What do we base our investment decisions on? — Open source Deal memo Template
By: Savina Van Der Straten
Tags: Venture Capital, Startup, Practical Guides

If you look at the process during a startup’s fundraising, there are 3 common steps :

Contact : Startup reaches out to investors via introduction or cold request, or investor reaches out to founder. Assessment : The investor evaluates the startup. Deal : The investor is willing to invest and negotiates a deal with the startup.

At Point Nine Capital, we love to be transparent about what we are looking for as it usually makes life easier for both parties.

In this post we want to give a detailed overview of what we are looking at during the Assessment phase and, for this purpose, to open source our deal memo template.

The deal memo is a document we start to fill in whenever we take a closer look at a company. Its main purposes is to make it easy for the rest of the team to get up-to-speed with what the company is and to identify key points which have not been covered yet. We write the deal memo ourselves by collecting all the information we could get from the deck, conversations with the founders (email, meetings, calls), and also our personal research.

Our deal memo usually covers 9 areas including the following points ( you can download the template : PDF or Google Doc )

Note: the 9 components are not ordered by importance. E.g: “Team” is at position 7 here but it’s one of our most important criteria.

1 - Product

Simple description of the product and the problem : It’s very important for us to see that founders can explain quickly what problem their product solves and for whom (positioning). We are usually not expert in the industry they tackle so the simpler and shorter, the better.

: It’s very important for us to see that founders can explain quickly what problem their product solves and for whom (positioning). We are usually not expert in the industry they tackle so the simpler and shorter, the better. Core features : We don’t need an exhaustive list of the features, just the ones which are core to the product and make it special eg. ‘’online payment’’ would not be very relevant in our case.

: We don’t need an exhaustive list of the features, just the ones which are core to the product and make it special eg. ‘’online payment’’ would not be very relevant in our case. Product roadmap : We like to see that founders have a good vision of what their product will be in the next 6/18 months.

We like to see that founders have a good vision of what their product will be in the next 6/18 months. Product overview : We love to try the product ourselves and, if not possible, get a live demo, a video or some screenshots.

2 - Market

Description of target market : When founders describe their target market the more precise they are, the better. If they did not figure out what’s their precise target market yet that’s ok. But we want to see at least some potential segments and not some general statements such as ‘’all SMBs in Europe ‘’ because it gives us the feeling that founders did not research the market well enough.

: When founders describe their target market the more precise they are, the better. If they did not figure out what’s their precise target market yet that’s ok. But we want to see at least some potential segments and not some general statements such as ‘’all SMBs in Europe ‘’ because it gives us the feeling that founders did not research the market well enough. Total Addressable Market (TAM) estimate (bottom up and top down) : This is where we check if the size of the opportunity is big enough. We always double check the market size ourselves so we will not be fooled by some random numbers. We also often ask the sources of the numbers provided by founders.

: This is where we check if the size of the opportunity is big enough. We always double check the market size ourselves so we will not be fooled by some random numbers. We also often ask the sources of the numbers provided by founders. Market structure and dynamics : It’s important for us to understand the big current trends of the market and how it will evolve in the next few years. Any additional relevant information on the market is always welcome (in appendix of the deck or additional reports sent by email after the first call).

3 - Competition

List of incumbents : We always try to identify who the big players are.

We always try to identify who the big players are. Strengths and weaknesses vs. competitors : We want to know who the startup is competing with : positioning chart and competitive profile matrix are a “must have” in the deck. A statement like ‘’we do not have competitors’’ is usually not a great sign as it gives us the impression that the founders probably don’t understand their market well enough.

We want to know who the startup is competing with : positioning chart and competitive profile matrix are a “must have” in the deck. A statement like ‘’we do not have competitors’’ is usually not a great sign as it gives us the impression that the founders probably don’t understand their market well enough. Long-term competitive advantage : It’s totally fine to have competitors (many successful startups had plenty of competition at the time they started i.e. Booking.com) but we need to figure out how the startup can build defensible assets in the long run (complex tech, network effect etc.).

4 - Traction

KPI sheet with month-over-month numbers from launch to present : Marketplace : GMV, net revenue, average basket size, margins + any other relevant activity metric. SaaS : MRR, number of customers + any other relevant activity metric (here’s a KPI dashboard for early-stage SaaS startups ).

Marketplace : GMV, net revenue, average basket size, margins + any other relevant activity metric. SaaS : MRR, number of customers + any other relevant activity metric (here’s a KPI dashboard for early-stage SaaS startups ). Cohort analysis : a cohort analysis is super important for us to have a good grasp of the product’s usage and retention ( see our template and guide on that topic).

a cohort analysis is super important for us to have a good grasp of the product’s usage and retention ( see our template and guide on that topic). Sales pipeline (number and size of opportunities per pipeline stage, total pipeline value per stage, probability-adjusted pipeline value) : the pipeline is very useful for us to get some confidence about the future growth.

5 - Acquisition

Current acquisition channels and costs : We want to know what the startup has done to acquire customers so far and at what cost (SEO, paid search, direct sales, partnerships, content marketing, events, etc.).

We want to know what the startup has done to acquire customers so far and at what cost (SEO, paid search, direct sales, partnerships, content marketing, events, etc.). Plan in terms of sales & marketing : It can be easy to get some quick early traction without any sales and marketing effort as the startup is picking the low hanging fruits, made some good noise at launch or some other happy circumstances. However, what happens at very early stage doesn’t necessarily indicates what will happen at bigger scale. Therefore, we also want to understand what is the plan in terms of sales and marketing for the next months.

6 - Business model

Pricing : We want to know what is the current pricing and how it compares to similar products.

7 - Team

Founders’ strengths, weaknesses : This is something we evaluate during our interactions with the team (calls, emails, meetings) but also looking at the background of founders and by getting some references from previous experiences / common acquaintances. As a reminder, we are looking for animals.

This is something we evaluate during our interactions with the team (calls, emails, meetings) but also looking at the background of founders and by getting some references from previous experiences / common acquaintances. As a reminder, we are looking for animals. Quality of first hires

Result of tech due diligence : Rodrigo (our geek at Point Nine) usually evaluates the tech stack in more details following this framework.

8 - Funding/ Deal

Round size / timing

Runway : How much cash is left in the bank and how much time it will last.

How much cash is left in the bank and how much time it will last. Milestones that will be achieved with the investment : What does the startup want to do with the additional investment it’s raising.

What does the startup want to do with the additional investment it’s raising. Funding up to date : Who invested, when and how much.

9 - Reference calls

Customers : We always try to have quick 15min calls with some of the current customers as they are the best positioned to evaluate the product.

We always try to have quick 15min calls with some of the current customers as they are the best positioned to evaluate the product. Industry Expert references : As we are not expert in every industry we try to get insights from industry experts.

Having answers to most of these points before reaching out to VCs will definitely save you a lot of time and headache during the assessment process.

If you are an early stage SaaS or Marketplace startup looking to raise a late seed / early Series A round and ready to cover these 9 areas — feel free to start our process here.

Other useful resources when fundraising

You can find here some other useful resources already published by Point Nine Capital and other folks that can help you throughout your fundraising process :