The 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:
- A detailed description of the business and all relevant financial information.
- A clear and detailed industry and market overview to help enable investors to assess market potential and attractiveness of the business.
- Details of all capital requirements.
- Key investment terms and objectives, as well as details of other co-investors, if applicable.
- An overview of the management team, their capabilities and potential, and details of key shareholders of the startup and the role each one has in the business.
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.
Business overview
An IM should include a detailed description of the business and all relevant financial information. In particular, it should contain:
- An overview of the business (including a description of the business model), its history and key milestones.
- Details of the products and services provided.
- Key statistics and financial information (i.e., revenue, projections, headcount and other key financial aspects).
- An overview of the countries, regions or markets where the business operates (including the services or products provided in each of them).
- Where applicable, a breakdown of revenue composition by the different services or products provided.
- Where applicable, a breakdown of revenue composition by country/region where the business is conducted.
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.
Industry and market overview
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:
- Key industry highlights (i.e., key market features, demand structure and trends, and barriers to entry).
- Market trends and developments since the business started.
- An overview of the competitive landscape (key players) and competitive advantage of the products and services provided (including details of any IP owned or developed by the business and legal protections in place).
- Key relationships (i.e., key suppliers and customers, long-standing relationships or collaborations).
- Market opportunities (including the opportunity to access new markets and new business segments).
- A summary of the regulatory environment (including any regulatory developments or gaps advantageous to the business).
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.
Investment terms and objectives
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:
- The financial needs of the business and the proposed overall amount for the fund raising.
- The purpose of the investment, e.g., product development, expansion, offering of new services, or talent acquisition, among other things.
- Where possible, a list of other co-investors participating in the capital raising or any investors leading the process (as well as any key potential investors).
- A summary of the deal structure and key terms (including valuation, subscription share price, number of shares on offer, minimum ‘ticket’, and investment terms).
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.
Key management and shareholding structure
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:
- Details of each member within the management team, including their background, role in the business, relevant achievements and alignment with the long-term strategy of the business.
- An overview of the shareholding structure of the company (including the value that each shareholder brings to the business and the role played by each of them).
- Details of any relevant advisors to the business.
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.
Other considerations
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.
About the authors
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.
