For those who do not know, an investment thesis is the analysis performed by a buyer to assess a potential acquisition against an established set of investment criteria.
The investment thesis may be formally written up as a document or slide presentation to the buyer’s investment committee for deal approval. An investment thesis helps investors evaluate investment ideas, ideally guiding them in selecting the best ideas that can help meet their investment objectives. In the world of investments, the thesis serves as a game plan to help readers understand the big picture and nuances attached to an investment strategy.*
So to make it simple, it’s just a number of values you follow while investing in startups. It should describe why you invest in the company and what you expect to happen. It’s kind of guide that you initially established and it helps you to make proper investment decisions. It determines in which initiatives you should get involved and which are not really in line with what you believe in and want to immerse into when it comes to funding startups/taking over or buying some entities. The important piece is that you need to prove that your thesis is true.
How to build an Investment Thesis
Think of what you invest in (early stage startups, developed businesses, any particular market, technology, etc.) It’s usually the market you have quite deep experience in and you know the specificity, market needs, and niches.
Think of why you invest in this particular category and what do you think is going to happen on this market. What do you believe in?
Think of what type of investor you are
Opportunistic, thesis-driven, sector or trend-focused? On which stage are you? Is it your first investment or you’ve done already a dozen?
Few examples below:
Forerunner Ventures: ‘We are an early stage venture capital firm dedicated to investing in ambitious entrepreneurs to define and dominate a new generation of commerce.’
Kleiner Perkins: ‘Today, Kleiner Perkins continues that legacy, investing in founders with bold ideas that span industries and continents, partnering with them from inception to IPO and beyond to maximize the potential of their ideas… and make history.’
Quotidian invests in companies transforming large, old-school industries with software. They believe that market fit is the most important factor.
Sequoia helps the daring build legendary companies.
500 Startups believe in great founders and help them thrive.
Your thesis is your market strategy. You as well as your prospective portfolio companies need to clearly understand what you are looking for. It should be public and simple to understand so the founders, when they notice your message on the market, could come to you and say:’hey, I think we follow the same rules, believe in the same products so let’s discuss if we can do business together‘.
The market is huge so you cannot focus on all possible opportunities. You need to choose the one you feel the most and stick to it. Otherwise, you will be lost in the numbers of early founders from different markets and you will not be able to support them all and gaining experience in all the areas simultaneously. Do not allow the FOMO (fear of missing opportunities) to catch you! You need to support your backed companies and trying to learn and become a specialist in all markets, you will not be able to provide deep value at all. Stick to your bit and to make it fun, choose the area you are truly passionate about!
Take your time and do not hurry up with this process. Be creative, confront your ideas with anti-thesis or completely different points of view to make sure you are perfectly fine with what you are building.
Get to know the specificities of the market, products and read a lot to become an expert in the field. It’s will set a lot of questions but let you ensure it has a place on the market and a space to grow.
Also, continue to evaluate your thesis, do not be afraid to re-word it slightly if you find it necessary. Do not do something only because you name it this particular way. Deviate the wording if you find something more in line with the thoughts you have in your head. The thesis should express your believes and strategy as closely as it’s possible. Articulation and verbalization of your thinking may be difficult but look for the proper words so people could easily get what drives you and your VC fund.
Want to learn more? Great talk about the Investment Thesis and its’ matter from [PREMONEY MIAMI] Quotidian Ventures >> Pedro Torres-Picón, “How To: Build an Investment Thesis” and video from 500 Startups, you can find here.
If you are looking for some ready examples of the investment thesis, you can take a look at a great collection created by Alexander Jarvis
*basic definition from:
Investopedia
Divestopedia
