Why We Write Investment Rationales
Before I get into what makes a strong investment rationale, I should explain what they are, and why they are written. The investment rationale is a core stage in many investors’, including the York IE team’s, deal process. What is an investment rationale? It is exactly what it sounds like, an explanation for why an investment is worth making. For our team it serves two major purposes.
First, to ensure our team is on the same page regarding the investment opportunity. Our rationale is written towards the end of our due diligence, after we haven spoken with a startup’s founder(s)/team multiple times, reviewed their pitch deck, financials, GTM strategy, and performed our own market/product research and validation. For our team the rationale will help confirm, and in some ways act as the last sales pitch for, the conviction we have in the investment opportunity. At the end of the day, if we can’t write a convincing investment rationale that gets the whole team on board, we probably shouldn’t be investing in the startup.
The other reason we write investment rationales is to provide transparency to our investors. Our investors are trusting us with their capital, and part of that relationship is providing continuous insight into our investment strategy, thesis, and investments. The investment rationales inform them on what their capital is being invested in, how it fits our investment strategy/thesis, and why we think it will generate returns on their capital.
What We Include in a Rationale
- Background on the company and product
- Founding history of the company and high level description of the product
- The problem the startup is looking to solve
- The reasons why and how it exists, and who it affects
- How the startup is going about solving the problem
- Description of the product and how it solves the problem
- The market opportunity that exists for this problem/solution (AKA TAM)
- This should include both a top down research (market reports, analyst opinions, etc) and a bottoms up analysis (ex. # of potential customers multiplied by the assumed deal/account size (average and max)
- Competitive dynamics
- Who are the incumbents and other startups in this space, and why the investment opportunity is better position to succeed, or at minimum earn significant market share
- Being an early stage investor, team is key to the York IE investment strategy and it is important to show why York IE believes these entrepreneurs are the right ones to solve the problem and build a successful company
- This could be previous experience in the industry, past successes in other businesses, and/or education backgrounds
- Deal terms
- Size of round, valuation, any additional , other investors
- It is important here to explain why this deal is appropriately valued
Overall, the goal is to make sure everyone is on the same page and excited about an investment. You can check out some of our previous rationales in the York IE Startup Growth Blog.