Startups face a variety of challenges throughout their lifecycle. These challenges include raising capital, developing a product or service, generating revenue and expanding into new geographies.
When seeking to raise capital, one of the first hurdles that founders encounter is preparing an information memorandum (IM) (or a pitch deck).
This article, prepared with the assistance of the EY Deal Origination team, looks at IMs and in particular what they are expected to contain.
If you have any questions in relation to this article, please contact Steve Johns at steve.johns@au.ey.com or on +61 402 793 004, Cameron Taylor at cameron.taylor@nz.ey.com or on +64 21 376125 or Adrian Smith at adrian.smith@au.ey.com or on +61 392 888 775.
S tartups and other companies looking to raise capital are generally advised to prepare a document, such as a pitch deck or an IM, to share with prospective investors.
Such documents are prepared to give prospective investors an understanding of the business and the requirements for capital. They can be time-consuming to prepare.
Despite this, they are seen as an important component of a capital raise and as lending credibility to the process.
Read more Read lessThere are a number of differences between a pitch deck and an IM.
Pitch decks provide a concise overview of the business and capital requirements. They are typically prepared by start-ups looking to raise small amounts of capital or early-stage startups (e.g., seed and Series A rounds).
IMs provide a detailed overview of the business, growth opportunities and requirements for capital. They are more comprehensive than pitch decks.
IMs are typically prepared by established companies or companies looking to raise larger amounts of capital (typically Series B rounds and beyond). IMs are also often prepared by the financial adviser to the company.
This article will focus on the information that founders should include in an IM.
The purpose of an IM is to provide prospective investors with a detailed overview of the business and requirements for capital.
As such, an IM should contain:
The IM should be accompanied by a cover email. The email should be tailored to each investor and explain why the business is a good fit for that particular investor.
The email is important as often it may determine whether the prospective investor reviews the IM or not.
An IM should include a detailed description of the business and all relevant financial information. In particular, it should contain:
By providing a comprehensive overview of the business, its mission, vision, and the problem it aims to solve, investors can clearly identify the strengths and weaknesses of the business. This will allow investors to determine the future potential for growth and how their investment would contribute to the long-term success of the business.
An IM should contain a clear and detailed market overview that allows investors to assess the market potential and attractiveness of the business.
Startups should conduct a thorough analysis of the market and any target markets, including market size, growth rate, trends, and competition, identify target customers and highlight the competitive advantage that the products and services provided can offer. The IM should include:
An industry and market overview enables investors to identify potential risks related to market saturation, regulatory changes or barriers, technological disruptions, or shifting customer preferences, and factor them into their investment decisions and risk management strategies.
Investors also often bring industry experience, market knowledge and valuable networks that can help grow the business. By providing a detailed overview of the business positioning and strategy in the market, investors can assess how their expertise may contribute to strengthening the market position of the business.
Investors will want to ensure that the startup's IP is properly safeguarded and provides a competitive advantage.
One of the keys to successfully attracting investors is to provide a clear understanding of the investment process and the objectives that the startup and founders aim to achieve. This provides credibility and allows investors to determine whether the investment proposal is aligned with their financial and commercial interests.
An IM should clearly outline:
Clear communication about the investment and investment process (including information about any lead investors or co-investors) builds transparency and trust between the startup and the potential investors.
Investors can quickly assess whether the opportunity fits their investment criteria and proceed with further due diligence or move on to other opportunities.
A key aspect for investors to decide whether to invest in a business is management capabilities and potential to make the business grow. A shareholding structure that allows investors to participate in the strategy of the business is also crucial to investors’ decision-making processes.
Founders should ensure that an IM includes:
Investors want to assess the capabilities and experience of the company’s management team. By providing details of their expertise, track record, and relevant industry knowledge, potential investors can assess management’s ability to successfully execute the business plan, navigate challenges, and drive growth.
Knowledge of the shareholding structure allows investors to understand the decision-making process and the value each shareholder brings to the startup.
While the relevance of an IM lies in its ability to effectively communicate the unique value of the business, founders should be mindful to ensure that the contents of the IM are correct and not misleading and fact checked (as applicable).
Founders should also understand the laws in relation to capital raisings (particularly as to whom securities can be offered and the requirements for such offerings) and comply with those laws. Failure to comply may give rise to civil and criminal liability.
Also, investors will expect the company to meet any milestones or forecasts in the IM. A failure to meet them may undermine investors’ confidence in the startup and its founders.
Lastly, founders should be mindful of the information provided in the IM and ensure potential investors keep the information confidential. Founders should put in place arrangements such as non-disclosure agreements prior to sharing any valuable information about the business in order to preserve the competitive advantage and know-how of the startup.
Steve Johns is an M&A partner at Ernst & Young, Australia (EY Australia), providing M&A and corporate law advice to clients. He has a focus on technology transactions and has over 20 years experience. He has worked on transactions throughout the US, Asia and Australia.
Cameron Taylor is Head of Corporate Law in the EY Law practice is New Zealand. Cameron advises clients on a broad range of strategic transactions, including mergers and acquisitions (M&A), capital raisings / IPOs and corporate governance. He has worked extensively in the US and New Zealand.
Adrian Smith is a director in the Private Equity Origination (Strategy and Transactions) team of EY Australia. He has a background in private equity with over 20 years of direct investment and M&A experience.
Steve, Cameron and Adrian were assisted in the preparation of this article by Gonzalo Castro and Eliza Unger.