Securing an allocation in an investment opportunity is only half of the battle an investor faces when participating in deals. If you’re raising capital from other LPs — like in a Special Purpose Vehicle (SPV) — you’ll have to compel your network to trust your due diligence and join in on the opportunity with you.
Investors use a written document called a deal memo to communicate the specific details of the investment opportunity and pitch to their network.
In this article, we’ll explain how to write a deal memo to inform and excite your network, giving you the best chance at a successful fundraise for your next investment opportunity.
Understanding the deal memo
A deal memo is a written document that an investor prepares for their network before soliciting capital for an investment opportunity.
Over time, deal memos have become ubiquitous in the startup community as new technology and regulations have allowed investors to raise SPVs with greater efficiency. Companies like AngelList, Carta, and Sydecar exist today to make it easier for an investor to raise and deploy capital from their network into private companies.
Given the growing popularity of syndicate deals in the venture capital and startup ecosystem, it’s become increasingly important for investors to write deal memos that clearly communicate the investment opportunity at hand.
Deal memos should contain relevant information on the company, like a market analysis, business model explanation, key risks and opportunities, the competitive landscape, and information on the executive team.
Preparing to write a deal memo
Preparation is a key component of writing an effective deal memo. This step in your process has two main parts: gathering information provided by the founder and your own independent research.
Information given by the founder
By the time you decide to pursue a deal and raise capital from your network, you’ve likely had several interactions with the founder, either by email or phone.
A founder will typically provide deal materials that outline key details from their perspective, usually framed as a pitch. These materials can include a pitch deck, a written deal memo, or video recordings.
You’ve also likely had the opportunity to meet the founder and ask specific questions.
Any information provided by the founder can be important supplementary context for your own deal memo. Company-provided information helps investors understand the company’s financial health, its unique business model, how the technology is built, and customer satisfaction.
Independent research
The information gathered from the company is only the first step in preparing to write your deal memo.
Next, you’ll want to gather additional information on your own — like the industry’s competitive landscape, the size of the total addressable market (link here), the backgrounds of each executive team member, and customer satisfaction in the market.
Structure of a good deal memo
Writing a good deal memo is about telling a story. The better your deal memo is structured, the more likely an investor in your network will be able to follow along, step by step.
Here are the key sections that should be included in your memo as you tell the story of the investment opportunity.
Highlights
The beginning of your deal memo should be reserved for the most compelling aspects of the deal.
Details worth highlighting may be that the company has experienced significant traction to date, or is led by a seasoned entrepreneur. These notes could also include certain partnerships, key clients, or other strong investors in the fundraising round.
The point of this section is to excite your readers so that they’re interested to continue reading the rest of the deal memo.
Executive summary
Building a business in the private markets is as much about the skills and abilities of the team as anything.
Use this section to break down the founders’ and their key executives’ backgrounds, past experiences, and skill sets.
Some examples that investors like to see include a team member who has led a successful company before or was in charge of an important function that grew rapidly under their leadership. As a founder or CEO, past fundraising experience or successful exits are meaningful because these can be great learning lessons for the current company. Technical abilities and past research are also worth noting if the company is in a deep tech or sciences field.
Company overview
This section is meant to educate the reader on the fundamentals of the investment opportunity.
You should explain in basic terms what the company does, which customers the company serves, and why the company’s solution is necessary now.
The deal memo will expand on the details of many aspects of the business below, but the company overview is meant to set the stage for what this company is that you’re raising capital to invest in.
Market opportunity
One of the key questions investors want to answer while reading your deal memo is, “If all goes well, how big could this company actually get?”
In venture capital, most startups fail to raise subsequent funding and deliver a positive return to their investors. To accommodate for a high failure rate amongst startups, investors want every investment to have the potential to return such a high multiple that it makes up for all of the investments that went to zero — this is called the “power law.”
In order to answer this question, your deal memo should include quantitative market sizing for the Total Addressable Market, as well as the Service Available Market and the Service Obtainable Market.
Other supporting details for your market analysis can include:
- How many customers suffer from the problem the company is solving
- How much those customers pay for a solution now
- Given the company’s current (or expected) business model, how much revenue the company could generate
With standard market multiples, you want to be able to show your network how much this business could be worth in a future exit scenario.
Product analysis
Your product analysis should first explain in simple terms what it is that customers are paying for.
In addition, you can include technical specifications through graphics or a demo video if available.
