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Jun 24, 2020, vc lab: vc investment thesis template.

In order to build a strong venture capital firm as a first-time fund manager, you need to start with a strong Investment Thesis. Find our worksheet here.

What is the Investment Thesis for a venture capital firm?

An Investment Thesis is the strategy by which a venture capital fund makes money for the fund investors, called Limited Partners or LPs. It identifies the stage, geography and focus of investments, as well as the unique differentiation of the firm.

What are Limited Partners?

Limited Partners, or LPs, are investors in venture capital funds, and there are a number of common categories, including family offices, pension funds, endowments, sovereign wealth funds and even corporates. LPs often have allocations for different stages of venture capital as an asset class, and these allocations are provided by their internal or external investment strategy managers.

Why is the Investment Thesis important for a venture capital firm?

An Investment Thesis is used to attract Limited Partners, and it guides the activities of the firm. Most LPs have investment criteria for their venture capital allocations that they are looking to meet, and a compelling Thesis allows LPs to see if a fund meets their desired allocation criteria.

What are New Managers?

New Managers are a category of venture capitalists that are launching a new venture capital firm. Even experienced venture capitalists get categorized as a New Manager if they are launching a new firm. Many categories of LPs are restricted from investing into New Managers, including pension funds, endowments, sovereign wealth funds and even corporates. This is because New Managers do not have a track record and because the new firms run into common problems of any new business.

What is the most common Limited Partner for a New Manager?

Most New Managers raise capital from family offices, which are the investment operations of wealthy individuals and families. Small to mid-sized family offices are often led by a wealthy individual, such as an entrepreneur that has had a large exit, and these individuals make the decision to invest into a fund. Family offices often have an agenda and a focus that can align with a compelling Investment Thesis, allowing New Managers to more easily get meetings. 

How do you write a compelling Investment Thesis?

There are multiple components to a compelling Investment Thesis that we have compiled into a simple to follow format. A good Thesis can often take months to develop, iterating on feedback from the market, advisors, and fund investors. In order to start this process, we have created a simple template for creating a venture capital Investment Thesis below.

“[Fund Name] is launching a [$x MM] [Stage] venture fund in [Country / City] to back [Geography] [Sector / Market Companies] [with Secret Sauce]”

Below you can see tips for each component in [brackets]:

• [Fund Name] When getting started, we recommend using a last name or color, like ‘Ressi Ventures’ or ‘Orange Fund,’ since the Thesis will evolve many times over the first months. After you feel that you have a final Thesis, then choose a name that represents your fund.
• [$x MM] This is the size of committed capital by LPs to the fund. You will be able to raise a fund that is 10 times the size of what you think you can easily close from contacts that you already have. So, if you think that you can easily raise $500,000 from friends, acquaintances and other contacts, then your first fund size maximum is $5 MM.
• [Stage] Stage is usually based on fund size, and, for New Managers, the options are angel (<$5 MM), pre-seed ($5 MM to $15 MM), seed ($15 MM to $50 MM) and Series A (>$50 MM). It is easier to have a larger fund doing an earlier stage, such as a $100 MM angel fund, than it is to have a smaller amount of money for a later stage, such as a $10 MM Series A fund.
• [Country / City] This is the city or country where the New Managers are living or plan to live while running the fund. Now, most funds have a life of at least 10 years, so make sure to pick a city or country where you and your fellow New Managers plan to be for some time. In addition, if you are living in a large country, then it is better to specify a city or region. “East Coast” is better than the United States.
• [Geography] This is the region where the fund will invest in portfolio companies. If the Geography is not specified, then it is assumed that the funding will be local. This is particularly important for New Managers, who often try to be too broad and then do not appear credible. For example, it is unrealistic to assume that a New Manager with a small fund will do cross border deals that require complex legal management. 
• [Sector / Market Companies] This is the type of companies that the fund will focus on investing in, such as FinTech, digital health, SaaS or marketplaces. Ideally, when choosing a sector or market in a geography, the opportunity will be obvious to the right LPs, such as "East Coast Fintech companies” or “German SaaS companies.” 
• [with Secret Sauce] ’Secret Sauce’ is your insight into a sector or market opportunity based on your in-depth experience. For example, “West Coast heath startups based on my 15 years leading the largest health tech angel group in San Diego while practicing neurosurgery.” The secret sauce needs to show why you are uniquely qualified to create this fund, and, if the market opportunity is not obvious, it should also show why the market opportunity is important right now.

What is a sample Investment Thesis?

Using the above template, here are some clear and concise thesis examples:

• “Purple Ventures is launching a $5 MM angel fund in Brussels to back European government technology startups that leverage the partner’s experience in various political and bureaucratic leadership roles across the EU.”
• “Found Capital is a $15 MM Seed fund in Lagos to back African mobile payment and fintech companies sourced from the partners network built while working as startup ambassadors at Google, PayPal and Microsoft in Africa.”
• “Sven Fund is a $100 MM Series A fund in Singapore to back blockchain startups in Asia that are building dynamic supply chain systems, which is a market segment where the partner had the largest recent exit in the region.”

How specific should your Investment Thesis be?

A compelling Investment Thesis is very specific about stage, geography and focus to align with the allocation requirements of Limited Partners. A common problem is that New Managers are often afraid to be specific, since they feel it will limit their ability to do hot deals. A Thesis states the intention of a firm to pursue certain kinds of investments, but often is not legally binding in the firm or in the fund agreements. So, an Investment Thesis has the effect of gravity. Venture capitalists often can do deals that are far away from the Thesis, but they have less attraction.

How do you refine your Investment Thesis?

You will be refining your Thesis heavily for the first few months when forming your fund. The measure of a great thesis is how easily it can attract meetings with LPs, but the first person that you need to satisfy with your thesis is yourself.

Here is an initial exercise to get started that should take about 30 minutes to an hour.

• First, use the template above and try to write three versions of a potential venture fund thesis. As mentioned above, be as concise and specific as possible.
• Next, read each of them aloud while recording a video of yourself. Speak conversationally (in the same way you might casually pitch the idea to someone in an elevator), and in one video "take". 
• Then, watch the videos and ask yourself if you would realistically invest in that thesis. How clear was the message? How confident was the delivery? What questions come to mind?
• Finally, revise the thesis and video until you are satisfied with your work. Resist the urge to make the one-sentence thesis a one-page thesis. Remember: brevity is the key. 

Download this VC Investment Thesis Worksheet

What are the next steps.

This is just one part of the first steps to starting a venture capital firm, which include: 

• Review Our VC Investment Thesis Template
• Determining Your Venture Capital Fund Size
• Selecting a Venture Fund Area of Focus
• Building a Strong Value Proposition for a VC Firm

We will be adding separate guides for each of these sections shortly on our main How to Start a Venture Capital Firm Guide . 

This content is provided by VC Lab, the YC for VC. Learn more about the industry-leading and free programs at: https://GoVCLab.com Decile Partners by Decile Group is the leading Fund Admin provider with a 94 NPS and no customer churn rate. Learn more about the turnkey and flat rate fund admin. https://FI.co/insight/best-fund-admin-decile-partners If you have questions about venture capital, ask the leading AI for VC, Decile Base. The Decile Base venture AI offers a fund lawyer, accountant, and tax specialist on demand. https://DecileHub.com/base VC Lab is a part of Decile Group. Decile Group is unlocking the potential of venture capital with a full-stack platform that empowers emerging managers to launch top-performing funds 3x faster through training, tools, and capital. https://DecileGroup.com

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Writing a Credible Investment Thesis

Only a third of acquiring executives actually write down the reasons for doing a deal.

By David Harding and Sam Rovit

• November 15, 2004

Every deal your company proposes to do—big or small, strategic or tactical—should start with a clear statement how that particular deal would create value for your company. We call this the investment thesis. The investment thesis is no more or less than a definitive statement, based on a clear understanding of how money is made in your business, that outlines how adding this particular business to your portfolio will make your company more valuable. Many of the best acquirers write out their investment theses in black and white. Joe Trustey, managing partner of private equity and venture capital firm Summit Partners, describes the tool in one short sentence: "It tells me why I would want to own this business."

Perhaps you're rolling your eyes and saying to yourself, "Well, of course our company uses an investment thesis!" But unless you're in the private equity business—which in our experience is more disciplined in crafting investment theses than are corporate buyers—the odds aren't with you. For example, our survey of 250 senior executives across all industries revealed that only 29% of acquiring executives started out with an investment thesis (defined in that survey as a "sound reason for buying a company") that stood the test of time. More than 40% had no investment thesis whatsoever (!). Of those who did, fully half discovered within three years of closing the deal that their thesis was wrong.

Studies conducted by other firms support the conclusion that most companies are terrifyingly unclear about why they spend their shareholders' capital on acquisitions. A 2002 Accenture study, for example, found that 83% of executives surveyed admitted they were unable to distinguish between the value levers of M&A deals. In Booz Allen Hamilton's 1999 review of thirty-four frequent acquirers, which focused chiefly on integration, unsuccessful acquirers admitted that they fished in uncharted waters. They ranked "learning about new (and potentially related) business areas" as a top reason for making an acquisition. (Surely companies should know whether a business area is related to their core before they decide to buy into it!) Successful acquirers, by contrast, were more likely to cite "leading or responding to industry restructuring" as a reason for making an acquisition, suggesting that these companies had at least thought through the strategic implications of their moves.

Not that tipping one's hat to strategy is a cure-all. In our work with companies that are thinking about doing a deal, we often hear that the acquisition is intended for "strategic" reasons. That's simply not good enough. A credible investment thesis should describe a concrete benefit, rather than a vaguely stated strategic value.

A credible investment thesis should describe a concrete benefit, rather than a vaguely stated strategic value. This point needs underscoring. Justifying a deal as being "strategic" ex post facto is, in most cases, an invitation to inferior returns. Given how frequently we have heard weak "strategic" justifications after a deal has closed, it's worth passing along a warning from Craig Tall, vice chair of corporate development and strategic planning at Washington Mutual. In recent years, Tall's bank has made acquisitions a key part of a stunningly successful growth record. "When I see an expensive deal," Tall told us, "and they say it was a 'strategic' deal, it's a code for me that somebody paid too much."

And although sometimes the best offense is a good defense, this axiom does not really stand in for a valid investment thesis. On more than a few occasions, we have been witness to deals that were initiated because an investment banker uttered the Eight Magic Words: If you don't buy it, your competitors will.

Well, so be it. If a potential acquisition is not compelling to you on its own merits, let it go. Let your competitors put their good money down, and prove that their investment theses are strong.

Let's look at a case in point: [Clear Channel Communications' leaders Lowry, Mark and Randall] Mayses' decision to move from radios into outdoor advertising (billboards, to most of us). Based on our conversations with Randall Mays, we summarize their investment thesis for buying into the billboard business as follows:

Clear Channel's expansion into outdoor advertising leverages the company's core competencies in two ways: First, the local market sales force that is already in place to sell radio ads can now sell outdoor ads to many of the same buyers, and Clear Channel is uniquely positioned to sell both local and national advertisements. Second, similar to the radio industry twenty years ago, the outdoor advertising industry is fragmented and undercapitalized. Clear Channel has the capital needed to "roll up" a significant fraction of this industry, as well as the cash flow and management systems needed to reduce operating expenses across a consolidated business.

Note that in Clear Channel's investment thesis (at least as we've stated it), the benefits would be derived from three sources:

• Leveraging an existing sales force more extensively
• Using the balance sheet to roll up and fund an undercapitalized business
• Applying operating skills learned in the radio trade

Note also the emphasis on tangible and quantifiable results, which can be easily communicated and tested. All stakeholders, including investors, employees, debtors and vendors, should understand why a deal will make their company stronger. Does the investment thesis make sense only to those who know the company best? If so, that's probably a bad sign. Is senior management arguing that a deal's inherent genius is too complex to be understood by all stakeholders, or simply asserting that the deal is "strategic"? These, too, are probably bad signs.

Most of the best acquirers we've studied try to get the thesis down on paper as soon as possible. Getting it down in black and white—wrapping specific words around the ideas—allows them to circulate the thesis internally and to generate reactions early and often.

The perils of the "transformational" deal. Some readers may be wondering whether there isn't a less tangible, but equally credible, rationale for an investment thesis: the transformational deal. Such transactions, which became popular in the exuberant '90s, aim to turn companies (and sometimes even whole industries) on their head and "transform" them. In effect, they change a company's basis of competition through a dramatic redeployment of assets.

The roster of companies that have favored transformational deals includes Vivendi Universal, AOL Time Warner (which changed its name back to Time Warner in October 2003), Enron, Williams, and others. Perhaps that list alone is enough to turn our readers off the concept of the transformational deal. (We admit it: We keep wanting to put that word transformational in quotes.) But let's dig a little deeper.

Sometimes what looks like a successful transformational deal is really a case of mistaken identity. In search of effective transformations, people sometimes cite the examples of DuPont—which after World War I used M&A to transform itself from a maker of explosives into a broad-based leader in the chemicals industry—and General Motors, which, through the consolidation of several car companies, transformed the auto industry. But when you actually dissect the moves of such industry winners, you find that they worked their way down the same learning curve as the best-practice companies in our global study. GM never attempted the transformational deal; instead, it rolled up smaller car companies until it had the scale to take on a Ford—and win. DuPont was similarly patient; it broadened its product scope into a range of chemistry-based industries, acquisition by acquisition.

In a more recent example, Rexam PLC has transformed itself from a broad-based conglomerate into a global leader in packaging by actively managing its portfolio and growing its core business. Beginning in the late '90s, Rexam shed diverse businesses in cyclical industries and grew scale in cans. First it acquired Europe's largest beverage—can manufacturer, Sweden's PLM, in 1999. Then it bought U.S.-based packager American National Can in 2000, making itself the largest beverage-can maker in the world. In other words, Rexam acquired with a clear investment thesis in mind: to grow scale in can making or broaden geographic scope. The collective impact of these many small steps was transformation. 14

But what of the literal transformational deal? You saw the preceding list of companies. Our advice is unequivocal: Stay out of this high-stakes game. Recent efforts to transform companies via the megadeal have failed or faltered. The glamour is blinding, which only makes the route more treacherous and the destination less clear. If you go this route, you are very likely to destroy value for your shareholders.

