Venture Capital (VC) deal memos are critical documents in the venture capital investment process. These memos provide a detailed analysis of potential investment opportunities, offering insights into the startup’s viability, market potential, and associated risks.
Significance of Deal Memos
VC deal memos serve as a key tool for investment decision-making. They include:
Startup Evaluation: Assessing the company’s business model, market size, and scalability.
Risk Analysis: Identifying potential risks and how they can be mitigated.
What is a deal memo used for?
Structuring Thinking: Deal Memos help VCs align the company’s potential with their investment thesis. They document initial assumptions, test their validity, and assist in decision-making. These memos facilitate quick evaluation of company-founder alignment and influence decisions for further engagement or due diligence.
Conducting Diligence: Central to due diligence, Deal Memos aid VCs in examining various business aspects. They ensure investments align with the firm’s thesis and commitments to Limited Partners (LPs), fulfilling fiduciary duties.
Sharing Facts: As a key documentation tool, Deal Memos succinctly summarize and communicate vital deal information among stakeholders, vendors, and partners. They are crucial for the Investment Committee’s decision-making process.
Memorializing Assumptions: Deal Memos record the VC’s rationale at the decision point, enabling retrospective analysis. This practice helps in refining decision-making processes and reassessing investment thesis and assumptions against market trends and outcomes.
Components of a Deal Memo
A typical VC deal memo includes several critical sections:
Executive Summary: Brief overview of the investment opportunity.
Company Description: Detailed analysis of the company’s business model and product.
Market Analysis: Evaluation of the market size, growth potential, and competition.
Financial Analysis: Review of financial metrics, projections, and funding requirements.
Management Team: Assessment of the company’s leadership and their competencies.
Who writes them?
The author of the Deal Memo can depend on the situation. Though partners are the ones to vote on a deal and write checks, in large established VC firms this task can fall on more junior members such as Associates and Analysts.
A pivotal point to take note of is the source of the deal. Typically, said junior members screen incoming deals into the fund and produce Deal Memos for the top percentile of incoming deals. On the other hand, a partner may also choose to write a Deal Memo for a deal they’ve sourced and are championing to the committee.
What makes a good Deal Memo?
We believe that central to a good Deal Memo is information regarding the founder / team, market size, company growth metrics, and the deal momentum / dynamics.
Note that Deal Memos are not standardized across stage, firm, or geography. Each firm has its own set of preferences and there is an overall lack of transparency in the industry. The contents and complexity of the Deal Memo can therefore depend on a plethora of factors.
Typically, Deal Memos need to be concise and informative in the early stages of consideration and a simple one-pager will suffice in screening. In the later stages of consideration, they need to be more comprehensive and metric-driven and the analysis should be in-depth and backed by data.
Consequently, the venture capitalists can collect information over time and continue to evaluate the deal while providing guidance and assistance to the founders of the company.
An example, you can refer to is Roelof Botha’s Seed Stage YouTube Deal Memo for Sequoia. Here you can see the increase in detail and analysis as the deal moves along the investment process.
Strategic Considerations
In evaluating a deal memo, investors focus on:
Market Opportunity: The potential for growth and market capture.
Innovative Edge: The uniqueness and defensibility of the company’s product or service.
Team Strength: The expertise and track record of the management team.
VC Lab’s Deal Memo Template
The venture capital industry lacks transparency /openness and VC firms typically tend not to share internal resources into their investment process.
At VC Lab we are committed to democratizing information and access to the venture capital industry. As such, we invite you to share your opinion and give feedback on our open resources.
Find below our Deal Memo template and join us in creating an open and transparent set of resources for both venture capitalists and founders by sharing your feedback and suggestions in our live document below.
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