Raising Your Institutional Round: Chapter 5
This is the fifth chapter of my upcoming book, “Move the Needle Anyway(s): Raising Your Institutional Round.” There are a total of 16 chapters. The book is currently with the publishers, however, I wanted to start sharing the content in a form of a series of blog posts so the startup ecosystem can benefit immediately. I hope you enjoy :)
Chapter 5: Write The Memo
Write the memo before creating the deck and snippet— the memo will provide you the DNA and content to create the deck, snippet, and key items in the data room. Crafting the memo is also an exercise of clarifying your thinking so you can understand your business from an outside investor’s perspective— what you are building, why it matters, and why the time to invest is now. A clear memo will be structured as follows:
Market Size & Opportunity: This is the market you are going after including a brief summary of how you arrived at your estimated number. Regardless of how strong your traction has been to date— if institutional VCs don’t believe the market is big enough to generate the returns they seek, you will be hard-pressed to convince them to invest. You can present both the Total Addressable Market (TAM) and the Serviceable Available Market (SAM).
TAM refers to the total market demand for a product or service. It's the maximum amount of revenue a business could possibly achieve if it achieved 100% market share in its intended market. TAM can be calculated using a top-down approach (starting from industry data and narrowing down) or a bottom-up approach (aggregating potential revenue from individual customers).
SAM represents the segment of the TAM that is within your business's geographical reach and that your business model can actually serve. It's a more realistic estimate of the market that can be reached and served in the near-term. Though, you might have a business offering that includes future product modules and packages that can allow you to capture more of TAM— if that is the case show how you arrive at your estimated numbers.
Here are some questions worth considering when you are writing about the market size and opportunity:
What is the market size for your wedge or beach-head?
What is the market size for the larger opportunity?
What assumptions about the market underpin your opportunity?
What negative biases do investors have about your industry and its constituents?
Given the negative bias investors might have— why should they keep an open mind?
Problem: Describe the problem your customer and/or market faces— the customer problem and the systematic level problem (e.g. everything is still on pen, paper, and physical servers). Where possible, quantify the business cost of this problem and show your logic here. Furthermore, you can also use the problem frame as an opportunity to differentiate how you define the problem compared to other incumbents— this helps position your unique perspective on your space. Here are some questions that you can use as prompts for this section:
What is the nature of the problem and what are the key assumptions that underpin that problem?
How do other incumbents approach the problem?
What other solutions exist— what are their strengths and what are their short-comings?
Why hasn’t this problem been solved yet?
What' hard things' have you and the team solved? And, which of those 'hard things' do others avoid even solving?
Solution: Describe your solution/product in terms of the benefits and points of difference. It also helps if you have a product demo (embedded video recording) or a set of screenshots that help the reader imagine what it is like to use your product. You can use the following questions to help frame this section:
Why do customers currently pay you? And why will they continue to pay you?
If customers don't currently pay you— why not? And, if you aren't charging them, why not?
Is the current product a wedge or beach-head into a much larger opportunity? If yes, why is your current focus an advantageous and efficient path to the larger opportunity?
What customer testimonials or case studies can you feature here?
Is your core product more of data-aquisition play, or, do you also anticipate it to be the core revenue driver for many years to come?
How have others approached the problem in your space— What’s worked well? What has failed to work, and why?
Traction: Depending on your business, traction can mean many things. However, more often than not, you want some leading revenue metrics in dollars, especially at the Series A. There are exceptions to the rule but here are some general metrics (SaaS mode) — you have the identify the metrics that matter for your specific business model:
Revenue in terms of ARR for example.
Revenue growth MoM, QoQ, YoY in % or multiples.
Retention in terms of Net Revenue Retention (NRR).
Net Promoter Score (NPR) to demonstrate customer satisfaction.
Total value of your qualified pipeline to show market pull/demand.
Noteworthy awards, press releases, or customer logos.
Go-to-Market (GTM): How do you currently acquire customers and how do they find you? This section is about how your sales and marketing engine help you generate leads, convert them to customers, and expand the value of each account. Here are a few questions that can help you frame this section:
What does the customer journey look like?
How long does it take for someone to go from first-touch point to signed contract?
How do customers pay you and for what? (i.e. pricing and packaging)
What is the average time to value?
How much does it cost to acquire a customer?
What is the Average Contract Value (ACV) of a customer?
What is the referral ratio for every happy customer?
What channel partnerships (or partnerships) do you have in place and why do they matter?