By definition, the transformational deal can't have a clear investment thesis, and evidence from the movement of stock prices immediately following deal announcements suggests that the market prefers deals that have a clear investment thesis. In "Deals That Create Value," for example, McKinsey scrutinized stock price movements before and after 231 corporate transactions over a five-year period. The study concluded that the market prefers "expansionist" deals, in which a company "seeks to boost its market share by consolidating, by moving into new geographic regions, or by adding new distribution channels for existing products and services."

On average, McKinsey reported, deals of the "expansionist" variety earned a stock market premium in the days following their announcement. By contrast, "transformative" deals—whereby companies threw themselves bodily into a new line of business—destroyed an average of 5.3% of market value immediately after the deal's announcement. Translating these findings into our own terminology:

• Expansionist deals are more likely to have a clear investment thesis, while "transformative" deals often have no credible rationale.
• The market is likely to reward the former and punish the latter.
• The dilution/accretion debate. One more side discussion that comes to bear on the investment thesis: Deal making is often driven by what we'll call the dilution/accretion debate. We will argue that this debate must be taken into account as you develop your investment thesis, but your thesis making should not be driven by this debate.

Sometimes what looks like a successful transformational deal is really a case of mistaken identity. Simply put, a deal is dilutive if it causes the acquiring company to have lower earnings per share (EPS) than it had before the transaction. As they teach in Finance 101, this happens when the asset return on the purchased business is less than the cost of the debt or equity (e.g., through the issuance of new shares) needed to pay for the deal. Dilution can also occur when an asset is sold, because the earnings power of the business being sold is greater than the return on the alternative use of the proceeds (e.g., paying down debt, redeeming shares or buying something else). An accretive deal, of course, has the opposite outcomes.

But that's only the first of two shoes that may drop. The second shoe is, How will Wall Street respond? Will investors punish the company (or reward it) for its dilutive ways?

Aware of this two-shoes-dropping phenomenon, many CEOs and CFOs use the litmus test of earnings accretion/dilution as the first hurdle that should be put in front of every proposed deal. One of these skilled acquirers is Citigroup's [former] CFO Todd Thomson, who told us:

It's an incredibly powerful discipline to put in place a rule of thumb that deals have to be accretive within some [specific] period of time. At Citigroup, my rule of thumb is it has to be accretive within the first twelve months, in terms of EPS, and it has to reach our capital rate of return, which is over 20% return within three to four years. And it has to make sense both financially and strategically, which means it has to have at least as fast a growth rate as we expect from our businesses in general, which is 10 to 15% a year.

Now, not all of our deals meet that hurdle. But if I set that up to begin with, then if [a deal is] not going to meet that hurdle, people know they better make a heck of a compelling argument about why it doesn't have to be accretive in year one, or why it may take year four or five or six to be able to hit that return level.

Unfortunately, dilution is a problem that has to be wrestled with on a regular basis. As Mike Bertasso, the head of H. J. Heinz's Asia-Pacific businesses, told us, "If a business is accretive, it is probably low-growth and cheap for a reason. If it is dilutive, it's probably high-growth and attractive, and we can't afford it." Even if you can't afford them, steering clear of dilutive deals seems sensible enough, on the face of it. Why would a company's leaders ever knowingly take steps that would decrease their EPS?

The answer, of course, is to invest for the future. As part of the research leading up to this book, Bain looked at a hundred deals that involved EPS accretion and dilution. All the deals were large enough and public enough to have had an effect on the buyer's stock price. The result was surprising: First-year accretion and dilution did not matter to shareholders. In other words, there was no statistical correlation between future stock performance and whether the company did an accretive or dilutive deal. If anything, the dilutive deals slightly outperformed. Why? Because dilutive deals are almost always involved in buying higher-growth assets, and therefore by their nature pass Thomson's test of a "heck of a compelling argument."

As a rule, investors like to see their companies investing in growth. We believe that investors in the stock market do, in fact, look past reported EPS numbers in an effort to understand how the investment thesis will improve the business they already own. If the investment thesis holds up to this kind of scrutiny, then some short-term dilution is probably acceptable.

Reprinted with permission of Harvard Business School Press. Mastering the Merger: Four Critical Decisions That Make or Break the Deal , by David Harding and Sam Rovit. Copyright 2004 Bain & Company; All Rights Reserved.

David Harding (HBS MBA '84) is a director in Bain & Company's Boston office and is an expert in corporate strategy and organizational effectiveness.

Sam Rovit (HBS MBA '89) is a director in the Chicago office and leader of Bain & Company's Global Mergers and Acquisitions Practice.                                              

10. Joe Trustey, telephone interview by David Harding, Bain & Company. Boston: 13 May 2003. Subsequent comments by Trustey are also from this interview.

11. Accenture, "Accenture Survey Shows Executives Are Cautiously Optimistic Regarding Future Mergers and Acquisitions," Accenture Press Release, 30 May 2002.

12. John R. Harbison, Albert J. Viscio, and Amy T. Asin, "Making Acquisitions Work: Capturing Value After the Deal," Booz Allen & Hamilton Series of View-points on Alliances, 1999.

13. Craig Tall, telephone interview by Catherine Lemire, Bain & Company. Toronto: 1 October 2002.

14. Rolf Börjesson, interview by Tom Shannon, Bain & Company. London: 2001.

15. Hans Bieshaar, Jeremy Knight, and Alexander van Wassenaer, "Deals That Create Value," McKinsey Quarterly 1 (2001).

16. Todd Thomson, speaking on "Strategic M&A in an Opportunistic Environment." (Presentation at Bain & Company's Getting Back to Offense conference, New York City, 20 June 2002.)

17. Mike Bertasso, correspondence with David Harding, 15 December 2003.

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• Investment thesis

What is an investment thesis?

Why you need a solid investment thesis, how to write an investment thesis , step one: determine your minimum viable fund size, step two: pinpoint your investment focus, step three: portfolio construction , how to present your fund thesis to lps, investment thesis example.

Breaking into the venture capital ecosystem is both challenging and competitive. Having a great investment thesis is key to running a successful VC fund. Without a clear investment strategy and effective portfolio construction , your fund won’t get very far.

In this article, we’ll cover how you can develop a strong investment thesis.

In private equity and venture capital , an investment thesis (sometimes called a fund thesis or fund strategy) outlines how you plan to use invested capital to generate returns. Your investment thesis clarifies how you’ll make money for the investors in your fund—it’s a definition of what your fund will do. 

Your investment thesis may include:

Your fund size

The number of companies in your portfolio

The stages and industries of those companies

The geographies those companies are located in

The differentiated way your fund will support your portfolio companies

Your average check size

The amount of capital reserved for follow-on investments

The return profile for your fund, based on the size of the stakes you’re trying to take in each company and your estimated success rate

How the fund will set itself apart from similarly sized or focused funds

An investment thesis tells a story by describing how each of these elements work together. 

Your fund’s investment thesis explains how you’ll cooperate with, compete with, and differentiate from other venture funds. An effective fund investment thesis is realistic and sustainable. It aligns with your investment team’s network of professional contacts (which provides access to deals), untapped opportunities in new and existing markets, and your LPs’ investment interests. 

Your fund thesis also supports compliance with the “ venture capital fund ” definition under the Investment Advisers Act of 1940 , which is important if you plan to rely on the related regulatory exemption for private funds. 

Creating your own fund investment thesis involves determining fund size, investment focus, and portfolio construction. 

The size of your fund influences almost every element of your investment strategy: The number of companies in your portfolio, your check size, the amount of reserve capital you have, and the return profile for your fund. Fund size also affects the types of LPs you attract and helps determine your fund’s portfolio management fees, which then dictate the operational expenses you can realistically support. 

Competitive research

To determine your ideal fund size, start by researching funds with goals and benchmarks like yours to see how they’re faring. You may also want to research successful funds across a handful of different industries and sectors to see what works. You can learn more information about funds by subscribing to trade publications, reading press releases from funds when they close, or on social media.

Once you’ve settled on a fund size, the next step is to outline the stage, industry, and location you’ll invest in. Articulating your investment focus helps narrow your aim and convince limited partners (LP) with interests in these sectors and stages to get on board with your strategy. It also makes it easier for founders who meet your parameters to identify your fund as a potential investor—and discourages founders who aren’t a good fit from pitching your firm.

At what point in a company’s life cycle do you want to invest and offer guidance? If you’re interested in being a sounding board for early-stage companies who are just getting started, you might want to invest at the pre-seed , seed , or Series A stages. However, if you prefer to work with companies that already have steady revenue and an established business model, you’ll probably want to focus on a later stage. 

Ultimately, the stage where you can focus your investments will be a function of your fund size and the anticipated number of companies in your portfolio. So keep this top of mind when building out your minimal viable fund size.   

Which sectors are you interested in? Do you plan to target a specific industry—like healthcare, fintech, or real estate—or focus on companies across a handful of different industries? 

Where are the companies you’ll be investing in? What particular challenges and assets do they have because of where they operate? You may choose to invest in local companies if you already have a deep network of contacts nearby. On the other hand, if you’re open to traveling, or want to capitalize on emerging, international, or underserved markets, you may want to expand your reach. This may also apply if your fund’s investment thesis is based on industry, for example, so you may be agnostic to geography. 

Other considerations

Depending on your investment goals, you might have other criteria to look at, like a company’s social impact, environmental influence, or commitment to diversity, equity, and inclusion. 

A thoughtful portfolio is critical to running a successful fund and shaping your overall investment thesis. Your strategy for portfolio construction signals to LPs how you plan to allocate their capital across investments. Your fund’s investment portfolio is essentially the roadmap for the life of the fund. It spells out the number of companies you’ll invest in, the amount of capital you’ll pour into each company, your target ownership for each company, how much you’ll set aside for initial investments, and how much you’ll reserve for follow-on investments.

Portfolio construction is made up of the following elements: 

Investment focus

Diversification: Types of companies you’ll invest in and what percent of the fund will be for non-qualifying investments or investments outside the thesis

Check size: The amount you’ll invest in each company

Investment horizon: How long you have to allocate the capital and how long you’ll hold each investment

Expected returns: How much you expect to return on the capital invested

Investor requirements: Maximum or minimum contributions

A good rule of practice is to ensure that your investments align with your portfolio construction model before making each investment decision, and then actively thereafter. Set aside time to regularly evaluate whether your investments align with your model, and where to course-correct. If your investments deviate from your original thesis, you’ll need to adjust your model or reset your focus. This is particularly important to track if you include a specific investment thesis in your fund’s legal documents.

Learn more about how to create a portfolio construction strategy

Most VCs prepare versions of their fund thesis that go into different levels of detail, ranging from a one-sentence elevator pitch, like the example below, to a full pitch deck.

You should be able to sum up your fund strategy in one or two straightforward sentences. Here’s an example investment thesis from a hypothetical venture fund:

“Krakatoa Ventures is raising a $25 million seed fund to back U.S.-based startups focused on climate technology and earth sciences. The fund will capitalize a highly specialized network of climate scientists the general partners developed during their two decades of academic study in volcanology and climatology.”

→Ready to make a full pitch deck for LPs? Prepare for your next meeting with investors using our free pitch deck template and example pitch decks .

This example highlights a key aspect of a great fund strategy: It shouldn’t be a thesis that just anybody can go out and execute. Your edge, such as your personal experience and network, are integral parts of the plan. Articulate why you’re better positioned than anyone else to execute your investment thesis.

Related Content

How to Develop Your Own Investment Thesis: A Critical Step for Aspiring Venture Capitalists

s an aspiring venture capitalist, you hold the key to unlock the untapped potential of startups, propelling them to soaring heights and reshaping industries. But in this electrifying landscape of opportunities, how do you navigate through the ever-changing tides? The answer lies in the essence of venture capital success: developing your own investment thesis.

What exactly is an Investment Thesis?

An investment thesis is your North Star, an illuminating beacon that guides you through the vast ocean of startups, helping you navigate toward the brightest prospects. It's a strategic framework, meticulously crafted to align your investment approach, criteria, and aspirations.

With an investment thesis, you define the types of companies you want to invest in, the industries you're interested in, and the stages of startups you believe have the most potential. It's like setting your preferences and priorities before you begin the journey.

Why is an investment thesis so critical for aspiring venture capitalists? The answer is simple—this well-defined roadmap sets you apart from the crowd and gives you the edge to thrive in this fiercely competitive world. It empowers you to make informed decisions, uncover hidden gems in the startup ecosystem, and unlock the true potential of visionary entrepreneurs.

In this blog post, we will explore the essential steps to create a compelling and potent investment thesis

Getting Started With Your Investment Thesis: Conducting Market Research

At the core of any successful investment thesis lies comprehensive market research. Understanding industry trends, evaluating market opportunities, and assessing the competitive landscape are vital steps to identify lucrative investment prospects. 

Keep a finger on the pulse of the business landscape and stay attuned to shifts and disruptions. Analyze the forces shaping various sectors, from cutting-edge technologies and regulatory changes to changes in consumer behavior. Identifying and understanding these trends will enable you to anticipate the future landscape, positioning you as an astute investor who can spot opportunities before they materialize.

With a keen understanding of industry trends, venture capitalists must evaluate market opportunities with a discerning eye. Look beyond the surface and assess the long-term growth potential of markets and industries. Identify white spaces and areas where innovation is likely to flourish. Be mindful of macroeconomic factors, such as GDP growth, inflation rates, and demographic shifts, as they can profoundly influence market dynamics. A comprehensive evaluation of market opportunities will empower you to focus your investments on ventures that have the potential to become tomorrow's industry leaders.

In the vibrant world of startups, competition is the norm. As such, to excel as a venture capitalist, you must also gain a panoramic view of the competitive landscape. Analyze existing players and their strengths, weaknesses, opportunities, and threats (SWOT analysis). Identify startups that have the potential to disrupt established markets and challenge the status quo. Furthermore, seek out market gaps, where unmet needs and underserved customer segments await innovative solutions. Investing in startups that address these gaps can lead to remarkable returns on investment and foster a positive impact on society.

