Market Research, Sourcing, and Investment Memos
By Chelsea Braithwaite, Brian Li, and Jon Samuel
When VCs evaluate start-ups to potentially invest in they have to look at all of the aspects of both the company and the market sector. Here, we learn about market research, sourcing, and investment memos.
Market Research
Market research is a crucial part of evaluating start-ups. Market research can be conducted under two different lenses: micro-investing and macro investing. Micro investing is stock investing, what everyday individuals do, and is based on public information. Macro investing is firm investing. It is well-rounded and delves into the firm’s viability. A firm is viable when long-term growth and success are expected. Great ideas happen daily, but great companies happen rarely, so it is important to know how to turn an idea into an investment. VCs are with companies for the long haul, so they have to ensure that they know what they are getting themselves into. When a VC invests in a company, they invest in both the company as a whole and every other company in the space, in order to understand the competition.
Micro and macro investing research require different questions to be answered. Below is an example, using the new Shake Shack in Hoboken, of what to look for when researching markets.
To gain the perspective of a VC firm, we looked at investing in both Tesla and Gamestop by answering these questions. Should a VC firm invest in this company? What products would you invest in? How can their pivot their company (if it is failing or on track to fail)? What are some potential issues surrounding investing in this company?
Tesla is a promising company that has in a sense become the “Apple” of transportation. They have new lithium-ion battery production and now accept bitcoin payments. They also have automated semi-trucks which have the potential to automate the supply chain. This would have an enormous effect on other markets and only help Tesla grow and succeed.
VCs shouldn’t invest in Gamestop. Although it has been growing a bit recently, it is bound to crash. The short growth was due to the internet and memes, not the company’s actual products or potential. Also, some board members have started leaving, and that is not a good sign for Gamestop.
Sourcing
Sourcing is the process of finding start-ups, listening to pitches, writing investment memos, and presenting to partners. When sourcing it is important to find companies that fit into the VCs theme or to understand the space if it is a new area of interest. Then the VC will reach out to the founder and listen to the pitch. If all goes well, the interviewer will write up an investment memo and do due diligence on the company to present to the partners about whether this company is worth investing in.
The call with the founder is an important step because it is where the VC gets an idea of what the company and the team are about. The conversation is typically about 30 to 45 minutes and consists of introductions, the pitch, and questions. VCs look at three main components of the company: the team, the target market, and the solution.
Does the team have the experience and drive to be successful? What is their background and is it related to the company?
Is this a growing market? Does it fix a problem? What is the competition like?
Does this company have a competitive advantage? What is their customer feedback? Is this a viable option? Do they have a workable prototype of their product?
Investment Memos
Investment memos essentially compile the key components of the company and the rationale for investing in it. It clarifies and summarizes the founder’s pitch, but also includes the VC's due diligence on both the company and the market. Sections of an investment memo include an introduction and company summary, the core product, the market space, the competition, and the team. The investment memo tackles what the problem and solution are, how the product works, who the customers are, how the market competition is, and what sets this company and team apart.
An example of an investment memo can be found here:
