How to Write an Information Memorandum

At Hyman Capital we help companies of many shapes, sizes, sectors, and in many different geographies. Companies come to us who are start-ups pre revenue, to early stage, or indeed established businesses looking to grow. In fund raising we are often asked:

“What materials do we need to prepare for the investor?”

This is not a simple question to answer as “it depends!”  

It depends on the size, scale, types of investor that is likely to be interested in the company and on the company itself. A number of criteria that should be take into account in developing investor materials include:

• Type of company: product or services, Business to Business, Business to Consumer, demographic of customer and consumer.
• Growth stage of company: Pre revenue, early stage, scale up, growth, Buy and Build, M&A (target or acquirer), IPO.
• Geography: local, national, international, or global reach. Location of home market, Europe, US, Asia, etc.
• Funding size required: is this an investment for an individual High Net worth, or a large Venture Capital or Private Equity house.
• Sector that the company operates in: Medical equipment, Healthcare, Green energy, Software, Fin tech, insure tech, robotics, AI….. etc.

At Hyman Capital we can write these documents for companies, we can support companies in writing their own document and we always review the documents that companies send us. 

Over the next few weeks, I will attempt to share with you the answers to the question “What materials do we need to prepare for the investor” as fully as I can with a few caveats:

• I will cover the main points that the vast majority of companies need to explain.
• I will outline some of the differences for the main types of business, investor, sector and global vs local geography.
• This will not be completely comprehensive for every type of business and investor – this is a blog, not an encyclopaedia

So given the above caveats let’s begin.

The document set

There are 4 key documents to be produced for fundraising. These are:

1. The Teaser – a short 1- 4 page flyer that summarises the opportunity for the potential investor.
2. The Information Memorandum or IM – a 15 – 40+page document that describes the opportunity in detail.
3. The financial forecast model – typically and excel workbook that describes in detail the financial forecast for the business. This should include cash flow, P&L, and Balance Sheet projections
4. The Pitch Deck – typically a 12 – 18 slide PowerPoint document which summarises the investment opportunity. This is used when a potential investor meets the management team.

 In this blog I am going to focus on the Information Memorandum to start with, as it’s the most detailed document and much of what is required in the Teaser and Pitch Deck will be covered here. In the IM we also get to extract parts of the financial forecast and discuss the assumptions and rational.

The contents of an Information Memorandum

The core sections of an IM include:

• Description of the market that the business is operating in, or planning to operate in
• Brief history of the business covering the key development milestones.
• Description of the goods and services that the business is delivering into that market.
• Description of the management team
• Description of the investment need and its uses (Source and use of Funds)
• Extracts from the financial forecast model with commentary.
• Likely valuation of the business now an end of investment period

Taking each of these areas in turn, I will discuss each one of them in a blog post.

Description of the Market

So, in this first blog I am going to focus on the description of the market that the business is operating. A brief history of the market, and any key innovations that have disrupted the market. However, the core focus should be on the here and now and the next 5 years and should include: 

Current market size and characteristics.

• Anticipated development and expected evolution in the investment period typically next 5 years.
• Current technology road map of the market and anticipated technology innovation.
• Expected market size and growth over the investment period.
• Expected competitor development, expected evolution or technology changes.
• List of alternatives and relative risk of substitution.
• Reference made to the authoritative publications in market and sector.

At the end of this section the reader will need to have understood the market opportunity, the customer need and the gap that the new company will address ( in the next section). It’s the problem statement that will be developed and articulated by the end. Taking each of these sections in turn:

Current market size and characteristics

This section should draw upon industry recognised market reports, in technology this is typically Garner and Forrester, in aerospace and defence it is Janes, but each industry has its own publications that provide a commentary on the current market and make predictions or forecasts for the future.

Other sources of information include, the major strategic consulting houses who publish reports that are typically in the public domain, reports from McKinsey, Boose Allan, Boston Consulting Group and others can provide respected sources of market information. Some industries get regular ‘pull out’ sections produced by The London Times, The Financial Times, The Economist, The Wall Street Journal. Other journals also have articles written by business leaders or academics discussing markets and opportunities. Sources for these include: the Harvard Business Review, Slone Management Review, and other respected publications.