Market research is not a mere exercise of intuition and speculation; it thrives on data-driven insights. Leverage data analytics, market reports, and industry research to augment your understanding of market trends. Embrace technology and data tools that can provide you with a wealth of information at your fingertips. By making data-driven decisions, you'll foster a more robust investment thesis and bolster your credibility as a venture capitalist.

While conducting market research, it's crucial to remember that the startup ecosystem is dynamic and ever-changing. Be prepared to pivot and adapt your investment thesis in response to new information and shifts in the market. Stay agile and flexible, allowing your investment strategy to evolve as you gain deeper insights. Successful venture capitalists are those who can navigate uncertainty, staying attuned to emerging trends and swiftly adjusting their course to capitalize on unforeseen opportunities.

Defining The Investment Criteria for your Investment Thesis

Once you've gathered market insights, now it’s the fun part - it's time to define your investment criteria. Determine the stages of startups you want to invest in, such as seed, early-stage, or late-stage companies. Consider the industries you're passionate about or have domain expertise in. 

Additionally, establish your preferred investment size and the level of diversification you aim to achieve within your portfolio. Having clear investment criteria will streamline your decision-making process and keep your investments focused on your goals.

Determining the Stages of Startups

Venture capitalists invest in startups at various stages of their lifecycle, each offering distinct opportunities and risks. Deciding which stage aligns best with your expertise and risk appetite is pivotal. Consider if you want to invest in seed-stage companies, which are in their infancy and require significant support, or if you prefer early-stage startups with a product and initial traction. Alternatively, you may focus on later-stage companies that are scaling and need capital to expand rapidly. Your chosen stage will dictate your involvement level and the potential return horizon of your investments.

Geographical Preferences and Target Industries

Venture capital is a global endeavor, and you can choose to invest locally, regionally, or even globally. Geographical preferences may be influenced by factors like your network, knowledge of specific markets, and comfort with regulatory environments. Moreover, identifying the industries you're passionate about or have domain expertise in is crucial. Investing in industries you understand well will allow you to provide strategic value to the startups you support, beyond just financial backing.

Investment Size and Portfolio Diversification

The size of your investments and portfolio diversification strategy are interlinked. Determine the average investment size you are comfortable with, as this will influence the types of startups you can back. Some venture capitalists prefer larger, concentrated bets on a select few startups, while others spread their investments across a broader range of smaller companies to diversify risk. Striking the right balance is key—too few investments can expose you to concentrated risk, while too many might dilute your ability to provide adequate support to each startup.

Alignment with Personal Values and Objectives

As an aspiring venture capitalist, your investment criteria should be in harmony with your personal values and long-term objectives. Consider what impact you want to make through your investments. Are you driven by social impact, environmental sustainability, or a particular mission? Aligning your investment criteria with your values will not only enhance your satisfaction as an investor but may also attract entrepreneurs who share your passion, fostering a mutually rewarding relationship.

Market Fit and Growth Potential

While defining your investment criteria, focus on identifying startups that exhibit strong market fit and immense growth potential. Market fit refers to the startup's ability to address a specific problem or need in the market effectively. Investigate whether the startup's product or service resonates with its target audience and has the potential for widespread adoption. Moreover, evaluate the scalability of the business model, as this will determine the startup's growth trajectory and its potential to become a market leader.

Synergy with Your Expertise and Network

Leverage your expertise and network to your advantage when defining your investment criteria. Aligning with startups that can benefit from your insights and connections will create a symbiotic relationship. As an investor, you can offer more than just financial support; your guidance and connections can be invaluable in helping startups navigate challenges and scale their businesses. Synergy with your expertise and network can significantly enhance your value proposition as a venture capitalist.

Balancing Risk and Return

Investing in startups inherently involves risk, and your investment criteria should reflect your risk appetite and tolerance. Strive for a balance between risk and potential return that aligns with your investment objectives. High-growth startups often carry higher risk, but they can also offer substantial rewards.

On the other hand, more established companies may provide a steadier return, albeit with potentially lower growth potential. Understanding this balance is essential in defining your investment criteria and building a well-rounded portfolio.

Balancing risk and potential returns is a fine art, and your investment thesis should outline how you plan to approach this delicate balance. Furthermore, learn to measure and quantify risk in the startup ecosystem using various risk assessment techniques to make informed investment choices.

Identifying Key Performance Indicators (KPIs) for Your Investment Thesis

Key Performance Indicators are quantifiable metrics that provide critical insights into the performance and achievements of a business. By tracking relevant KPIs, venture capitalists can assess the overall health and direction of a startup, enabling them to support portfolio companies effectively. Moreover, KPIs offer a basis for comparison, allowing you to benchmark a startup's progress against its peers and industry standards.

Tailoring KPIs to Startup Stages and Industries

While KPIs share a common goal of tracking performance, their significance can vary significantly based on the stage and industry of a startup. For example, early-stage companies might prioritize metrics related to customer acquisition, retention, and product-market fit. In contrast, late-stage startups might focus on revenue growth, customer lifetime value, and profitability. Tailoring KPIs to suit the unique needs and challenges of each startup stage and industry is vital for meaningful performance assessment.

Selecting Actionable and Measurable Metrics

When identifying KPIs, seek metrics that are both actionable and measurable. Actionable KPIs provide clear guidance on how to improve performance, helping startups identify areas that need attention and enhancement. Measurable KPIs, on the other hand, are quantifiable, allowing you to track progress and changes over time. The ability to take action based on KPIs and measure their impact ensures a proactive approach to enhancing a startup's performance.

Common KPIs in Venture Capital

While KPIs can be highly specific to individual startups and industries, certain metrics have proven valuable across the venture capital landscape. Some common KPIs include:

Customer Acquisition Cost (CAC): The cost to acquire a new customer, helping evaluate marketing efficiency.

Monthly Recurring Revenue (MRR): Provides insight into the company's predictable revenue stream.

Customer Churn Rate: Measures customer retention and the ability to maintain long-term 

relationships.

Burn Rate: Tracks how quickly a startup is spending its capital, indicating runway and sustainability.

Gross and Net Profit Margins: Assessing revenue generation and cost efficiency.

Customer Lifetime Value (CLV): Estimates the value of a customer over their entire engagement with the startup.

The Power of Data-Driven Decision Making

KPIs are not merely numbers on a dashboard; they fuel data-driven decision-making. By continuously monitoring KPIs, you can identify strengths, weaknesses, and potential roadblocks. Data-driven insights enable you to provide tailored guidance and support to your portfolio companies, helping them navigate challenges and seize growth opportunities.

Building a Well-defined Due Diligence Process

A well-structured due diligence process empowers you to make informed decisions, mitigates risks, and will help you identify the startups that align best with your investment thesis!

Let's delve deeper into the key steps involved in building an effective due diligence process so you can include it on your Investment Thesis:

1. Defining Your Due Diligence Objectives

Start by clarifying your objectives for the due diligence process. What key aspects do you want to evaluate in potential startups? Identify the critical areas of focus, such as market opportunity, team capabilities, competitive landscape, financials, and scalability. Setting clear objectives ensures that you leave no stone unturned while assessing potential investments.

2. Gathering Essential Information

Begin the process by collecting comprehensive data and information about the startup under consideration. Request financial statements, market research, business plans, and any other relevant documentation. Engage in one-on-one discussions with the startup's founders and management team to gain insights into their vision, strategy, and execution plans. Gathering essential information lays the groundwork for a detailed evaluation.

3. Market Analysis

Conduct a thorough market analysis to assess the startup's positioning within its industry. Analyze market trends, potential for growth, competitive landscape, and potential threats. Understanding the market dynamics helps you gauge the startup's competitive advantage and potential for success.

4. Team Evaluation

Evaluate the startup's team to understand their expertise, experience, and alignment with the company's vision. Assess the cohesiveness and complementarity of the team, as a strong and capable team is a significant factor in a startup's success.

5. Financial Due Diligence

Perform rigorous financial due diligence to examine the startup's financial health and viability. Analyze revenue streams, cost structures, cash flow, and projections. Scrutinize financial ratios and indicators to assess the startup's financial sustainability and growth potential.

6. Product and Technology Assessment

Evaluate the startup's product or technology to gauge its uniqueness and potential market fit. Understand the value proposition it offers to customers and how it addresses market needs. Assess the scalability and defensibility of the product or technology to ensure long-term competitiveness.

7. Legal and Regulatory Review

Conduct a legal and regulatory review to identify any potential legal risks or compliance issues. Scrutinize contracts, licenses, intellectual property rights, and any pending legal disputes. Ensuring the startup operates within legal bounds safeguards your investment from unnecessary risks.

8. Customer and Partner Feedback

Gather feedback from customers, partners, and industry experts to gain external perspectives on the startup's product or service. Their insights can validate the startup's market fit, customer satisfaction, and potential for growth.

9. Risk Analysis

Identify and assess potential risks associated with the investment. Consider market risks, operational risks, technological risks, and competitive risks. A thorough risk analysis helps you make informed decisions about risk-reward trade-offs.

10. Decision-Making and Post-Investment Monitoring

Based on the findings from the due diligence process, make data-driven decisions on whether to invest in the startup. If you decide to proceed, establish a monitoring plan to track the startup's progress and performance after the investment. Continuously monitor the startup's performance against the initially defined objectives and pivot if needed.

Refining Your Thesis and Iterating

It’s also important to keep in mind that an investment thesis should not be static; it should evolve with your experiences and the changing market dynamics. Embrace flexibility and adaptability, and be open to learning from both successful and unsuccessful investments. As you gain insights from your portfolio companies and the market, update and refine your investment thesis to enhance its effectiveness continually!

Developing your own investment thesis is a critical step for aspiring venture capitalists. It provides you with a structured approach to identify and seize opportunities in the dynamic startup ecosystem. 

Through comprehensive market research, clear investment criteria, risk assessment, and an adaptable approach, your investment thesis will act as a guiding force throughout your venture capital journey. Embrace the continuous learning process, and don't hesitate to iterate and refine your thesis as you gain experience in the thrilling world of venture capital.

Interested in the full research paper?

You might also like, mind over money: how psychology shapes startup investment decisions, 7 vc myths busted: what really happens in a day in the life of a venture capitalist, the ultimate guide to venture capital term sheets, mastering the art of the vc pitch: how to secure funding for your startup, surviving the startup gauntlet: lessons in failure and success, 18 questions every vc should ask a founder during an introductory call, about goingvc.

GoingVC is built around the idea of making venture capital education, investing, networks, and talent more accessible to those with the desire to succeed.

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Investment Thesis: An Argument in Support of Investing Decisions

October 29, 2023 by Abi Tyas Tunggal

An investment thesis is a well-reasoned argument that supports a specific investment decision, playing a vital role in the strategic planning process for individual investors and businesses alike. It comprises detailed research and analysis to evaluate an investment's potential profitability. A good investment thesis serves multiple purposes, including helping in the decision-making process, providing a comprehensive framework for monitoring and assessment, and offering a structured approach to identifying potential opportunities.

There are different types of investment strategies, such as venture capital , private equity, and long-term value investments. The core of an investment thesis involves identifying key parameters for evaluating an investment, understanding the unique market dynamics and competitive landscape, and realizing how to create value through strategic planning. To ensure a comprehensive and detailed investment thesis, it is crucial to involve thorough research, considering emerging trends and opportunities, and incorporating industry case studies for better understanding. Ultimately, financial statements and valuation metrics play a significant role in determining a well-suited investment decision.

Key Takeaways

• An investment thesis is a well-reasoned, research-based argument supporting a specific investment decision
• There are several types of investment strategies, and a well-structured investment thesis addresses market dynamics and competition to create value
• Research, valuation metrics, and understanding emerging trends are crucial in crafting a compelling investment ideas

Defining an Investment Thesis

An investment thesis is a well-structured, logical argument that justifies a particular investment decision, based on thorough research and analysis. It is essential for investors, as well as financial professionals in the domains of investment banking, private equity, hedge funds, and venture capital funds . A confident and knowledgeable investor will build out clear investment criteria to successfully navigate the investment landscape.

The primary purpose of an investment thesis is to outline the reasons and expected outcomes of a proposed investment, often focusing on the potential for growth and profit. This document offers a roadmap for investors, guiding them through their decision-making process, and helping to ensure that they arrive at rational and informed conclusions. A comprehensive investment thesis should consider various aspects, such as market conditions, competitive landscape, and financial performance of the targeted asset or company.

A strong investment thesis is built on rigorous market research and analysis. This involves evaluating historical and current financial information, as well as scrutinizing industry trends and the overall economic environment. Skilled investors will also incorporate their expertise in the industry to better assess the merits of an investment opportunity. This level of thoroughness creates a confidently expressed thesis, allowing investors to remain steadfast in their investment decisions, even amid market volatility.

In summary, an investment thesis plays a pivotal role in the investing process. It presents a well-reasoned argument, grounded in extensive research and clear analysis, that supports an investment decision. Crafting a robust investment thesis is crucial for both individual and institutional investors as it provides a solid foundation for investment choices and ensures the alignment of investment strategies with long-term objectives.

Importance of Research in Crafting an Investment Thesis

Thorough research is a crucial aspect of creating a solid investment thesis. It allows investors to gather vital information and insights that will help guide their investment decisions. There are several elements to consider while conducting this research, with data analysis, understanding risks, and returns being essential components.

Data Analysis

Data analysis forms the backbone of any research conducted for crafting an investment thesis. It involves collecting, organizing, and interpreting various types of data, such as financial statements, market trends, and industry forecasts, to identify patterns and make informed predictions about a potential investment opportunity. A comprehensive data analysis can help investors make confident choices based on reliable information, which is essential for a successful investment strategy.

Some key data analysis techniques used in crafting an investment thesis include:

• Comparative analysis: Comparing the performance of different companies within the same industry to identify investment opportunities.
• Trend analysis: Monitoring historical data to determine patterns and potential future developments.
• Financial statement analysis: Examining the financial health of a company through its balance sheets, income statements, and cash flow statements.

Understanding Risks and Returns

One of the primary goals of research in developing an investment thesis is to assess the risk/reward profile of a potential investment. This involves evaluating the potential risks associated with the investment and weighing them against the expected returns. A sound investment thesis should demonstrate a clear understanding of these risks and offer a rationale for why the investment’s potential returns make it a worthwhile addition to a portfolio.

Some common risks to consider when crafting an investment thesis include:

• Market risk: The risk of an investment losing value due to fluctuations in the market.
• Credit risk: The risk that a company or issuer of a financial instrument may default on its obligations.
• Operational risk: The risk of losses arising from failed internal processes, systems, or personnel within a business.

Evaluating these risks requires investors to develop a deep understanding of the investment opportunity, its industry, and the factors that may impact its performance. A diligent and systematic approach to research can help investors identify potential risks and gains, leading to informed and confident decision-making in crafting a strong investment thesis.

Types of Investment Strategy

When it comes to crafting an investment thesis, selecting an appropriate investment strategy is crucial. In this section, we will discuss two popular strategies: Value Investing and Growth Investing.

Value Investing

Value investing is a strategy that focuses on identifying undervalued stocks or assets in the market. These investments typically have lower valuations, which are reflected in their price-to-earnings ratios or book values. The central idea behind value investing is that the market may sometimes undervalue a company or asset, presenting an opportunity for investors willing to do thorough research and analysis.

The process of value investing involves:

• Fundamental analysis : Evaluating a company's financial health, management, and competitive advantages
• Value metrics : Identifying various valuation metrics, such as price-to-earnings, price-to-book, and dividend yield
• Margin of safety : Discovering investment opportunities with a built-in cushion to reduce the risk of loss

Famous investors, such as Warren Buffett and Benjamin Graham, have implemented value investing strategies to achieve long-term success.

Growth Investing

On the other hand, growth investing centers on companies that are expected to grow at an above-average rate compared to their industry. Growth investors seek opportunities in businesses they believe will offer substantial capital appreciation through rapid expansion or market-share gains. They prioritize the potential for future profit over the stock's valuation.

Features of growth investing include:

• High expectations : Companies targeted by growth investors typically have a history of robust revenue and profit growth
• Momentum : Investors seek stocks with upward price momentum, as increasing demand for these stocks may drive prices even higher
• Risk tolerance : Growth stocks can be volatile, and investors must be prepared to weather price swings

Renowned growth investors like Peter Lynch and Phil Fisher have demonstrated the effectiveness of growth investing throughout their careers.

Both value and growth investing strategies have their unique advantages and require different levels of risk tolerance. Investors should carefully consider their investment thesis and select a strategy that aligns with their objectives and risk appetite.

Venture Capital and Private Equity Investment Theses

When considering investments in private companies, venture capital (VC) and private equity (PE) firms each have their own unique strategies encapsulated within their respective investment theses. These theses provide guidance on the focus of investments, the sectors or geographies of interest, and the stage of the target companies.

Learn more about the differences between private equity and venture capital .

Venture Capital Investment Thesis

A venture capital investment thesis outlines how a VC fund aims to make money for its investors, typically referred to as Limited Partners (LPs). This strategy identifies crucial factors such as the stage of companies the fund will invest in, commonly early-stage companies, the targeted geography, and specific sectors of focus.

The thesis may vary depending on a venture capitalist's unique specialization, with some firms concentrating on a specific vertical and stage, while others invest more broadly without a core thesis driving their decisions. The underlying objective of a VC investment thesis is to outline how the firm will achieve high returns on investment by supporting and nurturing the growth of portfolio companies.

Private Equity Investment Thesis

In contrast, a private equity investment thesis is an evidence-based case in support of a particular investment opportunity. It usually begins with a concise argument illustrating how the potential deal supports the fund's general investment strategy. The thesis then provides details that substantiate this preliminary conclusion.

Private equity firms often target more established companies compared to venture capital firms, focusing on businesses with a proven track record. The PE investment thesis may identify areas where operational improvements, strategic mergers, or better capital structures could enhance value, ultimately generating a good return for the firm and its investors.

Overall, both venture capital and private equity investment theses serve as critical frameworks guiding investment decisions. They not only help align these decisions with a firm's specialized strategy but also provide a basis for evaluating potential deals to ensure they contribute to the firm's goals and long-term value creation.

Key Parameters for Evaluating an Investment

When assessing the viability of an investment, it is essential to examine various key parameters to make informed decisions. By analyzing these factors, investors can gain a deeper understanding of a company's financial health and its potential for growth.

One vital metric to consider is earnings per share (EPS) , which represents the portion of a company's profit attributed to each outstanding share of its common stock. A higher EPS indicates higher earnings and suggests that the company may be a lucrative investment opportunity.

Another fundamental metric is the return on assets (ROA) , which measures the effectiveness of a company in using its assets to generate profit. The higher the ROA, the better the company is at utilizing its assets to generate earnings. Similarly, return on equity (ROE) is a measure of financial performance that calculates the proportion of net income generated by a company's equity. A higher ROE demonstrates the efficient usage of shareholders' investments.

Conducting a thorough analysis of the company's financial statements is crucial. This includes reviewing income statements, balance sheets, and cash flow statements. By doing so, investors can gain insights into the company's profitability, liquidity, and solvency.

Another important factor to consider is a company's cash position. Adequate cash reserves enable a company to meet its short-term obligations and invest in growth opportunities. On the other hand, a lack of cash can leave a company vulnerable to market fluctuations and financial stress.

It is also essential to evaluate a company's capital structure, which refers to the proportion of debt and equity financing it uses to fund its operations. A balanced capital structure ensures financial stability, while excessive debt may lead to financial distress.

Examining a company's debt level is crucial, as it can directly impact the company's financial flexibility and risk profile. A high level of debt can hinder a company's ability to grow and adapt to changes in the market, making it a less attractive investment option.

Assessing a company's assets and how they're managed plays a significant role in evaluating an investment opportunity. This includes tangible assets, such as property and equipment, and intangible assets, such as patents and trademarks. Effective asset management contributes to a company's ability to generate profit.

Finally, it is important to scrutinize a company's costs associated with its operations, such as production costs and overhead expenses. A company that efficiently manages its costs will likely generate higher profitability and provide better returns for investors.

Creating Value through Strategic Planning

Strategic planning plays a crucial role in creating value for investors and businesses. It serves as the foundation for effective decision-making and guides companies towards achieving their goals. Through strategic planning, management teams can identify and focus on core competencies that contribute to a company's competitive advantage.

One way to create value is to prioritize revenue growth. By identifying key growth drivers, such as product innovation or market expansion, companies can allocate resources accordingly to boost earnings. Such targeted investments in growth engines allow firms to capture a larger market share and drive long-term profitability.

Another aspect of strategic planning involves optimizing a company's holdings. By assessing the existing portfolio, management can decide whether to divest underperforming assets or make strategic acquisitions that align with their investment thesis. The right combinations and adjustments can significantly enhance a company's overall performance and shareholder value.

Risk management is also an essential aspect of strategic planning. Companies must assess potential risks and incorporate suitable mitigation measures in their plans. This ensures that organizations are prepared for unforeseen circumstances, which can safeguard profits and protect the company's assets.

Furthermore, creating value requires continuous improvement and adaptation to market trends. Companies should routinely reevaluate their strategies to identify both internal and external factors that may impact their current position. By setting clearly defined objectives and quantifiable financial targets, management teams can measure their progress effectively and adjust their strategic plans as needed.

In summary , creating value through strategic planning involves a combination of focusing on core competencies, prioritizing revenue growth, optimizing holdings, managing risk, and continuously reassessing the company's strategic direction. This holistic approach can help businesses enhance their profitability, strengthen their market position, and ultimately deliver strong value creation to investors.

Understanding the Market and Competition

Before developing an investment thesis, it is crucial to have a deep understanding of the market and its competition. The stock market is influenced by various factors such as economic supercycles, bear markets, and secular trends. Analyzing these elements will provide a solid foundation to recognize potential investment opportunities.

An economic supercycle is a long-term pattern that occurs over several decades, during which the economy undergoes periods of growth and contraction. Investors need to be aware of the current phase and how it may impact their investment decisions. For instance, during a growth period, certain industries tend to outperform, while others may underperform during a contraction phase.

In addition to analyzing these market conditions, investors must also pay heed to the competitive landscape of the sector in which they plan to invest. Examining the competitors within the industry enables one to identify companies with competitive advantages, which may lead to superior performance. These advantages can stem from factors such as lower costs, innovation, or a dominant market share.

A bear market occurs when the stock market experiences a prolonged decline, typically characterized by a decrease of 20% or more from recent highs. In such environments, it becomes even more crucial for investors to understand the competitive dynamics within an industry to identify resilient companies that can withstand market downturns.

A secular trend is a long-term movement in a particular direction that can last for several years or even decades. Identifying secular trends within industries is essential to spotting opportunities for long-term growth. For example, investors may capitalize on sectors benefiting from a shift towards clean energy usage or the increasing importance of artificial intelligence.

In summary, understanding the market and competition requires a deep analysis of the stock market, economic supercycles, bear markets, and secular trends. By researching industry trends, evaluating market opportunities, and assessing the strengths and weaknesses of competitors, investors can develop a robust investment thesis that increases the likelihood of achieving long-term returns.

Industry Case Studies

In the investment world, the importance of an investment thesis cannot be overstated. By examining various industry case studies, we can gain insight into how businesses make strategic investments to enhance their value. In this section, we'll discuss notable examples from companies such as DuPont, General Motors, Rexam PLC, and Clear Channel Communications.

DuPont is a leading science and innovation company with a focus on agriculture, advanced materials, and industrial biosciences. During its acquisition of Dow Chemical, DuPont developed a robust investment thesis to justify the merger. Their investment case relied on the belief that the combined entity would benefit from increased operational efficiencies, new market opportunities, and enhanced innovation capabilities. This approach provided a strong rationale for the deal, which has created a more competitive company in the global market.

General Motors (GM) , a multinational automobile manufacturer, crafted its investment thesis in response to evolving trends in the automotive industry, such as the increasing importance of emissions reduction, electrification, and autonomous technology. GM's investment case centered on embracing these trends, focusing on innovation, and expanding its product offerings through strategic M&A, investments, and partnerships. For example, GM has made significant investments in electric vehicles and autonomous driving technology, positioning the company for future growth in these areas.

Next, we have Rexam PLC , a former British packaging manufacturer that was a leading producer of beverage cans globally. When Ball Corporation sought to acquire Rexam, they developed an investment thesis based on the value derived from combining the two companies' strengths. This thesis outlined the strategic fit between both companies, synergies from combining production capabilities, and projected growth, particularly in developing markets. The successful acquisition helped Ball Corporation consolidate its position as a global leader in the packaging industry.

Lastly, Clear Channel Communications is a media company specializing in outdoor advertising. As the company sought to expand its presence in this sector, it created an investment thesis centered around leveraging its core competence in outdoor advertising and acquiring strategic assets. One example is Clear Channel's acquisition of crucial billboard locations to solidify its competitive edge in the outdoor advertising market. This targeted growth strategy has allowed Clear Channel to remain a dominant player in the industry.

In conclusion, these industry case studies demonstrate the value of a well-crafted investment thesis. Effective investment theses provide a roadmap for companies to pursue strategic acquisitions and investments that create long-term value, while also helping investors evaluate the viability of proposed deals. By understanding how companies like DuPont, General Motors, Rexam PLC, and Clear Channel Communications have strategically invested in the market, we can better appreciate the importance of a well-structured investment thesis.

Long-Term Investment Strategies

A long-term investment strategy refers to an approach where investors hold onto their investments for an extended period, typically more than one year. This type of strategy aims to achieve the investment goal by allowing assets to grow through market fluctuations and capitalizing on the power of compounding interest. Diversification and patience play pivotal roles in ensuring the success of a long-term investment strategy.

Portfolio managers often use various techniques and methods to craft long-term investment portfolios. Some of these techniques include targeting undervalued sectors or stocks, dividend reinvestment plans, dollar-cost averaging, and asset allocation. By employing these strategies, portfolio managers increase chances of achieving their clients' investment goals over time.

In order to develop long-term investment strategies, investors should first define their investment goal . This could include objectives such as saving for retirement, funding a child's college education, or purchasing a home. Clear investment goals help in designing an appropriate investment strategy, taking into account factors like the investor's risk tolerance, time horizon, and available capital.

One key aspect of a successful long-term strategy is diversification . Diversifying across asset classes and industries allows investors to spread risks and potentially achieve higher risk-adjusted returns. A well-diversified portfolio will typically consist of a mix of stocks, bonds, and other asset types, with variations in investment size, industry sector, and geographical location. This diversified approach minimizes the impact of underperforming investments on the overall portfolio.

Another crucial element in long-term investing is patience . Market fluctuations can be tempting for investors to react to their emotions and make impulsive decisions, which could derail a well-thought-out investment strategy. Maintaining a disciplined approach and sticking to one's investment plan, even during periods of market volatility, is paramount to achieving long-term success.

In conclusion, long-term investment strategies require investors to define clear goals, diversify their portfolio, and exercise patience in the face of market fluctuations. By adhering to these principles, investors and portfolio managers can steer a course towards achieving their investment objectives.

Emerging Trends and Opportunities

In recent years, various emerging trends have presented attractive opportunities for investors. Among these trends, renewable energy, megatrends, and the coffee shop market stand out as sectors with significant potential for growth.

Renewable energy has gained considerable attention and investment as a response to the global push for addressing climate change and reducing emissions. Solar, wind, and hydroelectric power are some of the most prominent technologies in this sector. With an increased interest in clean energy from both governments and consumers, companies in this space are poised to experience substantial growth.

Megatrends such as urbanization, aging populations, and technological advancements are also influencing investment opportunities. These large-scale shifts provide a backdrop for businesses to tap into new markets and adjust their strategies to capitalize on these changes. For instance, companies working in healthcare and biotechnology may benefit from catering to the needs of an aging population, while businesses focused on artificial intelligence (AI) and automation may find increased demand due to technological advancements.

