Investment Memo Drafting (Investment Memo Drafter)

1. Overview

This procedure converts raw deal‑team input into a polished, structured investment memo. The memo contains a concise overview of the target company, the investment rationale, key financial and market data, identified risks, and proposed deal terms. The output is ready for review by senior investment staff and for presentation to the investment committee.

2. Business Value

• Consistent Documentation – Guarantees every deal memo follows the same structure and language, making it easy for reviewers to locate key information.
• Speed – Saves time for associates by turning raw notes into a ready‑to‑present document.
• Decision Quality – Ensures all critical data (market size, financials, risk factors) are captured and reviewed.
• Auditability – Provides a clear audit trail of the rationale behind each investment decision.

3. Operational Context

• Primary Users: Investment Associates (and later, senior investment staff).
• Frequency: Once for each new investment opportunity (e.g., seed, Series A‑D, or acquisition).

4. Inputs

4.1 Required Inputs

Note: If any required item is missing, the process must be paused, the missing item flagged, and a request sent to the deal team for completion.

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5. Outputs

Output Details

• Memo Structure – Use plain‑text headings (e.g., ## Executive Summary).
• Tone of Voice – Formal, business‑like, neutral (no slang).
• Formatting – Paragraphs left‑aligned; single‑spacing; line break between sections.

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6. Detailed Plan & Execution Steps

1. Collect All Inputs – Gather all documents and data listed in Section 4.
2. Check Completeness – Verify that each input item is present; if any are missing, send a “missing‑information” notice to the deal team and halt the process.
3. Read the Company Overview PDF – Extract the company’s mission, product description, and leadership background.
4. Summarize the Company – Write a concise paragraph (50‑80 words) for the Company Overview section using the extracted information.
5. Compile Market Data – From the Market Analysis list, compute the total market size and growth. Summarize in a paragraph and include a bullet‑point list of main competitors.
6. Summarize the Business Model – Use the Business Model Summary to describe the revenue model, pricing, and key customer segments.
7. Create the Financial Overview – Insert the financial numbers into a short paragraph (e.g., “Revenue for FY‑2023 was US $12.4 M, a 30% YoY growth.”) and add a Key Metrics Summary table (see Output section).
8. Draft the Investment Thesis – Re‑phrase the supplied thesis into a short, compelling paragraph (max 3 sentences).
9. List Risks & Mitigations – For each risk in the input, write a bullet‑point entry: “Risk: description – Mitigation: …”. Ensure each risk includes an impact rating (High/Medium/Low).
10. Summarize Deal Terms – Write a bullet‑point list of the main deal terms: investment amount, equity, valuation cap, liquidation preference, and any special clauses.
11. Write the Recommendation – Use a single sentence stating the recommended action (e.g., “Recommend proceeding with a US $2 M investment for 15% equity at a US $12 M pre‑money valuation”).
12. Assemble the Memo – Place each section in the order defined in the Output table, using bold headings, bullet points, and proper spacing.
13. Apply Formatting Rules – Check that all headings are bold, numbers are correctly formatted with commas, and the tone is formal.
14. Quality Review – Verify:

• All sections are present.
• Numbers match the Financial Summary.
• Every risk has a mitigation entry.
• No placeholder text (“TODO”) remains.
• No internal IDs or system‑generated codes appear.

1. Finalize Output – Produce the Investment Memo Draft and the Key Metrics Summary as plain text (or Markdown) following the format in the Outputs table.
2. Save / Deliver – Provide the two outputs to the associate’s inbox or designated sharing location.

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7. Validation & Quality Checks

• Section Presence – Verify all eight memo sections and the recommendation are present.
• Numeric Accuracy – Cross‑check every number in the Key Metrics Summary with the values from the Financial Summary input.
• Risk/Mitigation Pairing – Ensure each listed risk has a corresponding mitigation entry.
• Formatting – Confirm heading capitalization, bolding, and bullet‑point usage; confirm currency formatting.
• Spell‑Check – Run a spell‑check for spelling and grammar.
• Missing Data Check – If any input item is absent or flagged “N/A”, highlight the line in the memo with “Data not provided – needs manual review”.

