Lecture 5 Flashcards
What are the main sections of an investment memo?
Market Opportunity
Competitive Advantage
Team/Founder
Risk
What is one of the areas that people get too caught up with when it comes to evaluating company potential?
Market share
e.g., San Fran didn’t have a huge black car market until Uber
What are the attributes of a well-structured memo?
Short
Simple
To-the-point
clear
Is the job of a VC to avoid risk?
No, the job is to understand it
–> need to highlight all your learnings on the space
–> the risks section can be one of the longest sections of the memo
What are the 3 metrics to evaluate market size?
TAM: Total Addressable Market
SAM: Serviceable Addressable Market
SOM: Serviceable Obtainable Market
Taking the example of Uber, what would be the elements of market size?
TAM: Transportation globally
SAM: taxis in the US
SOM: Black cars in SF
What is SOM often referred to as and why?
The SOM can often referred to as a “wedge”
–> it helps you validate something and get product-market fit in a very narrow market
–> the SOM itself is not big, but it helps you to unlock bigger markets
Why is the TAM considered the king of all market calculations?
It assesses a company’s future potential and overall growth opportunity.
Needs to be in the hundreds of millions for VC to see potential
What is a criticism of Investment Memos?
Very sales based and usually used to try to convince someone higher up about the deal
What is the innovators dilemma?
Can x company get big enough before a large company ends up in that market
What is a competitive advantage?
Something that you have that your competitors will not be able to replicate with their offering
As a founder should you start by going big or small?
Need to “sell” a big vision to investors and employees (TAM)
However, you need to execute on a small wedge to de-risk the business (SOM)
What is market penetration?
to launch a product, enter the market as swiftly as possible, and, finally, capture a sizeable market share
What questions must you ask to determine the effectiveness of the market penetration strategy?
- Is the current market size right?
- Is the company creating a brand new market that doesn’t exist?
- Are there network effects? If so, the penetration rate can be extremely high
What is the network effect?
the phenomenon whereby a product or service gains additional value as more people use it.