The coffee shop market, too, presents investment opportunities. This industry has experienced robust growth in recent years as consumers increasingly seek out unique, high-quality coffee experiences. Independent and specialty coffee shops are at the forefront of this trend. Niche coffee shops that offer novel and authentic experiences have seen success by catering to the specialized preferences of today's consumers. As the demand for artisanal and premium beverages continues to rise, businesses operating in this space can expect to have ample opportunities for growth.

In conclusion, current emerging trends such as renewable energy, megatrends, and the coffee shop market offer a wealth of investment opportunities. As these sectors continue to develop and evolve, investors with well-informed investment theses stand to benefit from the potential rewards in these growing industries.

Role of Financial Statements and Valuation Metrics

Financial statements play a vital role in the investment thesis by providing crucial information about a company's financial health and performance. They consist of the balance sheet, income statement, and cash flow statement, which offer insights into the company's assets, liabilities, revenues, expenses, and cash flows. Investors use these statements to assess the company's past performance, current financial condition, and potential for future growth.

Valuation metrics, on the other hand, are vital yardsticks that investors use to compare different investment opportunities and make informed decisions. These metrics include price-to-earnings (P/E) ratio, price-to-sales (P/S) ratio, price-to-book (P/B) ratio, dividend yield, and return on equity (ROE), among others. By analyzing these ratios, investors can gauge a company's value relative to its peers and make better investment choices.

Analysts and investors scrutinize financial statements to identify growth trends, profitability, and financial stability. For instance, they may calculate the gross margin, operating margin, and net profit margin to determine the company's profitability across different stages of its operations. Additionally, they examine liquidity ratios, such as the current ratio and quick ratio, to assess the company's ability to meet its short-term obligations.

Valuation metrics provide a quantitative basis for comparing investment opportunities within the same industry or across different sectors. For example, a lower P/E ratio may indicate that a stock is undervalued, while a high P/E ratio might suggest overvaluation. Moreover, the P/B ratio can help investors determine if a stock is undervalued by comparing its market price to its book value.

Another key valuation metric is the dividend yield, which measures the annual dividend income per share relative to the stock's price. A higher dividend yield may attract income-oriented investors, while a lower yield might be more appealing to growth-focused investors. Furthermore, the ROE ratio, which measures a company's profitability in relation to its equity base, is an essential metric for evaluating the efficiency of management in creating shareholder value.

In conclusion, financial statements and valuation metrics are indispensable tools for investors to evaluate a company's financial health and investment attractiveness. By analyzing these data points, investors can make well-informed investment decisions that align with their risk tolerance and investment objectives.

Concluding Thoughts on Crafting a Compelling Investment Thesis

Crafting a compelling investment thesis is crucial for informed investing decisions, as it helps investors thoroughly analyze a potential opportunity. A well-researched investment thesis demonstrates the investor's conviction level and reinforces their confidence in the investment choice. This process involves a deep understanding of the business, its value drivers, and its potential growth trajectories.

A strong investment thesis should be definitive, clearly articulating the reasoning behind the opportunity and the expected returns. This allows investors to stay focused on their goals and maintain their conviction, even when the stock's price movement does not align with their expectations.

By adopting a confident, knowledgeable, and neutral tone, investors can effectively communicate their investment thesis to others. Clarity in presenting the investment case is essential for persuading potential partners or stakeholders to support the opportunity. Utilizing formatting tools such as tables and bullet points can aid in conveying essential information efficiently and ensuring the investment thesis is easy to understand.

In summary, crafting a compelling investment thesis enables investors to make well-informed decisions that align with their financial goals. By developing a thorough understanding of the investment opportunity and maintaining a strong conviction level, investors can better navigate the market and achieve long-term success.

Frequently Asked Questions

How do you develop a strong investment thesis.

A strong investment thesis begins with thorough research on the company or asset in question. This may include looking at the financials, competitive position, management team, industry trends, and future prospects. It's essential to critically analyze the available information, identify potential risks and rewards, and establish a clear rationale for the investment based on this analysis. Staying focused on the long-term outlook and maintaining a disciplined approach to the investment process can also contribute to developing a robust investment thesis.

What are the key elements to include in an investment thesis?

An investment thesis should include the following key elements:

• Overview of the company or asset: Provide a brief background of the company or asset, including its market, size, and competitive positioning.
• Investment rationale: Detail the reasons for investing, such as attractive valuation, strong revenue growth, or a unique business model.
• Risk assessment: Identify potential risks and how they could impact the investment returns.
• Expected return: Estimate the potential financial return based on the identified growth drivers or catalysts.
• Time horizon: Indicate the investment period, typically long-term, during which the thesis is expected to play out.
• Fund size: Specify the amount of invested capital that will be allocated to this particular investment, considering its impact on portfolio construction, liquidity, and potential returns within the overall portfolio strategy

How can one evaluate the success of an investment thesis?

Evaluating the success of an investment thesis involves tracking the progress of the company or asset against its initial expectations and underlying assumptions. This may involve measuring financial performance, analyzing key developments in the industry and the company's position within it, and monitoring potential changes in overall market conditions. It is helpful to revisit the investment thesis regularly to assess its validity and make adjustments as necessary.

What's the difference between an investment thesis for startups and publicly traded companies?

An investment thesis for a startup often focuses on the growth potential of a new or emerging market, considering the innovative products or services the startup offers in that market. Here, the focus may be more on the potential for long-term value creation, the management team's ability to execute on their vision, and market fit.

For publicly traded companies, the investment thesis may include analysis of current financial performance, valuation multiples, and overall market trends. Publicly traded companies have more historical data and financial performance information available, allowing investors to make more informed decisions based on these factors.

How does an investment thesis guide decision-making in private equity?

In private equity, the investment thesis helps guide the selection of companies to invest in, as well as the structuring of deals to acquire those companies. It provides a blueprint for how the private equity firm aims to create value, including plans for operational improvements, financial engineering, or growth strategies. This thesis serves as a basis for monitoring the progress of an investment and helps make decisions on the timing of potential exits.

How can real estate investment theses differ from other sectors?

Real estate investment theses may focus on factors such as location, property type, market dynamics, and demographic trends to identify attractive investment opportunities. The analysis may also take into account macroeconomic factors, such as interest rates and economic growth, which can influence real estate markets. Additionally, real estate investments may be structured as either direct property investments or through financial instruments like Real Estate Investment Trusts (REITs), affecting the underlying investment thesis.

What considerations should a first-time fund manager have when developing a fund's investment thesis?

For a first-time fund manager, crafting a compelling and robust fund's investment thesis is paramount for attracting investors. Given their lack of a track record, these managers need to lean heavily on the research, clarity, and vision articulated in their investment thesis. The thesis should detail how the fund aims to identify ideal investments, especially those in industries with high margins. It should also benchmark the strategies against industry standards to highlight the manager's acumen and awareness of market norms.

How is a stock pitch related to an investment thesis and what role does a target price play in it?

A stock pitch is essentially a condensed, persuasive form of an investment thesis, often presented to stakeholders to advocate for investing in a particular publicly-traded company. A key element of any stock pitch is the target price, which is an estimation of what the stock is worth based on projections and valuation models. This target price serves as a quantitative anchor for the investment thesis, giving stakeholders a specific metric against which to measure potential returns and risks.

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Create Your Own Venture Capital Strategy

Venture capital funding has experienced exponential growth in recent years. While the peak for venture capital in terms of dollar value has passed in the face of the global economic slowdown, the field continues to be one of tremendous opportunity — if you know where to find it.

In order to thrive in this fast-paced, volatile environment, venture capital professionals must stay abreast of trends and develop a solid investment thesis to help them navigate uncertainty and pinpoint viable opportunities.

Lead faculty Angela Lee is the founder of 37 Angels, an investing network that has evaluated 20,000 startups, invested in 90+ startups, and currently activates new investors through a startup investment boot camp. Join us to learn how to create a successful investment strategy and decision-making framework to improve venture fund performance and intelligently diversify your portfolio.

Global venture capital funding surged to $621B in 2021, two times more than in 2020, and around 10 times the level of 10 years ago.

Source: CB Insights

$132B invested in financial services in 2021, which is 169 percent year-over-year growth and 21 percent of total venture funding.

62 percent of all venture capital deals are early-stage deals.

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By the end of the program, you will be able to:

• Determine the best investment strategy for your portfolio
• Establish your criteria for industries and business models to invest in
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• Recognize and navigate trends that are transforming the venture capital market and uncover upcoming opportunities

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This advanced-level program is designed specifically for mid-career venture capital professionals interested in exploring the evolution of the venture capital landscape and identifying emerging startup trends and technologies in which to invest.

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Get a refresher on the venture capital industry and self-assess your current knowledge. Identify the venture capital players, risks, rewards, and funding stages, and navigate the venture capital deal flow process.

Compare existing startup investment strategies and determine the investment strategy that works best for your portfolio.

Identify components of an investment thesis, evaluate real-world investment thesis examples, and build your own criteria for industries and business models in which you want to invest.

Understand the best stages in which to invest and how they benefits your portfolio. Compare methods used to mark up a portfolio.

Explore technology trends that have transformed the market and how to spot upcoming opportunities. Apply a framework to plan for uncertainties and decide on the trends that can add value.

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Professor of Professional Practice in Finance, Faculty Director, the Eugene Lang Entrepreneurship Center, Columbia Business School

Angela Lee Professor of Professional Practice in Finance, Faculty Director, the Eugene Lang Entrepreneurship Center, Columbia Business School Angela Lee is an award-winning professor and former Chief Innovation Officer at Columbia Business School, where she teaches venture capital and leadership programs. She started her career in product management and then moved to consulting at McKinsey. She founded 4 startups and is also the founder of 37 Angels, an investing network that has evaluated over 20,000 companies and invested in over 90+ companies. She also serves as a venture partner at Fresco Capital, an early-stage venture fund that focuses on the future of work, digital health, and sustainability. She was awarded the Dean's Award for Teaching Excellence at Columbia Business School in 2020 and won the Singhvi Prize for Scholarship in the Classroom in 2022. Angela has spoken at the White House and NASA and is an expert in teaching online and making learning scalable. She is a sought-after expert on CNBC, Bloomberg TV, MSNBC, and Fox Business. She was recognized by Inc . as one of 17 Inspiring Women to Watch, by Entrepreneur Magazine as one of 6 Innovative Women to Watch, and by Crain’s as a Notable Women in Tech.

Elliott Robinson Partner, Growth Equity, Bessemer Venture Partners Elliott Robinson is a partner and co-founder of the growth investment practice at Bessemer, where he focuses primarily on cloud software investments, and is a board member of a number of organizations. Prior to Bessemer, he was a partner with M12, a vice president at Georgian Partners, and an associate with Syncom Venture Partners (where he led investments in organizations such as Canva, Forter, and Statespace). He earned his MBA from Columbia Business School and his BS from Morehouse College.

Hilary Gosher Managing Director, Insight Partners Since joining Insight Partners two decades ago, Hilary has played a role in some of the most exciting growth journeys in SaaS history. She founded and leads Insight Onsite, a team that accelerates growth at Insight's portfolio organizations. In addition, she is an adjunct associate professor at Columbia Business School. She holds an MBA from INSEAD in France along with a BA and LLB from the University of Kwa-Zulu Natal, South Africa.

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Other Recommended Programs

• Foundations of Venture Capital (Online) 6 weeks, online Learn the sources for deal flow and select the best organizations to invest in and identify key elements to consider when developing and managing a VC portfolio. Learn more

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The Impact Investor | ESG Investing Blog

Investing for financial return is only part of the equation.

How to Create an Investment Thesis [Step-By-Step Guide]

Updated on June 13, 2023

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One of the worst mistakes an investor can make is to sink their money into an investment without knowing why. While this may seem like the world’s most obvious mistake to avoid, it happens every day. Look no further than the stock market for plenty of examples of misguided optimism gone terribly wrong.

That’s where the idea of an investment thesis comes in. An investment thesis is a common tool used by venture capital investors and hedge funds as part of their investment strategy.

Most funds also use it on a regular basis to size up potential candidates during buy-side job interviews. But you don’t have to work at a venture capital fund or private equity firm to reap the benefits of creating an investment thesis of your own.

Table of Contents

What Is an Investment Thesis?

Materials needed to create a thesis for your investment strategy, a step-by-step guide to creating a solid investment thesis, step 1: start with the essentials, step 2: analyze the current market, step 3: analyze the company’s sector, step 4: analyze the company’s position within its sector, step 5: identify the catalyst, step 6: solidify your thesis with analysis, free tools to help strengthen your investment strategy.

An investment thesis is simply an argument for why you should make a specific investment. Whether it be a stock market investment or private equity, investment theses are all about creating a solid argument for why a certain acquisition is a good idea based on strategic planning and research.

While it takes a little more work upfront, a clear investment thesis can be a valuable tool for any investor. Not only does it ensure that you fully understand why you’re choosing to put your hard-earned money into certain stocks or other assets, but it can also help you develop a long-term plan.

Should an investment idea not go as planned, you can always go back to your investment thesis to see if it still holds the potential to work out. By considering all the information your thesis contains, you’ll have a much better idea of whether it’s best to cut your losses and sell, continue holding, or even add to your position.

An investment thesis includes everything you need to create a solid game plan, making it a foundational part of any stock pitch.

See Related : Best Socially Responsible Stocks To Invest In Today

One of the benefits of an investment thesis is that it can be as complex or as simple as you like. If you actually work at a venture capital firm , then you may want to develop a full-on venture capital investment thesis. But if you’re a retail investor just looking to solidify your investment strategy, then your thesis may be much more straightforward.

If you’re an individual investor, then all you really need to create an investment thesis is somewhere to write it out. Whether it be in a Google or Word doc or on a piece of paper, just make sure you have a place to record your thesis so that you can consult it down the line.

If you’re developing a venture capital investment thesis that you plan to present to an investment committee or potential employers, then there are plenty of great tools online that can help. Slideteam has thousands of templates that can help you create a killer investment thesis , as well as full-on stock pitch templates.

As mentioned earlier, an investment thesis holds the potential to help you plot out a strategy for pretty much any acquisition. But for the sake of simplicity, we’ll assume throughout the examples in the following steps that you’re an investor interested in going long on a stock that you plan to hold for at least a few months or years.