This section can also highlight unique differentiating factors that make the company’s product or service a better option to other alternatives on the market.
Business model
Some businesses might sell a one-time product, while others use a recurring or subscription model.
For companies that sell both hardware and software, they might have a two-pronged business model — a one-time hardware purchase with an additional software subscription.
In this section, you can expand on the company’s mix of revenue sources. For example, it’s worth noting if the company has a high concentration of large enterprise customers compared to its middle market customers.
Growth and traction
A company’s existing growth rate and traction help investors understand how quickly the business is acquiring and retaining new customers. The greater a company’s growth rate is, the more proof it has that customers want its products.
As a company grows and matures, investors increasingly care about these important metrics as a way to de-risk the investment opportunity. Startups can also attract a high valuation by showing strong growth and traction.
Financial overview
This is where the bulk of your quantitative data will live.
Depending on the stage of a company, the founder may provide you with varying levels of financial statements. Even at the early stages, it’s a helpful exercise for founders to deliver a basic forecasted income statement so that investors can understand how the founder is thinking about the financial health of their company.
As time goes on, financial statements will become more robust and should include a full package.
As the lead of the SPV, you should take any financial information the company provides, and supplement it with your own financial analysis.
If the company is young, your analysis could be as simple as extrapolating its pricing model over the market opportunity to show revenue expectations. Over time, your financial analysis can be more robust, showing market comps and pricing models like a Discounted Cash Flow analysis.
Risk assessment
Every company has its own unique risks. Unsystematic risks — risks that are company-specific — include anything from executive key-person risk, business model risk, execution risk, and technical risk. Systematic risks — risks that are tied to the broader market — include changing interest rates, consumer trends, funding cycles, and geopolitical risks.
When describing the risks of the company, it’s important to be transparent and detailed in your analysis. Your investors understand that every company has their own set of risks. By being upfront about your core concerns, you will be able to build trust better with your network.
Competitive landscape
Don’t be afraid to disclose information on the company’s competitors. Like risks, most companies will have competitive pressures, whether these are direct competitors with competing products, or adjacent companies that serve a similar customer base.
This is your opportunity to inform your network of how the company’s customers are being served today. It’s also an opportunity to highlight the advantages of the company over its competitors. What makes the target company better suited to serve its customers?
Investment thesis
At the end of your deal memo, you want to wrap up the key points you made throughout the document, providing takeaways of key strengths, potential risks, and why you ultimately have conviction in the investment opportunity.
Transparency is key and this is your opportunity to explain your thought process behind your investment decision and why you think others should commit as well.
Tips for writing an effective deal memo
With this structure in mind, here are a few additional do’s and don’ts for writing an effective deal memo:
Do: Write with clarity and conciseness. Every sentence should have a reason and be written to inform the reader. Be objective in your analysis.
Don’t: Use fluff words or vague analysis. Although you’re writing a story about the investment opportunity, it’s not a storybook. Get to the point.
Do: Support your claims with data. Back up statements with relevant data provided by the company or through independent research.
Don’t: Make statements sound objective if it is your subjective opinion. Distinguish between your belief about something and data that can be cited.
Do: Use visual elements — either graphics, charts, tables, or even videos — to present information.
Don't: Write in big block text. Remember, you want to grab your reader’s attention so they keep reading about the investment opportunity. Make sure your deal memo is dynamic in its presentation and compelling to read.
Common mistakes to avoid
Writing a deal memo is a new experience for many startup investors. Here are some common mistakes to avoid whether this is your first time or you’re a veteran investor:
Lack of detail
Your network is trusting you to provide full and transparent information. After all, they don’t have the time to do much of their own due diligence on the opportunity. That's what you’re there for (and how you earn your carry).
Ensure that your deal memo is thorough and not skimping on any important information.
Overlooking risks
It may be tempting to glide by the risks section of your deal memo. After all, you’re trying to sell the investment opportunity.
This common mistake does more harm than good and tarnishes the trust that you’ve built with your network of investors.
Pitching too hard
Writing a deal memo involves balancing between being objective with your analysis and explaining to your investors why you’re bullish on the investment opportunity.
You’ll want to stick with an objective analysis of the company and market. With that said, your network wants to know why you personally are excited about the opportunity since you’re the one who has done the full due diligence and has been in contact with the founder.
Writing a great deal memo takes practice. Although there’s not a single correct way to write one, our guide will ensure that you communicate effectively with your network so that they have the information they need to make an informed investment decision.
Tucker McKay