PS#059: My Approach to Building IC Materials
Last week, we started breaking down the investment committee memo.
Today, I am going to walk through a structure and framework that I think works well for presenting opportunities to your investment committee.
To be clear, this isn’t just a bunch of talk. I actually use this framework for all of my deals.
I’ve been iterating and improving upon this process over the course of my career. The version I present here is the best one I have to date.
I truly believe this process has made me a better investor.
The process of synthesizing information, summarizing diligence, and communicating the vision to my investment committee helps me understand the company and opportunity at a deeper level – allowing me to be a better investor and partner for my portfolio companies.
Quick disclaimer – this issue is going to be a bit longer and more detailed than others. I recommend leveraging it as a reference guide for you to use in your work.
Grab a cup of coffee, get comfortable, and let’s get started.
How do I organize all of this information?
In the last issue, I provided a long list of information to be included in the investment committee.
For most, it’s overwhelming.
If not presented properly, I agree.
I prefer to structure my IC materials in the following manner…
Executive summary
Investment overview
Company overview
Market opportunity
Go-to-market strategy
Performance to-date
Deal analysis
Financial analysis
Key risks
Next steps
Summary of diligence
Let’s dive into each of these in more detail…
My IC Materials Approach
In the approach below, I’ve provided a description of what should be included as well as a list of questions I try to make sure I’ve answered in my materials (because they are questions the IC will almost always have as a part of the investment).
As I’ve mentioned, there are many different formats and styles for IC materials. There’s no right or wrong way. It’s all about clearly communicating the details outlined below.
Executive Summary
This should summarize the key takeaways of the opportunity for your investment committee.
Like most senior executives, your investment committee members have a lot on their plate. They are putting out fires, overseeing investments, managing fund operations, reviewing multiple new opportunities, fundraising from LPs, etc.
It’s a lot to handle.
The solution? Providing an executive summary to set the stage.
This should include and answer the following questions…
What does this company do?
How have they performed to-date?
What is the expected performance going forward?
What is the investment opportunity and our recommendation?
What is our underlying thesis?
Investment Overview
Next in line is defining the investment opportunity itself.
This should answer the following…
What’s the context for this deal?
How did we find the opportunity?
What is our investment thesis for the opportunity?
How does this opportunity perform against our fund’s investment criteria?
What is the structure for this investment?
What is our allocation in the deal?
What are the terms for the deal?
Who else is participating?
Company Overview
OK, now it’s time to dive into more detail on the company. This is where we will define the problem, solution, and other details around the company.
In this section, I look to answer the following…
What is the underlying problem?
Who has this problem?
What is the company’s proposed solution?
Why is this the right solution to the problem?
What’s the product roadmap?
Who’s on the management team?
Why is this the right team?
Who is on the Board?
What value does the Board bring to the table?
Will we be on the Board? And, if so, in what capacity?
Market Opportunity
From here, I like to dive into the market opportunity. I’m attempting to highlight two things: (1) why this is a big, venture-backable opportunity, and (2) how this company stacks up against competing solutions.
This should include and answer the following questions…
How big is this market?
How do we segment this market?
How many people, companies, etc. have this problem?
What are they willing to pay for this solution?
What’s the progression for capturing this market (i.e., near-term, long-term, etc.)?
What is the competitive landscape?
How is this company’s solution differentiated?
Why will this company have a sustainable competitive advantage?
Go-to-Market Strategy
Once we’ve defined the solution and the market, we can discuss the go-to-market strategy for the company. Essentially, defining how they are selling or bringing this solution to market.
This should answer the following…
Who are the buyers, users, and champions?
What is their motivation for buying this solution?
What are the initial and expansion target markets (i.e., industries, geographies, company types, etc.)?
How is the solution priced?
What is the strategy for selling this solution to new customers?
What’s the strategy for expanding within the current customer base?
Who is needed to sell this solution?
Performance To-date
After defining the strategy, we want to outline the progress the company has made to date. This will often depend on the stage of the company. If it’s very early, this may be more focused around building the team and product. If it’s a bit later, it’s likely around the customer traction and revenue. We’re going to focus our questions on the latter scenario.
With that in mind, I will typically answer the following…
What has been the company’s revenue or customers growth to-date?
Who is in the current customer base?
How do we expect the customer base to evolve?
What are the unit economics?
What are the customer acquisition costs?
What is the lifetime value of a customer?
Have any customers churned? If so, why?
Do contract values expand or contract over time?
What’s the current pipeline?
Does it match the target market and customer base?
What’s the expected growth of the company?
Deal Analysis
Now, it’s time to get into the nitty gritty of the deal.
We’ll want to make sure that we answer the following…
How will this capital be used?
What are the expected milestones for the company with this round?
What was the ownership structure prior to this round?
What will the ownership structure be after this round?
How does this compare to comparable venture investments?
What will our ownership be in this round?
What do we think of those participating in this round?
How do they handle reserve capital and future rounds?
What are the exit opportunities for this company?
What are our exit assumptions?
Who are the potential acquirers?
What valuation multiples can we expect to receive?
How many future rounds do we expect for this company?
What is our strategy for future dilution and investment?
What are the different exit scenarios?
How are we protected in a downside scenario?
Financial Analysis
Pieces of our financial analysis will find its way into many of the sections above, but it’s important that we discuss it in its own section. We will use this portion of the IC materials to walk through the historical financials and future financial projections of the company.
Our materials should answer the following questions…
How have the company’s financials looked historically (i.e., over past years, quarters, or months)?
What has the historical revenue growth been?
What are the historical COGS and gross margins?
What is the overall cost structure?
How much has the company spent on product development, sales & marketing, etc.?
What is the current cash position?
What has been the company’s cash burn historically?
How capital efficient has the company been to-date?
What do the company’s future projections look like?
What do we expect for future revenue growth?
What will COGS and gross margins be going forward?
What will the cost structure be going forward?
Where will the invested capital be used?
What will the cash burn be going forward?
How much runway will this financing round provide?
When will the company be profitable or need to raise another round of capital?
Key Risks
Every venture capital investment has risks. There are no sure things.
It is our job to identify those risks and provide the rationale for why we are comfortable with them. To make sure we do so, our materials should answer the following questions…
What are the market risks?
What are the risks around the people?
What are the technological or competitive risks?
What are the financial and deal risks?
Next Steps
As I’ve mentioned, it’s critical that we decide and agree upon what to do next.
In our materials, we should define what we believe are next steps and be prepared to discuss the following questions…
What are we asking of the IC (i.e., approval for an investment, term sheet, etc.)?
What is left to do from a diligence standpoint?
What legal structuring or negotiating is left?
What is the timeline for close?
Summary of Diligence
Finally, I like to finish with a summary of the work we’ve done. This will include the analyses we performed, the conversations we had with the company, reference calls done on the investors, management team, customers, etc., and our general takeaways.
We should answer the following…
What off-sheet references were performed?
What on-sheet references were performed?
What diligence or analysis did we perform?
What conversations, discussions, or onsite did we have with the company?
Who did we speak with from the company?
What co-investors or existing investors did we speak with?
What were the main takeaways from this diligence?
Step 2: Building consensus.
Whew, that was a lot.
Take some time. Digest it. Review it. And, of course, leverage this to make sure you’re covering everything you need in your investment committee meetings.
In the next issue, we are going to discuss the second step for preparing for investment committee meetings – building consensus.