Venture capitalists looking to invest in companies or startups can also apply the same principles to other investment goals. Investors who are looking to short a certain stock should also be able to use these techniques to locate potential investments. The main difference, of course, is that you’ll be looking for bad news instead of good.

First things first. Before you get into doing the research that goes into an investment thesis or stock pitch, make sure you take the time to write out the basics. At the top of the page, include things like:

• The name of the company and its ticker symbol
• Today’s date
• How many shares of the company you already own, if any
• The current cost average for any shares you may already hold
• Whether the stock pays dividends and, if so, how often. You may also want to include the current ex-dividend and dividend payment dates.
• A brief summary of the company and what it does

See Related : How to Start Investing With Purpose

Now it’s time to take a look at the entire market and the direction it’s headed. Why? As Investors Business Daily points out,

“History shows 3 out of 4 stocks move in the same direction as the overall market, either up or down. So if you buy stocks when the market is trending higher, you have a 75% chance of being right. But if you buy when the market is trending lower, you have a 75% chance of being wrong.”

While the overall market direction is definitely an important factor to keep in mind, what you choose to do with this information will largely come down to your individual investing style. Investors Business Daily founder William O’Neil advised investors only to jump into the market when it was trending up.

Another approach, however, is known as contrarian investing, which revolves around going against market trends. Warren Buffett summed up the idea behind this strategy with his famous quote, “Be fearful when others are greedy, and greedy when others are fearful.” Or as Baron Rothschild more graphically put it, “Buy when there is blood in the streets, even if the blood is your own.”

Most investors who are looking for a faster return will likely be better off waiting to strike until the iron is hot. If you align more with the long-term contrarian philosophy, however, bleak macroeconomic outlooks may actually strike you as an ideal investment opportunity .

See Related: How to Invest in Private Equity: A Step-by-Step

Now that you’ve got a look at the overall market, it’s time to take a look at the sector your company fits into. The Global Industry Classification Standard (GICS) breaks down the entire market into 11 sectors. If you want to get even more specific, you can further break down companies into the GICS’s 24 industry groups, 69 industries, and 158 sub-industries.

Once you identify which group your company belongs to, you’ll then want to take a look at that sector’s performance. Fidelity provides a handy breakdown of the performance of various sectors over different time periods.

But why does it matter? Two reasons.

• Identifying which sectors various companies belong to can help you ensure that your portfolio is properly diversified
• The reason that sector ETFs tend to be so popular is that when a sector is trending, many of the stocks within that sector tend to move in unison. The reverse is also true. When a certain industry is lagging, the individual stock prices of the companies in that industry may be affected negatively. While this is not always the case, it’s a general rule of thumb to keep in mind.

The idea behind working sectors into your investment criteria is to give you an overview of what type of investment you’re about to make. If you’re a momentum trader, then you may want to shoot for companies within the strongest-performing sectors this year or even over the past few months.

If you’re a value investor, however, you may be more open to sectors that have historically experienced high growth, even if they are currently suffering due to the overall state of the economy. Some speculative investors may even be interested in an innovative industry with strong potential growth possibilities, even if its time has not yet come.

See Related : How to Invest in Community [Step-by-Step Guide]

If you want to up your odds of success even more, then you’ll want to compare the company you’re interested in against the performance of similar companies in the same industry.

These are the companies that tend to get the most attention from large, institutional investors who are in a position to significantly increase their market value. Institutional investors tend to have a huge amount of money in play and are far less likely to invest in a company without a proven track record.

When choosing an investment, they’ll almost always go with a global leader over a new business, regardless of its promise. However, they also consider intrinsic value, which considers how much a company’s stock is selling for now, as opposed to how much revenue the company stands to earn in the future. In other words, institutional investors are looking for companies that are stable enough to avoid surprises but that also stand to generate considerable capital in the future.

Why work this into your game plan? Because even if you don’t have millions of dollars to invest in a company, there may be hedge funds or venture capital firms out there that do. When these guys make an investment, it tends to be a big one that can actually move a company’s share price upward. Why not ride their coattails and enjoy a solid growth rate as they invest more money over time into proven winners?

That’s why it’s important to make sure that you see how a company stacks up against its closest competitors. If it’s an industry-leading business with a large market share, it’s likely to be a strong contender with solid fundamentals. If not, you may end up discovering competing companies that make sense to consider instead.

See Related : What is a Triple Bottom Line? Definition & Examples

At this point, hopefully, you’ve identified the best stock in the best sector based on your ideal investing style. Now it’s time to find out exactly why it deserves to become a part of your portfolio and for how long.

If a company has been experiencing impressive growth, then there’s bound to be a reason why.

• Is the company experiencing a major influx of business because it’s currently a leader in the hottest sector of the moment? Or is it a “good house in a bad neighborhood” that’s moving independently of the other stocks in its industry?
• How long has it been demonstrating growth?
• What appears to be the catalyst behind its movement? Does the stock owe its growth to strong management, recent world events, the approval of a new drug, the introduction of a hot new product, etc?

One mistake that far too many beginning investors make is assuming that short-term growth alone always indicates the potential for long-term profit. Unfortunately, this is not always the case. By figuring out exactly why a stock is moving, you’ll be far better positioned to decide how long to hold it before you sell.

A strong catalyst can cause the price of a stock to skyrocket overnight, even if it’s laid dormant for years. Even things like social media hype and rumors can cause a stock’s price to shoot up over the course of a given day. But woe to the investor that assumes these profits will last. Many are often left holding the bag when the price increase turns out to be part of a “ pump and dump .”

While many day traders can make a nice profit by capitalizing on these situations, such trades are best avoided altogether if you plan to hold a stock long-term. That’s why it’s so important to understand whether a stock is “in play” for the day or whether its growth can be attributed to more permanent factors that support the potential for a high return over time.

See Related : How to Become an Impact Investor [Step-By-Step Guide]

If you’re planning on investing a significant amount of capital in any stock, then a little research may be able to save you from a lot of heartache. Keep in mind that the focus of an investment thesis is to formulate a reasoned argument about why adding an asset to your portfolio is a good idea.

While all investments come with some level of risk, research can be an excellent risk mitigation strategy. There’s nothing worse than watching an investment fail due to an obvious factor you could have spotted with closer analysis. Don’t let it happen to you!

Fundamental analysis can help you ensure that your potential investments have the underlying traits that winning stocks are made of. While there’s a bit of a learning curve involved when you’re first starting out, here are some of the things you’ll want to focus on:

EPS stands for “earnings per share.” It’s a common financial indicator that basically tells you how much a company makes each time it sells a share of its stock. In this regard, a higher EPS is a good thing, but it’s important to look for solid EPS growth over time. Ideally, you’ll want to see consistent growth in a company’s EPS over the past three or more quarters.

Sales and Margins

Investing is all about putting your cash into successful companies, which is why sales and margins are key components to finding worthy investments. Sales indicate how much a business has made from (you guessed it) sales. Sales margin, also known as gross profit margin, is the amount of revenue a company actually gets to keep after you factor in overhead and other production costs. Ideally, a good investment will exhibit strong, consistent sales growth in recent years.

Return On Equity (ROE)

ROE is one of the more commonly used valuation metrics and is calculated by dividing the company’s net income/shareholders’ equity. ROE is basically a measure of how efficiently a company is using the capital it generates from equity fundraising to increase its own value. The higher the ROE, the more likely it is that a company operates with a focus on using its cash flow to increase its profits.

See Related : How to Do a Stakeholder Impact Analysis?

While these are just a few examples of various analysis methods to work into your investment thesis, they can go a long way toward locating solid companies worth investing in. Interested in learning more about technical and fundamental analysis? There are now plenty of great sites that can help you master the secrets of the training world.

In our opinion, Tradimo is one of the most underrated, as it provides tons of free classes for investors of all levels. Udemy also has some great classes that can help you learn how to beef up your investment thesis with as much quality information as possible.

But keep in mind that these are only suggestions. The most important part of any personal investment thesis is that it makes sense to you and can serve as a valuable tool to help you along your investing journey.

Related Resources

• Best Impact Investing Online Courses
• Best Green Apps for a More Sustainable Life
• Sustainable Investing vs Impact Investing: What’s the Difference?

Kyle Kroeger, esteemed Purdue University alum and accomplished finance professional, brings a decade of invaluable experience from diverse finance roles in both small and large firms. An astute investor himself, Kyle adeptly navigates the spheres of corporate and client-side finance, always guiding with a principal investor’s sharp acumen.

Hailing from a lineage of industrious Midwestern entrepreneurs and creatives, his business instincts are deeply ingrained. This background fuels his entrepreneurial spirit and underpins his commitment to responsible investment. As the Founder and Owner of The Impact Investor, Kyle fervently advocates for increased awareness of ethically invested funds, empowering individuals to make judicious investment decisions.

Striving to marry financial prudence with positive societal impact, Kyle imparts practical strategies for saving and investing, underlined by a robust ethos of conscientious capitalism. His ambition transcends personal gain, aiming instead to spark transformative global change through the power of responsible investment.

When not immersed in the world of finance, he’s continually captivated by the cultural richness of new cities, relishing the opportunity to learn from diverse societies. This passion for travel is eloquently documented on his site, ViaTravelers.com, where you can delve into his unique experiences via his author profile.

Writing a Credible Investment Thesis

by David Harding and Sam Rovit

Every deal your company proposes to do—big or small, strategic or tactical—should start with a clear statement how that particular deal would create value for your company. We call this the investment thesis . The investment thesis is no more or less than a definitive statement, based on a clear understanding of how money is made in your business, that outlines how adding this particular business to your portfolio will make your company more valuable. Many of the best acquirers write out their investment theses in black and white. Joe Trustey, managing partner of private equity and venture capital firm Summit Partners, describes the tool in one short sentence: "It tells me why I would want to own this business." 10

Perhaps you're rolling your eyes and saying to yourself, "Well, of course our company uses an investment thesis!" But unless you're in the private equity business—which in our experience is more disciplined in crafting investment theses than are corporate buyers—the odds aren't with you. For example, our survey of 250 senior executives across all industries revealed that only 29 percent of acquiring executives started out with an investment thesis (defined in that survey as a "sound reason for buying a company") that stood the test of time. More than 40 percent had no investment thesis whatsoever (!). Of those who did, fully half discovered within three years of closing the deal that their thesis was wrong.

Studies conducted by other firms support the conclusion that most companies are terrifyingly unclear about why they spend their shareholders' capital on acquisitions. A 2002 Accenture study, for example, found that 83 percent of executives surveyed admitted they were unable to distinguish between the value levers of M&A deals. 11 In Booz Allen Hamilton's 1999 review of thirty-four frequent acquirers, which focused chiefly on integration, unsuccessful acquirers admitted that they fished in uncharted waters. 12 They ranked "learning about new (and potentially related) business areas" as a top reason for making an acquisition. (Surely companies should know whether a business area is related to their core before they decide to buy into it!) Successful acquirers, by contrast, were more likely to cite "leading or responding to industry restructuring" as a reason for making an acquisition, suggesting that these companies had at least thought through the strategic implications of their moves.

Not that tipping one's hat to strategy is a cure-all. In our work with companies that are thinking about doing a deal, we often hear that the acquisition is intended for "strategic" reasons. That's simply not good enough. A credible investment thesis should describe a concrete benefit, rather than a vaguely stated strategic value.

This point needs underscoring. Justifying a deal as being "strategic" ex post facto is, in most cases, an invitation to inferior returns. Given how frequently we have heard weak "strategic" justifications after a deal has closed, it's worth passing along a warning from Craig Tall, vice chair of corporate development and strategic planning at Washington Mutual. In recent years, Tall's bank has made acquisitions a key part of a stunningly successful growth record. "When I see an expensive deal," Tall told us, "and they say it was a 'strategic' deal, it's a code for me that somebody paid too much." 13

And although sometimes the best offense is a good defense, this axiom does not really stand in for a valid investment thesis. On more than a few occasions, we have been witness to deals that were initiated because an investment banker uttered the Eight Magic Words: If you don't buy it, your competitors will.

Well, so be it. If a potential acquisition is not compelling to you on its own merits, let it go. Let your competitors put their good money down, and prove that their investment theses are strong.

Let's look at a case in point: [Clear Channel Communications' leaders Lowry, Mark, and Randall] Mayses' decision to move from radios into outdoor advertising (billboards, to most of us). Based on our conversations with Randall Mays, we summarize their investment thesis for buying into the billboard business as follows:

Clear Channel's expansion into outdoor advertising leverages the company's core competencies in two ways: First, the local market sales force that is already in place to sell radio ads can now sell outdoor ads to many of the same buyers, and Clear Channel is uniquely positioned to sell both local and national advertisements. Second, similar to the radio industry twenty years ago, the outdoor advertising industry is fragmented and undercapitalized. Clear Channel has the capital needed to "roll up" a significant fraction of this industry, as well as the cash flow and management systems needed to reduce operating expenses across a consolidated business.

Note that in Clear Channel's investment thesis (at least as we've stated it), the benefits would be derived from three sources:

• Leveraging an existing sales force more extensively
• Using the balance sheet to roll up and fund an undercapitalized business
• Applying operating skills learned in the radio trade

Note also the emphasis on tangible and quantifiable results, which can be easily communicated and tested. All stakeholders, including investors, employees, debtors, and vendors, should understand why a deal will make their company stronger. Does the investment thesis make sense only to those who know the company best? If so, that's probably a bad sign. Is senior management arguing that a deal's inherent genius is too complex to be understood by all stakeholders, or simply asserting that the deal is "strategic"? These, too, are probably bad signs.

Most of the best acquirers we've studied try to get the thesis down on paper as soon as possible. Getting it down in black and white—wrapping specific words around the ideas—allows them to circulate the thesis internally and to generate reactions early and often.

The perils of the "transformational" deal . Some readers may be wondering whether there isn't a less tangible, but equally credible, rationale for an investment thesis: the transformational deal. Such transactions, which became popular in the exuberant '90s, aim to turn companies (and sometimes even whole industries) on their head and "transform" them. In effect, they change a company's basis of competition through a dramatic redeployment of assets.

