Investment Memorandum: Definition, Examples, Tips (+How to Write)

Few companies receive investments without first creating an investment memorandum.

This document should outline the information that an investor would want to see before considering an investment in a business. It’s not quite as easy as it sounds, with an industry now existing just to develop high-quality investment memos.

This is the DealRoom guide to investment memorandums.

An investment memorandum can be written in-house by a company’s management, but more often than not, an external team of investment bankers or intermediaries will be hired to draft the document.

These investment bankers or intermediaries will have more experience in how the information within should be structured and communicated. Importantly, if hired by the company to do so, they can also share the information with the network of investors.

Types of Investment Memorandum

There is some confusion around the different types of investment memorandum used by business, owing to the different names given to the document. These names give the impression of different documents, but in truth, there is no difference between a Private Placement Memorandum (PPM), Offering Memorandum (OM), or an Information Memorandum (IM). All are simply synonyms for the same document.

However, this being said, there is a second document, for which a distinction from investment memorandums is required. This is the investor prospectus:

The Investor Prospectus

While the investment memorandum is used for private markets, an investor prospectus - or simply, ‘prospectus’ - is used for public markets.

In essence, both markets are extremely similar, although there tend to be stricter criteria around disclosures for prospectuses than memorandums.

One such example is the balance sheet, which is only given some importance in small public companies, but represents an important component of a mid-sized or large public company’s investor attractiveness.

Purpose of investment Memorandum

The investment memorandum is used to communicate to investors that the company is seeking an investment, and where the investors funds will be used, and how they will be repaid.

This means that the document is essentially a business plan aimed at investors. This doesn’t mean that the investment memorandum is an advertisement for the company; rather, it should seek to inform investors in an objective and detailed manner about the company.

This benefits investors in several ways:

1. Information

The core idea of an investment memorandum is to provide investors with information. A good memorandum will inform them about things they didn’t know before, potentially with the idea that they’re willing to invest on the basis of the new information.

2. Comparison

Most investors receive dozens or hundreds of investment memorandums every week. This enables them to compare companies with their peers to enable them to make better investment decisions. Investors will often use financial ratios to make these comparisons across companies.

3. Protection

By holding a document that the company itself has provided, the investor is given a degree of legal protection against disinformation. If a company yielding an investment memorandum provides false information that leads to an investment, for example, the investor has strong grounds for litigation.

For these reasons, the investment memorandum plays a key role in the investment process. It is usually accompanies by a one-page teaser, a non-confidential document that can be shared with multiple investors.

The one-page teaser usually talks of companies in an anonymous fashion, (E.g., “A New York-based Manufacturing Company”), before sharing the investment memorandum with interested investors that have signed a confidentiality agreement.

If the investment memorandum spikes the investors’ interest, a more detailed conversation about the terms of a potential investment can commence.

Contents of an Investment Memorandum

The contents of an investment memorandum rarely change, regardless of the company’s geography, industry, or size.

For companies in more technical areas of operation - particularly in the sciences, for example - it’s common to see a glossary of terms, and a more detailed description of the company and its industry.

Outside of these exceptions, the chapter headings are as follows:

• Executive Summary: Within 2.5 pages, the company, its financials, its strengths, and its prospects are outlined in a clear and concise fashion. The idea is that, if an investor has no time to read the document, the executive summary should summarize it well.
• Business Overview and History: As the name suggests, this is where the company tells the story of how it got where is is, what trajectory it is on, and some of its major historical milestones.
• Industry Analysis and Market Overview: Those without experience in this area usually fail to understand the difference between an industry and a market - an important distinction. This section usually includes a market sizing of some form.
• Financial Results and Projections: This section includes (preferably audited) financial statements and financial projections. Investors expect some optimism of financial projections, and account for it. Too much optimism lacks credibility, however.
• Management Team and Key Personnel: The management and the company’s key personnel have to be investible. That means, a good track record, capability to deliver on the company’s goals, and above all, being trustworthy.
• Use of Funds and Capital Structure: Here, the company will show investors how the funds will be used, and how they will effect the capital structure. Showing capital structure is also important as it gives insight into the company’s decision making.
• Risk factors and disclosures: No company is without its risks, and investors know it. Showing what these risks are, as well as any disclosures, shows investors a level of transparency and awareness, which they typically want to see in people they invest in.

The importance of good design & formatting

There is an expression which is sometimes used which applies to some extent to investment memorandums: The medium is not the message. That is to say that investors’ bread and butter is to scan business plans, pitch decks, and investment memorandums.

The cover design, or the corporate color scheme are ultimately not what wins their funding. Rather, it is the words and numbers within the document.

That doesn’t mean that a company can or should send an investor a poorly presented word document. An comparison with an interview can be made here.

An investment company won’t somebody because they’re wearing a Giorgio Armani suit, but they expect you to be well presented. Similarly, they won’t give a company funding if it’s been designed by a professional graphic design firm, but it’s similarly good to make a strong impression.

As the examples below allude to, companies that win funding are often the ones that take care of every detail in their investment memorandum. This includes professional design in addition to a convincing story.

Creating an effective investment memorandum

Effective investment memorandums share several characteristics. They are:

• Concise: If you can’t tell an investor what your company is in a few lines, you can’t tell them what it is.
• Compelling: Like a good movie script, you have to grab their attention within a few lines. Most investors will skim 80% of investment memorandums.
• Honest: For obvious reasons. This also means being transparent - not including a potentially damaging detail which is material is considered as bad as lying about it.
• Convincing: The investor must come way from the document believing that there is almost now way they’re not going to make money from their investment.
• Well-presented: A document which isn’t well-written and well-presented takes from an otherwise fantastic investment opportunity. Hire somebody tto do it if required.

Example of an effective investment memorandum

Naava a Finnish-Swedish company which makes green walls has been successful with fundraising.

Having already raised EUR 14 million, in 2023, it plans to EUR 7 million more to continue its expansion and prepare for an IPO on the Finnish stock market. To get here, it has had to be adept at putting together investment memorandums (in addition to green walls).

Below, we look at some of the features of its 2017 investment memo, which can be seen in its entirety here.

Cover

Most companies go with a plain cover, but Naava’s memorandum already hints at an environmentally-themed business model, as well as looking attractive in its own right.

Executive Summary (“The Offer”)

The executive summary here is a little unorthodox, but still looks good. It outlines exactly what the company is looking for in this raise, and what investors can expect.

Management Section

This is simple, concise,  and elegant. Investors don’t want to know what a management team like to do at the weekends - just why they’re the right people to fund.

History and Background on Company

Two slides, with nicely-spaced paragraphs tell the reader what they need to know about Naava. They’re also well signposted, so that the reader can skip if they don’t want to read about the company’s history.

Company’s Special Sauce

This isn’t usually a section for an investment memorandum, as not every company has IP, but if they did, this is a good paradigm to follow. Well-presented and easy-to-follow.

Financials

The financial statements are well presented, and enable an investor to see exactly what’s going on. Note that there’s not a breakdown of every single data point in operating costs.

Ownership

Any investor can see how the company’s shares are already distributed by looking here.

Again, it’s well signposted and shows the company knows what it’s doing.

Summary

Creating a strong investment memorandum is a proven way to generate millions of dollars for a company.

If your company doesn’t have experience in putting together these documents, it can pay to hire outside help to properly construct the documents, ensuring they maximize its chances of raising funds.

Furthermore, a well put-together document can be updated regularly rather than completely rewritten, and may even serve as a strategy document for your company as it executes its business plan, as well as attracting outside investors.