net funding position. So there must be at least one, or perhaps more, variables that we’re missing. I think there are two.
The first is the founder’s ability to inspire others to join them in the pursuit of a shared vision. This comes from being authentic, being able to clearly communicate your vision, and caring about the people you work with.
The second is how much time the founder spends recruiting. All else equal, the more time you spend meeting candidates the more likely you are to hire the right people. Together with setting the company’s vision and keeping it funded, recruiting is one of the three most important responsibilities of a startup founder. And some founders have internalized this more than others.
Your traction and net funding position determine your weight when recruiting. Your ability to communicate your vision in a way that inspires others and the time that you dedicate to recruiting let you punch above your weight.