The roster of companies that have favored transformational deals includes Vivendi Universal, AOL Time Warner (which changed its name back to Time Warner in October 2003), Enron, Williams, and others. Perhaps that list alone is enough to turn our readers off the concept of the transformational deal. (We admit it: We keep wanting to put that word transformational in quotes.) But let's dig a little deeper.

Sometimes what looks like a successful transformational deal is really a case of mistaken identity. In search of effective transformations, people sometimes cite the examples of DuPont—which after World War I used M&A to transform itself from a maker of explosives into a broad-based leader in the chemicals industry—and General Motors, which, through the consolidation of several car companies, transformed the auto industry. But when you actually dissect the moves of such industry winners, you find that they worked their way down the same learning curve as the best-practice companies in our global study. GM never attempted the transformational deal; instead, it rolled up smaller car companies until it had the scale to take on a Ford—and win. DuPont was similarly patient; it broadened its product scope into a range of chemistry-based industries, acquisition by acquisition.

In a more recent example, Rexam PLC has transformed itself from a broad-based conglomerate into a global leader in packaging by actively managing its portfolio and growing its core business. Beginning in the late '90s, Rexam shed diverse businesses in cyclical industries and grew scale in cans. First it acquired Europe's largest beverage-can manufacturer, Sweden's PLM, in 1999. Then it bought U.S.–based packager American National Can in 2000, making itself the largest beverage-can maker in the world. In other words, Rexam acquired with a clear investment thesis in mind: to grow scale in can making or broaden geographic scope. The collective impact of these many small steps was transformation. 14

But what of the literal transformational deal? You saw the preceding list of companies. Our advice is unequivocal: Stay out of this high-stakes game. Recent efforts to transform companies via the megadeal have failed or faltered. The glamour is blinding, which only makes the route more treacherous and the destination less clear. If you go this route, you are very likely to destroy value for your shareholders.

By definition, the transformational deal can't have a clear investment thesis, and evidence from the movement of stock prices immediately following deal announcements suggests that the market prefers deals that have a clear investment thesis. In "Deals That Create Value," for example, McKinsey scrutinized stock price movements before and after 231 corporate transactions over a five-year period. 15 The study concluded that the market prefers "expansionist" deals, in which a company "seeks to boost its market share by consolidating, by moving into new geographic regions, or by adding new distribution channels for existing products and services."

On average, McKinsey reported, deals of the "expansionist" variety earned a stock market premium in the days following their announcement. By contrast, "transformative" deals—whereby companies threw themselves bodily into a new line of business—destroyed an average of 5.3 percent of market value immediately after the deal's announcement. Translating these findings into our own terminology:

• Expansionist deals are more likely to have a clear investment thesis, while "transformative" deals often have no credible rationale.
• The market is likely to reward the former and punish the latter.

The dilution/accretion debate . One more side discussion that comes to bear on the investment thesis: Deal making is often driven by what we'll call the dilution/accretion debate . We will argue that this debate must be taken into account as you develop your investment thesis, but your thesis making should not be driven by this debate.

Simply put, a deal is dilutive if it causes the acquiring company to have lower earnings per share (EPS) than it had before the transaction. As they teach in Finance 101, this happens when the asset return on the purchased business is less than the cost of the debt or equity (e.g., through the issuance of new shares) needed to pay for the deal. Dilution can also occur when an asset is sold, because the earnings power of the business being sold is greater than the return on the alternative use of the proceeds (e.g., paying down debt, redeeming shares, or buying something else). An accretive deal, of course, has the opposite outcomes.

But that's only the first of two shoes that may drop. The second shoe is, How will Wall Street respond? Will investors punish the company (or reward it) for its dilutive ways?

Aware of this two-shoes-dropping phenomenon, many CEOs and CFOs use the litmus test of earnings accretion/dilution as the first hurdle that should be put in front of every proposed deal. One of these skilled acquirers is Citigroup's [former] CFO Todd Thomson, who told us:

It's an incredibly powerful discipline to put in place a rule of thumb that deals have to be accretive within some [specific] period of time. At Citigroup, my rule of thumb is it has to be accretive within the first twelve months, in terms of EPS, and it has to reach our capital rate of return, which is over 20 percent return within three to four years. And it has to make sense both financially and strategically, which means it has to have at least as fast a growth rate as we expect from our businesses in general, which is 10 to 15 percent a year. Now, not all of our deals meet that hurdle. But if I set that up to begin with, then if [a deal is] not going to meet that hurdle, people know they better make a heck of a compelling argument about why it doesn't have to be accretive in year one, or why it may take year four or five or six to be able to hit that return level. 16

Unfortunately, dilution is a problem that has to be wrestled with on a regular basis. As Mike Bertasso, the head of H. J. Heinz's Asia-Pacific businesses, told us, "If a business is accretive, it is probably low-growth and cheap for a reason. If it is dilutive, it's probably high-growth and attractive, and we can't afford it." 17 Even if you can't afford them, steering clear of dilutive deals seems sensible enough, on the face of it. Why would a company's leaders ever knowingly take steps that would decrease their EPS?

The answer, of course, is to invest for the future. As part of the research leading up to this book, Bain looked at a hundred deals that involved EPS accretion and dilution. All the deals were large enough and public enough to have had an effect on the buyer's stock price. The result was surprising: First-year accretion and dilution did not matter to shareholders. In other words, there was no statistical correlation between future stock performance and whether the company did an accretive or dilutive deal. If anything, the dilutive deals slightly outperformed. Why? Because dilutive deals are almost always involved in buying higher-growth assets, and therefore by their nature pass Thomson's test of a "heck of a compelling argument."

Reprinted with permission of Harvard Business School Press. Mastering the Merger: Four Critical Decisions That Make or Break the Deal , by David Harding and Sam Rovit. Copyright 2004 Bain & Company; All Rights Reserved.

[ Buy this book ]

David Harding (HBS MBA '84) is a director in Bain & Company's Boston office and is an expert in corporate strategy and organizational effectiveness.

Sam Rovit (HBS MBA '89) is a director in the Chicago office and leader of Bain & Company's Global Mergers and Acquisitions Practice.

10. Joe Trustey, telephone interview by David Harding, Bain & Company. Boston: 13 May 2003. Subsequent comments by Trustey are also from this interview.

11. Accenture, "Accenture Survey Shows Executives Are Cautiously Optimistic Regarding Future Mergers and Acquisitions," Accenture Press Release, 30 May 2002.

12. John R. Harbison, Albert J. Viscio, and Amy T. Asin, "Making Acquisitions Work: Capturing Value After the Deal," Booz Allen & Hamilton Series of View-points on Alliances, 1999.

13. Craig Tall, telephone interview by Catherine Lemire, Bain & Company. Toronto: 1 October 2002.

14. Rolf Börjesson, interview by Tom Shannon, Bain & Company. London: 2001.

15. Hans Bieshaar, Jeremy Knight, and Alexander van Wassenaer, "Deals That Create Value," McKinsey Quarterly 1 (2001).

16. Todd Thomson, speaking on "Strategic M&A in an Opportunistic Environment." (Presentation at Bain & Company's Getting Back to Offense conference, New York City, 20 June 2002.)

17. Mike Bertasso, correspondence with David Harding, 15 December 2003.

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1. What is Your Venture Capital Investment Thesis

Pre-Curriculum 1: Use the leading Investment Thesis template to craft your investment focus

In order to build a strong venture capital fund, you start with a strong fund Thesis.

What is the fund Thesis?

A fund Thesis is the strategy by which a venture capital fund makes money for the fund investors, called Limited Partners or LPs. It identifies the stage, geography and focus of investments, as well as the unique differentiation of the firm.

A fund Thesis is not for public consumption. It is private for Limited Partners only.

How do you write a compelling fund Thesis?

There are multiple components to a compelling fund Thesis that we have compiled into a simple to follow format. The ideal Thesis should not be longer than 40 words , preferably 35 to 37 words.

“[Fund Name] is launching a [$x MM] [Stage] venture fund in [Country / City] to back [Geography] [Sector / Market Companies] [with Secret Sauce]”

What are the key components of a fund thesis, naming your fund: [fund name] .

When getting started, we recommend using a last name or color, like ‘Ressi Ventures’ or ‘Orange Fund,’ since the Thesis will evolve many times over the first months. After you feel that you have a final Thesis, then choose a name that represents your Thesis.

Fund Size: [$x MM] 

This is the minimum size of committed capital by LPs to the fund. For new managers, the fund size should be no greater than $10 MM. Your goal is to oversubscribe whatever your target fund size is, so aim for a small number.

Investment Stage: [Stage] 

This is the stage of portfolio companies where the fund will enter most investments. Stage is usually based on the fund size and the manager deal access. Most new managers choose angel, pre-seed, or seed as the stage. Limited partners prefer a focused stage over multi-stage funds, especially larger limited partners.

Your Location: [Country / City] 

This is the city or country where the managers are living or plan to live while running the fund. Funds have a life of at least 10 years, so pick a city or country where the managers plan to be for some time. If you are living in a large country, then it is better to specify a city or region, such as “East Coast” versus the “United States.”

Geographic Focus: [Geography] 

This is the geography where the fund will invest in most portfolio companies. The majority of limited partners want a focused geography, such a single country, a set of countries, or a small geographic region. When investing in multiple countries, managers and limited partners face complex legal and tax issues on entering and exiting deals.

Sector Focus: [Sector / Market Companies] 

This is the sector or subsector that the fund will have the most portfolio companies. Target sectors or subsectors need to be in areas that most people understand, such as FinTech, digital health, SaaS, or marketplaces. Do not make up new sectors or phrases, such as “Lazy Tech” or “Innovation Origination.” The sector or subsectors of the Thesis are one of the most important ways to connect with limited partners.

Unique Selling Point: [with Secret Sauce] 

The secret sauce is the applied track record of the managers to the Thesis using metrics to quantify experience and success. The top secret sauce metrics are the following in order: 1. investment exits, 2. investment performance, 3. capital raised, 4. sales closed, 5. companies helped, 6. size of network, 7. years of experience. The secret sauce needs to show why the managers are uniquely qualified to run this fund.

What are some sample fund Theses?

Using the above template, here are some clear and concise thesis examples:

• Azure Capital is launching a $5 MM pre-seed fund in Toronto to back Canadian AI startups with the GP achieving 15+ successful exits for $3.5 B from a network of 500+ AI scientists.
• Green Ventures is starting a $7 MM seed fund in Berlin to back European sustainability companies based on a track record of 200% ROI over 5 years of investing in the space.
• Coral VC is creating a $10 MM angel fund in Sydney to back APAC e-commerce startups leveraging the managers experience helping 5 companies achieve 30% month over month revenue growth in ecommerce.
• Blue Investments is launching a $2 MM pre-seed fund in São Paulo to back Brazilian Agritech startups from manager’s network of 1,200 leaders built from 20 years as CEO of the leader Agritech supplier in LATAM.
• Pink Management is launching a $10 MM venture studio fund in Silicon Valley to back studio-created biotech hardware capitalizing on a history of raising over $500 MM for biotech startups and assisting in 20+ FDA approvals.

How specific should your fund Thesis be?

A compelling fund Thesis is very specific about stage, geography and focus to align with the allocation requirements of Limited Partners. A common problem is that New Managers are often afraid to be specific, since they feel it will limit their ability to do hot deals.

A Thesis states the intention of a firm to pursue certain kinds of investments, but is not legally binding in the firm or in the fund agreements. So, a fund Thesis has the effect of gravity. Venture capitalists often can do deals that are far away from the Thesis, but they have less attraction.

How do you refine your fund Thesis?

You will be refining your Thesis heavily for the first few months when forming your fund. A well-defined thesis is specific about stages, geographies, and focus, thus attracting the right LPs while allowing some flexibility. But the first person that you need to satisfy with your thesis is yourself.

Here is an initial exercise to get started that should take about 30 minutes to an hour.

• First, use the template above and try to write three versions of a potential venture fund thesis. As mentioned above, be as concise and specific as possible.
• Next, read each of them aloud while recording a video of yourself. Speak conversationally (in the same way you might casually pitch the idea to someone in an elevator), and in one video “take”. 
• Then, watch the videos and ask yourself if you would realistically invest in that thesis. How clear was the message? How confident was the delivery? What questions come to mind?
• Finally, revise the thesis and video until you are satisfied with your work. Resist the urge to make the one-sentence thesis a one-page thesis. Remember: brevity is the key. 

What are the next steps?

This is just one part of the first steps to starting a venture capital firm, which include: 

• What is your Venture Capital Fund Thesis
• How to Determine Your Venture Capital Fund Size
• How to Select a Venture Capital Firm Focus
• How to Determine your Venture Capital Secret Sauce

About The Author

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The Decile Group develops industry-leading offerings to transform venture capital into an ethical force for good in the world, including VC Lab, Decile Hub, Decile Partners and Decile Capital.

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How to Create an Investment Thesis

What it is, why you want one, and how to create it.

One of the essential elements in a venture capital firm is the investment thesis. The thesis can come in many varieties, from broad and loosely defined focuses to a specific vertical and company stage. On the other hand, some investors choose to allocate capital without a core thesis driving their decisions and see success in this strategy. This post will define an investment thesis, why investors decide to develop one, and some tips on creating one.

What is an investment thesis?

Simply put, the investment thesis is an assumption made about a market, vertical, or trend that will drive the strategy for a particular firm or fund. Just as a startup will assume a problem or market need and build a product around solving that problem, an investor will consider various markets and trends and develop an investment strategy focused on that assumption.

Why develop an investment thesis?

The thesis is the driving force behind what a firm chooses to focus on to generate returns. It will be a fundamental part of how VCs decide what to look for in specific markets, source deals, and where they ultimately decide to invest their capital. The thesis helps keep a firm focused, allowing investors to work within particular parameters when they go about their business.

There are a couple of advantages to having a thesis-driven approach as a venture capital firm. It will drive relationships that the firm pursues. This relationship driver applies to how firms source deals from an investment standpoint and choose their limited partners. These relationships with experts in a particular vertical will help portfolio companies with mentorship, independent board seats, and talent sourcing.