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8. Special Rules / Edge Cases

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9. Example

Input (single run)

• Deal Name: AlphaTech Series A
• Company Name: AlphaTech, Inc.
• Industry: AI‑enabled SaaS
• Deal Description: Series A round seeking US $2 M for 15% equity; lead investor is Capital Ventures.
• Company Overview Document (PDF): Provides overview of AI‑driven workflow automation platform, founded 2018, 30 employees, headquartered in San Francisco.
• Financial Summary: • Revenue FY‑2023: US $12.4 M (30% YoY growth) • EBITDA: US $1.6 M (EBITDA margin 13%) • Cash: US $4.2 M • Debt: US $0.5 M • Valuation: US $13.0 M (12× revenue)
• Market Analysis: • TAM: US $20 B (global AI‑automation) • SAM: US$5 B (North‑America) • Growth: 25% CAGR • Competitors: “WorkflowX”, “AutomateNow”, “SmartProcess”.
• Business Model Summary: Subscription‑based SaaS, $99 per user per month, 10‑year average contract length, 80% renewal rate.
• Investment Thesis: “AlphaTech’s AI‑driven automation platform addresses a rapidly growing market with a sticky subscription model and a proven team, offering high‑margin recurring revenue.”
• Risks:

1. Product Adoption Risk – Customer adoption slower than forecast.
2. Talent Retention – Key engineers have high turnover risk.

• Risk Mitigation:

1. Conduct pilot projects with anchor customers;
2. Offer equity grants to retain core engineers.

• Deal Terms: US $2 M for 15% equity, 1× liquidation preference, no anti‑dilution clause, board observer seat.
• Team Comments: “Strong founding team; product demo impressed. Need more data on churn rates.”
• Supporting Materials (PDF): Pitch deck (PDF), demo video link (PDF contains link).

Output (excerpt)

Executive Summary AlphaTech, Inc. is an AI‑enabled SaaS provider that helps enterprises automate workflow processes. The company generated US $12.4 M revenue in FY‑2023, a 30% year‑over‑year growth, and is seeking US $2 M for a 15% equity stake in a Series A round.

Company Overview Founded in 2018 and based in San Francisco, AlphaTech offers a cloud‑based AI platform that automates repetitive business tasks. The team is led by CEO Jane Smith (ex‑Google) and CTO John Doe (ex‑Microsoft).

Market Opportunity

• TAM: US $20 B (global AI‑automation)
• SAM (North America): US $5 B (25% CAGR)
• Key Competitors: WorkflowX, AutomateNow, SmartProcess

Business Model

• Revenue Model: Subscription SaaS at $99 per user per month.
• Customer Retention: 80% renewal rate, average contract length 10 years.

Financial Overview

• Revenue (FY‑2023): US $12.4 M
• EBITDA: US $1.6 M (13% margin)
• Cash: US $4.2 M
• Debt: US $0.5 M
• Valuation (pre‑money): US $13.0 M (12× revenue)

Investment Thesis AlphaTech’s AI‑driven automation platform addresses a rapidly growing market with a sticky subscription model and a proven leadership team, delivering high‑margin recurring revenue.

Risks & Mitigation

• Product Adoption Risk – Mitigation: Launch pilot projects with anchor customers.
• Talent Retention – Mitigation: Offer equity grants to retain key engineers.

Deal Terms

• Investment amount: US $2 M
• Equity: 15%
• Valuation: US $13 M pre‑money
• Liquidation Preference: 1×
• Board Rights: One board observer seat.

Recommendation Proceed with a US $2 M investment for 15% equity at a US $13 M pre‑money valuation, with a board observer seat and a focus on pilot‑based product adoption.

Key Metrics Summary

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Appendix A – FAQ

Q1: What if the financial numbers are not in the same currency? A: Convert all monetary values to US $ before entering them. If conversion is not possible, flag the issue and request a consistent currency.

Q2: How should I handle missing risk information? A: Insert “No risk identified” as a placeholder but flag the memo for review. The memo must contain at least one identified risk for completeness.

Q3: The pitch deck is a PowerPoint file – can I still use it? A: Convert the PowerPoint into a PDF and submit it as a Supporting Material PDF.

