Decoding the VC Perspective: Navigating Startup Evaluation Memo

A VC memo is a crucial tool for venture capitalists to evaluate startups. It allows to:

• Document the thinking: The memo forces the VC to think critically about the startup and its potential. This can help them identify potential risks or challenges and make a more informed decision about whether or not to invest.
• Communicate with their partners: The memo can communicate the VC’s thoughts on the startup to their partners. This helps build consensus within the VC firm and ensures everyone is on the same page about the investment.
• Track their investments: The memo can track the VC’s investments over time. This can help them assess their portfolio companies’ performance and make adjustments to their investment strategy as needed. It also helps to debrief the decisions in retrospect.

Here are the main sections you wish to have in your next memo:

Introduction

Begin with an overview of the startup, including its name, founders, and a brief description of its product or service. In some cases, it’s good to anchor the startup with an analogy like: “Uber for cats” – That will help frame the new service/product and help understand what the startup is coming to do in the world. Make it clear what problem the startup is trying to solve.

Investment Thesis

1. State the investment thesis that aligns with the VC firm’s focus and strategy.
2. Explain why the startup fits this thesis and presents an attractive investment opportunity.
3. Focus on ‘why’ this specific team/startup is a sound investment.

Market Opportunity

1. Assess the startup’s target market (TAM), including its size and growth potential.
2. Analyze industry trends, customer needs, and the startup’s unique value proposition within the market.
3. Competitive landscape – who are the known competitors and the hidden ones.

The Solution (Product/Service) Evaluation

1. Evaluate the startup’s product or service, highlighting its differentiation, competitive advantage, and potential for scalability.
2. Consider factors such as technology, intellectual property, entry barriers, and innovation potential.
3. Does it have an IP or other ‘moat’ to keep the competitive advantage?

Business Model

1. Assess the startup’s business model, including revenue streams, pricing strategy, customer acquisition, and distribution channels.
2. Analyze the sustainability and profitability of the model.
3. What are potential risks or challenges?

Team

1. Evaluate the startup’s founding team, including their experience, expertise, and track record.
2. Assess their ability to execute the business plan, adapt to challenges, and attract talent.
3. Highlight any gaps in the team and how they could be addressed.

Financial Analysis

1. In this section, we are trying to answer “What is the startup’s valuation?”
2. Review the startup’s financials, including historical and projected revenue, expenses, and profitability.
3. Assess the assumptions made in the financial projections and perform sensitivity analysis to gauge the startup’s financial health and potential return on investment.

Risks and Mitigation Strategies

1. Identify and evaluate the risks associated with the startup, such as market competition, regulatory challenges, operational risks, and financial constraints.
2. Propose potential strategies to mitigate these risks and assess the startup’s resilience.

Investment Recommendation

Summarize the evaluation and recommend whether the VC firm should invest in the startup. Justify the recommendation based on the analysis conducted throughout the memo.

Conclusion

Conclude the memo with a concise summary of the key points, a final recommendation, and any additional comments or considerations.

Good luck!