Do I need an IM?
(This was first published on Linkedin Pulse on 11 Nov 2015)
This question’s coming up a lot lately. Firstly, what is an IM? IM stands for “Information Memorandum” and is often used as a marketing document to provide an outline of a company to a prospective investor.
There are several terms used in capital raising on communications with investors which give helpful context on where an IM fits in:
- Sophisticated investor: the specific definition changes by country however is normally an individual or family with substantial amounts of private wealth). Retail investors are anyone else.
- Prospectus: this is a lengthy and detailed document, including audited financial statements, used to raise money from any investor. It is used during an IPO process and is in a prescriptive format to allow it to be offered to both sophisticated and retail investors. It’s a core element of any IPO and comes with a hefty pricetag.
- Information Memorandum: this document is only used if you are approaching sophisticated investors, it is not suitable for retail investors. It is normally a PDF several pages long that includes the strategy of the business, why it’s an attractive investment, and the key financial data. This costs less than a prospectus to construct however there is still a cost in putting this together.
- Investment Summary (also known as Investment Teaser): this is a 3-4 page summary of the IM provided to investors ahead of signing a confidentiality agreement. Again, it is only suitable for sophisticated investors.
- Pitchdeck: this is a slidedeck used during an investor presentation, which is far more graphical in nature and has very little in the way of financial information. It is used extensively in place of the investment summary (and often the IM) by the technology sector.
If you’re raising money from corporates, VC’s or sophisticated investors, there are very few regulations around which form of the above documents you should use and for what purpose.
For founders in emerging technology businesses, most of the investor communication effort is spent around the pitchdeck and there is substantial commentary within the tech sector on what this should include.
As a tech founder, what do you do in terms of investor documents?
The answer to this is similar to what you’re doing in designing your product to engage with your customers – what is it your target investor audience will engage with? Remember you are selling part of your business hence understanding your audience is key.
In investment, there’s another way to look at this – what is your target investor used to seeing?
There are no hard and fast rules here, and the venture funding industry is not immune from disruption, however at the time of writing there are some guidelines you can use:
- VC’s who invest in the tech sector want to see your pitchdeck, your numbers, and you. They will have an analyst who will rebuild your business model based on their view of the world, however they won’t do this until they understand your vision and believe in you as a founder.
- Corporates will place far more emphasis on the numbers, hence an IM with detailed financial analysis is key here. They will also have analysts who will do their own version of the numbers, however you will not reach this point unless they’ve got a set of numbers to start from. You will need the pitchdeck once you go see them. The “teaser” is helpful in getting a meeting booked and them to sign the required confidentiality agreement.
- Sophisticated investors who invest in the tech sector (Angels) want to get to know you as the founder, hence for them the introduction that comes through your startup program, plus your pitchdeck, is often what you need. They will want to see the numbers in future meetings they have with you before they’ll invest.
- Sophisticated investors who have created their wealth using industrial age business models are used to a process something like the following:
- They have dealflow sources they trust. Direct approaches often will not work. You need to go through the gatekeepers.
- They will want to see an investment summary,
- If they’re interested, they’ll sign a confidentiality agreement, then receiving a copy of the IM. This will still need to come from their trusted source, chances are you won’t have met them yet.
- If they’re interested, they will book a meeting or come to an investor presentation to meet you as the founder.
This last category is a growing sector as this group learns more about technology investing and also as the traditional asset categories no longer produce the yields they’re used to. As one stockbroker put it, their clients invest 95% of their assets in property and blue chip stocks, and 85% of their conversation with them is about tech.
They are interested. However you need to speak in their language if you want to reach them (as you would in any marketing activity). For now, if this is your target audience this means you need an IM.