How I Wrote My First Investment Memo for a VC Interview
Investment Memo: Patched (YC S24)
Hey everyone! I was recently asked to write an investment memo for a VC interview, choosing a startup that aligned with the firm's investment focus. Since this was my first time ever writing one, I wanted to share how I approached the task and conducted my research.
Step 1: Understanding the VC’s Investment Thesis
The first thing I did was visit the VC fund’s website to study their investment thesis. Now, it's not always easy to grasp a firm's core values and priorities just from their website. Even after reading it, I wasn’t entirely sure what they were looking for. So, I took a different approach: I checked out the startups they had already invested in.
This gave me valuable insights. I noticed a clear pattern—they tended to back tech-focused startups, particularly those building AI infrastructure and developer tools, like APIs. This observation really helped narrow my focus and gave me a solid understanding of the types of companies that fit their portfolio.
Step 2: Sourcing Startups on Product Hunt
With that in mind, I headed over to Product Hunt, a popular platform where startups and tech companies announce new product launches. I browsed the Infrastructure & DevTools category, specifically looking for companies that matched the VC’s tech-heavy focus.
A lot of the startups I found were indie ventures, which were outside the typical investment range for this fund, but I concentrated on ones from Europe, the U.S., and France, where the VC fund had already invested. That’s when I came across Patched, a YC S24 startup that had been a top product on Product Hunt in September.
Step 3: Evaluating the Startup
Patched seemed like a great fit—it’s a YC-backed, AI-driven developer tool, which aligned perfectly with the VC’s past investments in AI infrastructure. I also researched the founding team, and their backgrounds looked strong, which made the startup even more compelling.
So, I chose Patched as the subject of my investment memo. Here’s the one-pager I put together for the interview.
Investment Memo: Patched (YC S24)
Prepared by: Henri NGO
Date: October 14, 2024
https://www.patched.codes/
Introduction
Patched presents a compelling seed-stage investment opportunity. The company has achieved notable early traction with a differentiated product in a fast-growing market segment. Patched’s mission is to become the DevOps "copilot" by creating an AI-powered workflow that seamlessly reviews code and resolves issues directly on GitHub.
The two co-founders are highly skilled entrepreneurs with deep expertise in DevTools and Security Ops. They have already launched a free MVP on GitHub, positioning the company for rapid user adoption.
With over 43,000 downloads, 1,800+ active users, and recognition as one of the Top 7 products on Product Hunt (September 2024), Patched is designed to simplify and automate tedious software development tasks such as code reviews, triaging, documentation, and patching. The platform addresses a critical pain point in software development: developers typically spend 35% of their time on maintenance tasks.
Deal
This memo evaluates Patched at the pre-seed stage, currently backed by Y Combinator (YC). (We propose a $1M investment in the upcoming seed round, followed by a $5M Series A investment upon reaching key milestones. Our projections indicate Galion could secure approximately 20% equity post-Series A, with a 17% employee option pool.)
Competition Analysis
Patched faces competition from several companies, including:
Direct competitors: GitHub Copilot (Microsoft), GitLab.
Feature-specific competitors: Snyk, SonarQube.
Broader competitors: Atlassian (Jira), large DevOps platforms.
Despite this competitive landscape, Patched holds a competitive edge over other startups in the space, particularly due to its focus on automating code maintenance, patching, and documentation. Additionally, its open-source model offers flexibility for developers to integrate their own large language models (LLMs), providing control over privacy and customization.
However, the next 3-6 months are crucial for Patched to enhance its feature set and build content depth to strengthen its defensibility. By leveraging the open-source community, the company can continue to differentiate itself from larger players.
Hiring Plan
No information provided.
Immediate Needs
No information provided.
Key Risks and Considerations
1. Competition and Defensibility
Patched operates in an increasingly crowded market of AI-powered development tools. The company’s key differentiator is its privacy-focused, open-source model, which will require continuous innovation and strong community engagement to maintain its competitive edge.
2. Revenue Model
Patched has potential for a clear usage-based revenue stream, although details on the cost efficiency of managing LLM tokens at scale are still unknown. The current pricing tiers include:
Free Tier: Up to 5 patchflows per month, designed for individual developers and small teams to encourage adoption.
Advanced Tier: Up to 100 patchflows per month with usage-based pricing for growing teams.
Enterprise Tier: Customized pricing for larger teams with specific needs.
Revenue modeling is contingent on understanding how many patchflows are used per company and the associated margins. The following scenarios illustrate potential revenue outcomes:
Scenario 1: $250K annually, assuming 10% conversion from the free tier.
Scenario 2: Over $1M annually, driven by enterprise pricing and a 50% conversion of advanced-tier users.
Testing these assumptions over the next few months will be crucial for forecasting Patched's revenue potential. The company must also validate the accuracy and distribution of its patchflows.
3. Scalability
Patched will need to scale significantly beyond its current user base to achieve meaningful revenue. The reliance on third-party LLMs introduces variable costs that need careful management as usage scales. Ensuring the company can manage these costs effectively while scaling its offering is a key priority.
4. Balancing Growth
Patched has generated substantial interest from developers on GitHub, but the challenge lies in converting open-source users to paid subscribers. Growing the open-source user base without a corresponding increase in paying customers could strain resources. Prioritizing subscriber growth will be critical for sustainable scaling.
Exit Strategy
Risk: Limited high-value exit precedents exist in the emerging AI-driven developer tools market.
Mitigation: Position Patched for potential acquisition by larger platforms like GitHub or Atlassian, emphasizing its unique value proposition. While the market is still maturing, Patched’s affiliation with YC (S24) and potential for strategic acquisitions offer a viable path to exit.
Technical Challenges
Risk: Potential for biased or hallucinated code reviews when leveraging AI, which could introduce errors instead of resolving them.
Mitigation: Rigorous testing and continuous AI refinement will be essential to minimize these risks and improve the platform’s reliability.
Recommendation
Patched has demonstrated impressive early traction, including over 43,000 downloads and 1,800+ active users, with strong recognition in a rapidly evolving space where AI is reshaping software development. Given its potential to automate critical DevOps tasks, Patched is well-positioned to become a leader in the AI-driven DevTools space.
We recommend proceeding with the $1M seed investment, with further investments contingent on the company reaching key milestones, such as achieving a $1M ARR. The focus should be on:
Expanding product features and AI capabilities.
Scaling the engineering and customer success teams.
Accelerating customer acquisition and market penetration.
Though we may not have a lead position due to their YC affiliation, Patched’s experienced founding team and its positioning in the AI-driven DevTools trend make this an attractive investment opportunity.
Founding Team:
Rohan Sood (CEO): Former COO of Scantist, with seven years of experience in AI-driven DevSecOps. A second-time founder, Rohan holds a Computer Science degree from Nanyang Technological University (NTU), Singapore, and brings deep operational and leadership expertise in DevOps and Security tools.
Asankhaya Sharma (CTO): Previously held roles at Veracode and Microsoft, with a Ph.D. in Computer Science from the National University of Singapore (NUS). He brings significant technical expertise to the team.
