What are the main sections of an investment memo?
Market Opportunity
Competitive Advantage
Team/Founder
Risk
What is one of the areas that people get too caught up with when it comes to evaluating company potential?
Market share
e.g., San Fran didn’t have a huge black car market until Uber
What are the attributes of a well-structured memo?
Short
Simple
To-the-point
clear
Is the job of a VC to avoid risk?
No, the job is to understand it
–> need to highlight all your learnings on the space
–> the risks section can be one of the longest sections of the memo
What are the 3 metrics to evaluate market size?
TAM: Total Addressable Market
SAM: Serviceable Addressable Market
SOM: Serviceable Obtainable Market
Taking the example of Uber, what would be the elements of market size?
TAM: Transportation globally
SAM: taxis in the US
SOM: Black cars in SF
What is SOM often referred to as and why?
The SOM can often referred to as a “wedge”
–> it helps you validate something and get product-market fit in a very narrow market
–> the SOM itself is not big, but it helps you to unlock bigger markets
Why is the TAM considered the king of all market calculations?
It assesses a company’s future potential and overall growth opportunity.
Needs to be in the hundreds of millions for VC to see potential
What is a criticism of Investment Memos?
Very sales based and usually used to try to convince someone higher up about the deal
What is the innovators dilemma?
Can x company get big enough before a large company ends up in that market
What is a competitive advantage?
Something that you have that your competitors will not be able to replicate with their offering
As a founder should you start by going big or small?
Need to “sell” a big vision to investors and employees (TAM)
However, you need to execute on a small wedge to de-risk the business (SOM)
What is market penetration?
to launch a product, enter the market as swiftly as possible, and, finally, capture a sizeable market share
What questions must you ask to determine the effectiveness of the market penetration strategy?
- Is the current market size right?
- Is the company creating a brand new market that doesn’t exist?
- Are there network effects? If so, the penetration rate can be extremely high
What is the network effect?
the phenomenon whereby a product or service gains additional value as more people use it.
What are forms of competitive advantage?
- Technology/ Intellectual Property
- Network effects
- Resources (access to capital/talent)
- Experimentation (investors’ dilemma)
Why can a startup succeed against a
large incumbent?
- Culture of experimentation
- Threat of extinction
- Less stakeholders to please
- Allowed to make mistakes
When having the initial meeting with a founder what key things should you ensure gets achieved in the process?
- only ask for the data that you need
- your goal is to get to the 3 questions that matter
- be transparent (don’t drag out the process, be honest, keep in short)
When having the initial meeting with a founder what key things should you ensure gets achieved in the process?
- only ask for the data that you need
- your goal is to get to the 3 questions that matter
- be transparent (don’t drag out the process, be honest, keep in short)
When evaluating the founder what should the VC be weary of?
- Co-founders should have complementary skills
–> 2-3 co-founders is optimal
–> Solo founders are a red flag
–> looking for a mix of skills - Academics should be evaluated carefully
–> Are they “do-ers.”
–> only relevant for fields that require deep technical background (e.g., healthcare)
–> have they built something before? - Should have excelled at something in their lives
–> Most tier 1 founders are exceptional at something (e.g., violin as a kid)
–> demonstrates that they are capable of greatness, even if it isn’t in the business - Ideal founder has startup experience but also spent time in a big company
–> Experienced the industry and wants to disrupt it
–> Have a unique mental framework
In order to generate true alpha you need to make a prediction about what?
Something that the market is NOT pricing in
What two attributes must you have to build something massive?
Being both right and contrarian
–> just being right is not enough because the market won’t be big enough
How can you ask great questions to a founder during a meeting?
- The founder spends 24/7 thinking about their business, you do not
–> be humble
–> be a ‘learn it all’ not a ‘know it all’
–> be open to being wrong
–> absorb knowledge, even if you disagree - Come prepared having done research
–> show you care and your market knowledge
–> ask questions they may have not heard before
–> get to the burning questions rather than the standard questions - Make it conversational
–> its not an interview, its a relationship building process
–> treat them as a partner/friend from the get-go
–> be professional, prepared, and engaging - Figure out how you can help them and if there is a match is supply and demand
What is a bad question for a VC to ask?
All of the “bad” questions are things you could have found on your own
Examples:
- How big is your market?
- How did you perform last year?
- What are the biggest risks?