Multiple sources should be collected, and key stats and findings presented, typically on market growth I like produce a table which quotes several sources (3 or more) and then quotes the annualised growth rate of the market that has been assumed in the financial forecast and the rest of the document.

The segmentation of the market should be described, some industries have a standard for this, others are yet to mature one that is universally accepted. After sharing the segmentation then some commentary about which segments of the market the company’s products or services will address with a more detailed review of the current customer needs and competitor offerings should be outlined at this point.

Anticipated Market development

How the Market is expected to develop is a critical point leading to how the company will meet customer needs today and tomorrow. This section should describe the expected changes in the market that will support the growth of the company. Again, much of the source material should be drawn from external respected sources highlighted above. There are generally a limited number of drives for business change in a market or segment these include:

• Regulation – change or enhancement.
• Technology – ability to do the same thing with better outcomes and or at lower cost.
• New materials – ability to use new materials to deliver the same or better outcomes.
• Environmental – changes in the process driven by environmental needs.
• Health and Safety – need to provide a service in a way that removes risk to human life or welfare.
• Political – changes to the local or global political banning or changing cost of import or export materials, tax and employment requirements.
• Societal changes – changes to fashion, taste and consumer expectations.

Drawing upon external documents as references this section should describe the road map for the market over the next 5 years or more. Some markets such as technology may have a shorter time frame, others such as power generation and large infrastructure and much longer forward timeframe. Key market segments – particularly those that are critical to the success of the business described later – should be explored and described more fully. All assumptions made by the management team on market outlook should be stated and justified.

The emphasis of this section depends upon the characteristics of the market and the current constraints to change and growth. However, the success of the future business given the opportunities in the market should be laid bare. 

Current technology road map

Again, drawing on external sources the strengths and limitations of the current technology should be explored. This section is more important if the company is introducing new technology or a technology innovation to the market, or moving the process back to traditional values to enhance the customer value proposition.

A brief history of the innovations in the market and the triggers is helpful, more important is the anticipated changes that are foreseen, and the possibilities introduced by expected changes in the near future. The introduction of quantum computing may be too futuristic in today’s IM, however introduction of 5G and the move to fully electric vehicles is happening now.

Expected market size an growth

Managements predictions for the market size and growth need to be described and discussed. The external sources used above should once again be used as reference points. If the business is focused on one segment, then the changes, growth or reduction in size should be discussed. A reducing segment does not preclude investment, however its important to discuss the lifecycle value of the customer and any enhanced value opportunities. Any possible foreseeable threats to the business such should also be described and discussed.

Expected competitor development

Discussion of the core competitors in the market, particularly any well established and respected need to be described. The expected or predictable reaction to the business’s new product, service and innovation need to be described. How quickly will the competitors be able to match the innovations in the market? What is the track record of the core competitors to challengers and innovations in the market?

If the competitors are large and acquisitive, are they likely to buy out any innovators, or replicate the capability and eliminate them through competition? Critically managements views on the current and evolving competition landscape will need to be explored and shared. Often academic or regulator commentaries on the market are a good source of reference for this section of the document.

List of alternatives and relative risk of substitution.

From Porters 5 forces, risk from alternatives in the market should be outlined and discussed. As appropriate this section will need to examine the risk of alternatives developing and providing a significant challenge to the core market that the company is operating in.

Reference made to the authoritative publications in market and sector.

This section needs to draw extensively from external respected sources of primary and secondary information. Management assertions on the market are unlikely to be persuasive with investors. For larger amounts of money its likely that the investor organisation will have its own view on the market outlook and will be keenly interested in yours. Some investors specialise in certain market sectors and geographies and so its best to rely on externally respected information – and where necessary - provide logical and robust challenge to it.

If your business is creating a new market with a new product, as a disruptor, then it will be critical to identify the customer and the core reasons why they will buy this new product or service from you.

In summery

This section of the IM a should have pointed out deficiencies and inefficiencies in the current market and current competitor offerings. It should have highlighted areas of entry and opportunity for a new business offering and hinted on the core characteristics of that offering which would enable it to be successful, be it price, performance, or availability. This section is often the most important part of the IM, it is like a picture frame, it sets the context for the business, products and service which is described in the next section. A good description of the current market and offerings give the document a springboard in which to launch into the subsequent sections of the IM, which I will describe in future parts of this blog.