Product Strategy: How does your product and your future product roadmap strengthen the important aspects of your business such as speed of revenue growth, reduced onboarding times, CAC, and future monetization opportunities? In our opinion, it is more helpful to frame product strategy and GTM strategy as two sides to the same coin— the better they work in concert, the better your perceived business value. If you have covered the pricing and packaging strategy in the GTM section— this section will be about unpacking how the product fits well into that pricing and packaging.
What are some upcoming product milestones, and why do they matter?
How does your product strategy unlock more revenue potential in the near-term and the long-term?
How does your product strategy help you achieve better margins and unit economics as you scale?
What aspects of your product strategy make your offering stickier and more defensible?
Is your product going to be virtually self-serve in the future? Why?
Market Landscape & Competition: This is about helping people understand how to think about your positioning in your market— how you are differentiated and how you aren’t. Often, creating a 2 x 2 diagram is an effective way to help investors understand your competitive landscape and market positioning. This type of diagram typically involves two axes representing different dimensions that are critical to understanding market dynamics, such as price vs. quality, upmarket vs. longtail, personalization vs. generic. Here are some key questions you can answer as you craft this section:
Who are the key stakeholders— internal and external— to your business? E.g., customers, partners, regulatory bodies, talent pools, etc.
How does your business' success positively benefit those stakeholders?
How, if any, does your business' success harm those stakeholders?
Who are your incumbents, and why?
Which company in the market scares you the most, and why? If no company scares you, why not?
What are the core differentiators for your business?
Of those differentiators, which one(s) provide you the competitive edge against notary incumbents?
If a competitor were to win against you— what would they have to do?
What moats does your business currently have?
How does your current strategy help build even greater moats over time?
Where are the single points of failure in your business, if any? And, how are you building redundancies into those areas?
Leadership Team: A summary of the key leaders in your company. You are looking to communicate relevant expertise for your space, and the scalability of your team. This is also an opportunity to showcase your ability to attract and enroll key leaders Furthermore, recall the importance of social status— leverage college pedigree, prior startup success, high-value social associations, and the like. Here are some questions for your consideration:
Why is your current leadership team a match for the opportunity you are securing?
What are the largest teams you and your leadership have grown and/or led in the past?
What other startups of consequence have you and your team been part of?
What awards have you and your team achieved in the past?
Who are your advisors and existing investors? What important doors can they open for you?
Business Model: A good way to present this is to map out the key stakeholders and describe how funds flow between them— this indicates the nature of the relationships through financial incentive. Then, show how your company positions itself to monetize its offering(s). Depending on your specific business model, it may help if you use this exercise to develop a visualization of your flywheel. Here are some questions for your consideration:
How do the funds flow in the market you are serving?
How do you make money now?
How do you help others make money?
How else will you make money in the future?
What pricing model are you using, for what, and for whom?
Growth Forecast: This forecast shows how valuable your startup will be in the coming three to five years, assuming you are capitalized to execute against the opportunity, and things go as you plan. This will generally be a revenue forecast with key milestones along the way which can include things like hitting profitability, launching new product features/capabilities, expanding into international markets, and achieving new economies of scale. Now, most VCs won’t believe it— they will challenge it and the assumptions behind it (they should). However, the purpose here is to show your company’s revenue potential, signal well-thought out intent and aggression, and have a discussion about it. For potential VCs, you don’t want to signal the intent that you want to grow 1.1X Year-on-Year, for example. Here are some questions for your consideration:
What would additional capital allow you to achieve?
How will you deploy the new investment capital, specifically?
What is the opportunity cost to your business of raising later versus now?
Why should an investor invest in your business now versus later? And, if they were to invest at a later round— 6 or 12 months from now— what premium would they likely pay?
Executive Summary: Why Now? Your memo should have an easy-to-grok executive summary that provides the high level takeaways of your company and the opportunity ahead. Often, you will write this section after completing the sections above— then you loop this section to the front of the memo. It is a distillation of your key talk points at the highest level. To write this section, think through the three or so takeaways you want any investor to walk away with after reading the memo— this becomes the opening frame (the lead) for your memo. For example, you might want them to understand that:
Your GTM motion is working and is growing quickly at a very low CAC.
The market is pulling faster than you can respond, and in fact, the SAM is larger than you originally thought.
You have enrolled key industry players to join you on this venture and can’t hire fast enough— e.g. Hired strong industry leaders and secured mission-critical channel partnerships.
Most founders make the mistake by starting the communication piece with too much nuance. Start at the highest elevation and pace the investor to understand the more detailed nuance. It is like creating landscape painting or a landscape sketch— the artist will often start by outlining the general geometry of the land before filling in specific details like trees, animals, rocks, roads, and fences.