I write a short memo for every angel investment that I make and I’ve practiced this for the last 10 years.
I do this because I believe that writing is refined thinking (to quote Stephen King in his book “On Writing“) and because memory can be warped over time. A memo best captures my thinking on the rationale and the risks of the investment at the time I made it. It’s also helpful to share with co-investors and helps build mutual trust and help refine the thesis.
Memos are typically 1-2 pages and I usually assess the Market, Team, Product and Traction between A-C (letter grades) in addition to the qualitative description. If a company does not have any As, then it does not make sense to invest and most great investments have more than one A but rarely all As.
At the earliest stages, Market and Team and the most important but as the companies mature and entry price becomes higher, Product and Traction become more important. In Africa, I rarely invest in companies without at least one paying customer unless I have very high confidence in the market and team.
Here is the format that I use – I don’t imagine there is anything groundbreaking here.
Background: What problem is the company trying to solve? How did I meet and get to know the founders?
Market: I need to believe that that market is currently big enough, or it could be big enough in the future. In newer investment markets (like SAAS in Africa) it’s important to understand the pain point and willingness to pay deeply when sizing the market. (e.g. can they only sell to other startups?).
Team: Teams that know each other well and have complementary skills are often excellent. The founders’ ability to tell a compelling story and paint a vision that allows them to continue to raise capital is also important. If the problem ios something that is authentic to the team in some way also helps a lot – understanding their “why” is something I over-index on in my calls.
Product & Business model: Summary of the product, stage of development and an assessment of product/market fit risk vs. execution risk. Clear synthesis of their business model in this section as well.
Traction: In newer venture markets like Africa, I look for some traction before investing. Traction, especially recurring revenue, has a 10x derisking effect on the business as there is some evidence of product-market fit.
Key customers/suppliers: Early stage B2B companies typically have only a handful of customers. As they grow I look for customer concentration risk. I try and call their early customers and ask how they would feel if I took the product away.
Competition: Who else is building in the same space? Are they competing against other startups or mostly outdated incumbents?
Investment Rationale: I try and crystalize “the why” for the investment as it’s one of the most important sections of the memo. My bar for investing are things I’d be happy spending my time but may not have the time or the skills.
Risks: This is another important section and one I come back to particularly in cases where it did not work out to see if I identified the reason it did not succeed upfront. For things that ultimately fail, I try and pattern match across them for future deals.
References: I try talk to at least one other investor, customers, or old colleagues of the founding team. Almost all my deal flow is through trusted referrals so this happens fairly naturally as part of the process.
Cap Table: Companies that have been around for a while may have strong fundamentals, but messy cap tables so this is a deal hygiene step to make sure I understand prior funding and equity ownership.
Investment: How much I’m investing, the round size, the terms and the key co-investors.
Hope this is helpful to both other angels and entrepreneurs.