Q4: The deal team wants an informal tone. Can I change the tone? A: No. This SOP requires a formal and professional tone. If a different tone is needed, a separate SOP must be created.

Q5: What if the market growth rate is missing? A: Indicate “Market growth data unavailable – request update”.

Q6: Are percentages allowed for revenue growth? A: Yes, show percentages with one decimal place (e.g., 30.0%).

Q7: The company has multiple business units. How to present? A: Add a short bullet list under the Company Overview describing each business unit with its primary revenue contribution.

Q8: How to handle a case where the valuation is not disclosed? A: Insert “Valuation not disclosed – pending”. Do not leave the field blank.

Q9: The team has a conflicting opinion on the valuation. A: Capture both viewpoints in the “Team Comments” section and note that a consensus is needed.

Q10: How to treat a “N/A” entry? A: Replace “N/A” with “Data not available – to be supplied”.

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Appendix B – Glossary

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Appendix C – Reference Materials

C.1 Standard Investment Memo Sections (Template)

1. Executive Summary – 2–3 paragraph snapshot of the deal, including key financials, investment amount, equity offered, and overall recommendation.
2. Company Overview – One paragraph on the company’s history, mission, founders, and location. Include a short sentence on the team’s experience.
3. Market Opportunity – Include TAM, SAM, growth rate, and key market trends. Provide a bullet list of top three competitors and a one‑sentence description of each competitor’s market position.
4. Business Model & Product – Describe the product/service, pricing model, customer base, and revenue streams. Include a short paragraph on the go‑to‑market strategy.
5. Financial Overview – Present revenue, EBITDA, cash balance, debt, valuation, and multiples in a concise paragraph. Provide a Key Metrics Summary table with the main numbers (see Section 5).
6. Investment Thesis – 2–3 sentences explaining why the investment makes sense, referencing market size, business model, team, and financial metrics.
7. Risks & Mitigation – Use a bullet list format: Risk – Description; Mitigation – Action. Include risk rating (High/Medium/Low).
8. Deal Terms – List investment amount, equity, valuation, liquidation preference, any special rights (e.g., board seat), and any other material terms. Use bullet points.
9. Recommendation – Single sentence stating the action (e.g., “Proceed with a US $2 M investment for 15% equity”).
10. Appendix (Optional) – Additional supporting material references (e.g., link to demo video, full financial model, product screenshots).

C.2 Risk Categories

C.3 Tone & Style Guide

• Tone: Formal, professional, neutral. Use “the company” and “the investment” instead of “we”.
• Voice: Active voice (e.g., “The company generates…”).
• Verb Tense: Use present tense for facts, past tense for historical events, future tense for recommendations and forward‑looking statements.
• Numbers:
  • Use US$ for all monetary values.
  • Include commas for thousands (e.g., US $1,234,567.00).
  • Show percentages with one decimal place (e.g., 25.0%).
• Dates: Write as “Month Day, Year” (e.g., “June 15, 2025”).
• Bullets: Use “‑” as bullet marker. Indent sub‑bullets with an additional dash.
• Capitalization: Headings in Title Case. Use bold for main headings.
• Spelling & Grammar: Follow US English spelling (e.g., “analyze” not “analyse”).

C.4 Formatting Checklist

• All headings are bold and in Title Case.
• Sections are in the order listed in C.1.
• Numbers are correctly formatted (commas, two decimal places for currency).
• No placeholder text such as “TODO” or “XXXX”.
• No system‑generated IDs or reference numbers appear.
• All bullet lists are punctuated consistently (period or none, but consistent).
• The memo does not exceed 2,000 words.
• No external references (web URLs) are included unless they are part of the supporting documents.

C.5 Worked Example (Full)

[The full example can be found in the “Example” section above.]

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Additional Notes

• The SOP is intended for one deal at a time; each new deal requires a fresh run of the process with its own set of inputs.
• If you need to modify any section (e.g., add “Competitive Advantages” as a new heading), update the Standard Investment Memo Sections list in Appendix C.1 accordingly.
• Keep a copy of all source PDFs and the final memo in a secured, version‑controlled repository for future reference.
• For any clarifications beyond this SOP, consult the senior Investment Manager or the SOP author.