A thesis compels VCs to be experts within their particular field. If a firm bases its thesis around FinTech, it will most likely have some expertise in that field. This knowledge will help them understand the marketplace, specific problems a startup is trying to solve and judge founder talent. The firm will also be a thought leader in the space by releasing analysis and reporting trends in the industry. Lastly, the firm's partners will be a better value-add to the companies within their portfolio, paving a quicker path for a startup's growth and success.

Example of a thesis

A16Z , a prominent Silicon Valley firm, has several different areas they invest in, from FinTech to Growth to Consumer focused startups. Below is their investment thesis for their FinTech portfolio:

"Fintech companies are innovating across broad categories — in banking, lending, insurance, real estate, and investing — both on the customer-facing side and in core infrastructure. We believe the combination of mobile, digital money, machine learning, and new data sources offers startups a unique opportunity to leapfrog outdated infrastructure and compete with incumbent financial institutions to reimagine the way we manage our finances." Source

We understand that the firm focuses on startups that use mobile and machine learning to innovate on financial management through this statement. This thesis has helped drive the firm's investments in Stripe (now valued at $36B) and Carta (currently valued at $3.3B).

For an awesome hub of investment thesis examples, check out this link !

How to build an investment thesis

When developing a thesis, there are vital things to keep in mind:

Markets : Start with market sizing to make sure that a particular industry is worth pursuing. We will discuss market sizing strategies in a future post.

Trends: Understand macro trends impacting the markets and industries that you determine are big enough to pursue.

Companies : Break down each company within a market that has upside potential. Look at recent companies that have seen success within your specific industry focus.

Exits : Make sure there is an exciting exit environment for companies in that particular segment. You want your investments to see a return through going public or M&A activity.

Tips on the above:

Things to think about defining in a thesis would be company stage, geography, vertical, or market.

People tend to want a fully-formed thesis right off the bat, but it's an iterative process. The scrum process might be three months, but the full process can take a year before talking about a thesis publicly.

Have a hunch on something that isn't fully formed and then test it out:

Go out and talk to entrepreneurs.

Talk to buyers of the technology.

Form relationships with ecosystem partners.

Incrementally improve your thesis based on feedback and results.

For some more tips and strategies on creating a thesis, check out this informative Medium post .

Final thoughts

The thesis can help you stay focused and is your north star. For startups, it will help them target your firm. For LPs, it will help them judge your conviction and investment strategy. When developing a thesis, think about taking on big problems and big ideas. There are so many significant issues to be solved globally, and we have a golden opportunity to help solve them. Think big, and don't limit yourself only to ideas on making returns for investors, but how to impact the world.

This story is from Sutton Capital contributor Zeb Hastings. For more information on Zeb’s work, please visit his  website .

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Investment Thesis: What It Is, How To Write One & Examples

An investment thesis formulates the characteristics and criteria that define a potentially profitable investment. It outlines the reasons behind the investment decision, including various criteria, financial outcomes, and strategies to manage risks. Essentially, it serves as a detailed plan for investors.  

What is an Investment Thesis?

An investment thesis serves as a strategic blueprint for investors, guiding their decisions and actions by providing the rationale behind their investment choices. Typically crafted by financial analysts, portfolio managers, or investment professionals, the process begins with a thorough assessment of market potential. This involves scrutinizing trends, growth forecasts, and demand dynamics to identify opportunities. The investment thesis validates the significance of these opportunities by highlighting unmet needs or areas of dissatisfaction within the market.

Furthermore, it quantifies potential gains through meticulous financial scrutiny, including revenue forecasts and return on investment assessments. Beyond identifying opportunities, the investment thesis also plays a crucial role in managing risks by employing risk management tactics such as diversification and contingency plans, helping investors navigate market fluctuations and operational hurdles effectively.

Key Takeaways

• An investment thesis defines the criteria for profitable investments, providing a detailed plan and rationale for investors.
• An investment thesis serves as a guiding framework for investment decisions, enhancing comprehension and facilitating well-informed choices.
• Key components of an investment thesis include identifying the investment opportunity, clarifying goals, evaluating viability and risks, and assessing growth potential.

Understanding the Investment Thesis

An investment thesis is akin to a detailed plan for potential investments, often formulated by finance experts. It entails extensive research and analysis to articulate investment ideas effectively. While typically authored by professionals such as venture capitalists or private equity firms, individuals may also develop their own. This document holds significant importance in facilitating well-informed investment decisions, aiding both investors and companies in evaluating opportunities such as stocks or acquisitions.

By elucidating the reasons for investment, the thesis serves as a guiding framework for investors’ decisions. It streamlines decision-making processes, enhances comprehension of underlying rationales, and provides a means for investors to gauge the performance of their investments. Moreover, an investment thesis functions as a roadmap, charting the course toward successful investments.

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How to write an Investment Thesis

Crafting an investment thesis is essential for all investors, whether individuals or professionals. An investment thesis serves as a guide for making choices, explaining the reasoning behind decisions, and providing a framework for assessing investment opportunities. Here is a simple guide with the most important steps for crafting a good investment thesis:

Examples of an Investment Thesis

Portfolio managers and investment companies frequently share their investment strategies on their websites. Here are three examples from prominent investors:

Andreessen Horowitz

Andreessen Horowitz, often referred to as a16z, is a prominent venture capital firm established in 2009 by Marc Andreessen and Ben Horowitz. Active in the private markets, the firm invests in various sectors including AI, healthcare, consumer goods, cryptocurrency, enterprise solutions, fintech, and gaming.

Their investment strategy revolves around observing consumer trends and investing where AI intersects with consumer products. They stress the importance of developing the right AI applications to attract funding, particularly in areas like productivity enhancement and specialized tasks.

In this example, the firm explores how Moore’s Law contrasts with Eroom's Law in healthcare costs. They propose leveraging AI to cut costs and enhance outcomes by gradually integrating it into workflows. Combining AI with life sciences advancements offers transformative opportunities, advocating for a gradual transition to revolutionize healthcare and life sciences. [1]

Goldman Sachs

Goldman Sachs is a global financial powerhouse operating in major financial hubs worldwide, offering services in investment banking, IPO underwriting, securities trading, wealth, and asset management.

The bank’s investment thesis has resulted in a $1 billion investment in companies led by diverse individuals through the “Launch With GS” program aimed at supporting diverse leadership. [2] Goldman Sach collaborates with clients to invest in diverse General Partners across various strategies and offers the Entrepreneur Cohort for growth, reflecting their commitment to diversity and inclusion for achieving strong investment returns and driving industry innovation. [3]

ARK Invest provides  ETFs focused on disruptive innovation like AI and blockchain. The firm remains committed to long-term growth, leveraging innovative strategies and deep research across various sectors, including cryptocurrencies.

The Ark Invest thesis revolves around disruptive innovation, targeting transformative technologies nearing tipping points. They focus on five innovation platforms: AI, Robotics, Energy Storage, DNA Sequencing, and Blockchain. Ark Invest’s approach blends top-down and bottom-up research for early innovation capture and long-term value creation. Emphasizing high-conviction bets, long-term investment, and industry focus, Ark Invest anticipates exponential growth to benefit from technological disruptions. [4]

What should be in an investment thesis?

As an important document, an investment thesis explains why an investment opportunity is expected to be profitable. It should include key components to thoroughly analyze and guide decision-making effectively. These 7 pieces of information are indispensable:

• The Investment in Question: Identify the reason and the investment opportunity under consideration.
• Investment Goal(s): Clarify the investment's aims and aspirations by defining its objectives and goals.
• Viability of the Investment: Evaluate the investment's potential, considering any favorable trends or factors.
• Potential Downsides and Risks: Address and analyze the risks associated with the investment, highlighting any potential challenges or drawbacks.
• Costs and Potential Returns: Evaluate the financial aspects of the investment, including costs, expected returns, and potential losses.
• Alignment with Intended Goals: Ensure that the investment aligns with the overall investment objectives and strategies.
• Growth Potential: Assess the growth prospects of the investment opportunity.

What is the difference between investment thesis and investment mandate?

An investment thesis is the reasoning behind an investment strategy, based on research and analysis, helping investors make informed decisions. Conversely, an investment mandate is a set of instructions given by an investor to a manager, guiding how to manage funds according to the investor’s goals, risk tolerance, and desired outcomes. Here are the key differences:

What is a trade thesis?

A trading thesis is essentially an idea or argument made by a trader or investor about a particular financial instrument, market or asset. This process explains the reasoning behind a trading decision, considering things like market trends, economic indicators, and technical or fundamental analysis. This thesis acts as a plan for understanding the reasons behind a trade and what factors are likely to influence its outcome, aiding in making informed decisions in financial markets. Having a clear trading thesis helps traders and investors clarify their strategy and evaluate the possible risks and rewards of a trade.

Article Source

• Andreessen Horowitz: “ AI at the Intersection: The a16z Investment Thesis on AI in Bio + Health ”
• Goldman Sachs: “ Launch With GS ”
• Goldman Sachs: “ Goldman Sachs Research ”
• Ark Invest: “ Big Ideas 2022 ”  

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What Is an Investment Thesis?

• Understanding the Thesis

Special Considerations

• What's Included?

The Bottom Line

• Portfolio Management

Investment Thesis: An Argument in Support of Investing Decisions

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

The term investment thesis refers to a reasoned argument for a particular investment strategy, backed up by research and analysis. Investment theses are commonly prepared by (and for) individual investors and businesses. These formal written documents may be prepared by analysts or other financial professionals for presentation to their clients.

Key Takeaways

• An investment thesis is a written document that recommends a new investment, based on research and analysis of its potential for profit.
• Individual investors can use this technique to investigate and select investments that meet their goals.
• Financial professionals use the investment thesis to pitch their ideas.

Understanding the Investment Thesis

As noted above, an investment thesis is a written document that provides information about a potential investment. It is a research- and analysis-based proposal that is usually drafted by an investment or financial professional to provide insight into investments and to pitch investment ideas. In some cases, the investor will draft their own investment thesis, as is the case with venture capitalists and private equity firms.

This thesis can be used as a strategic decision-making tool. Investors and companies can use a thesis to decide whether or not to pursue a particular investment, such as a stock or acquiring another company. Or it can be used as a way to look back and analyze why a particular decision was made in the first place—and whether it was the right one. Putting things in writing can have a huge impact on the direction of a potential investment.

Let's say an investor purchases a stock based on the investment thesis that the stock is undervalued . The thesis states that the investor plans to hold the stock for three years, during which its price will rise to reflect its true worth. At that point, the stock will be sold at a profit. A year later, the stock market crashes, and the investor's pick crashes with it. The investor recalls the investment thesis, relies on the integrity of its conclusions, and continues to hold the stock.

That is a sound strategy unless some event that is totally unexpected and entirely absent from the investment thesis occurs. Examples of these might include the 2007-2008 financial crisis or the Brexit vote that forced the United Kingdom out of the European Union (EU) in 2016. These were highly unexpected events, and they might affect someone's investment thesis.

If you think your investment thesis holds up, stick with it through thick and thin.

An investment thesis is generally formally documented, but there are no universal standards for the contents. Some require fast action and are not elaborate compositions. When a thesis concerns a big trend, such as a global macro perspective, the investment thesis may be well documented and might even include a fair amount of promotional materials for presentation to potential investing partners.

Portfolio management is now a science-based discipline, not unlike engineering or medicine. As in those fields, breakthroughs in basic theory, technology, and market structures continuously translate into improvements in products and in professional practices. The investment thesis has been strengthened with qualitative and quantitative methods that are now widely accepted.

As with any thesis, an idea may surface but it is methodical research that takes it from an abstract concept to a recommendation for action. In the world of investments, the thesis serves as a game plan.

What's Included in an Investment Thesis?

Although there's no industry standard, there are usually some common components to this document. Remember, an investment thesis is generally a proposal that is based on research and analysis. As such, it is meant to be a guide about the viability of a particular investment.

Most investment theses include (but aren't limited to) the following information:

• The investment in question
• The investment goal(s)
• Viability of the investment, including any trends that support the investment
• Potential downsides and risks that may be associated with the investment
• Costs and potential returns as well as any losses that may result

Some theses also try to answer some key questions, including:

• Does the investment align with the intended goal(s)?
• What could go wrong?
• What do the financial statements say?
• What is the growth potential of this investment?

Putting everything in writing can help investors make more informed decisions. For instance, a company's management team can use a thesis to decide whether or not to pursue the acquisition of a rival. The thesis may highlight whether the target's vision aligns with the acquirer or it may identify opportunities for growth in the market.

Keep in mind that the complexity of an investment thesis depends on the type of investor involved and the nature of the investment. So the investment thesis for a corporation looking to acquire a rival may be more in-depth and complicated compared to that of an individual investor who wants to develop an investment portfolio.

Examples of an Investment Thesis

Portfolio managers and investment companies often post information about their investment theses on their websites. The following are just two examples.

Morgan Stanley

Morgan Stanley ( MS ) is one of the world's leading financial services firms. It offers investment management services, investment banking, securities, and wealth management services. According to the company, it has five steps that make up its investment process, including idea generation, quality assessment, valuation, risk management , and portfolio construction.

When it comes to developing its investment thesis, the company tries to answer three questions as part of its quality assessment step:

• "Is the company a disruptor or is it insulated from disruptive change? 
• Does the company demonstrate financial strength with high returns on invested capital, high margins, strong cash conversion, low capital intensity and low leverage? 
• Are there environmental or social externalities not borne by the company, or governance and accounting risks that may alter the investment thesis?"

Connetic Ventures

Connetic Adventures is a venture capital firm that invests in early-stage companies. The company uses data to develop its investment thesis, which is made up of three pillars. According to its blog, there were three pillars or principles that contributed to Connetic's venture capital investment strategy. These included diversification, value, and follow-on—each of which comes with a pro and con.

Why Is an Investment Thesis Important?

An investment thesis is a written proposal or research-based analysis of why investors or companies should pursue an investment. In some cases, it may also serve as a historical guide as to whether the investment was a good move or not. Whatever the reason, an investment thesis allows investors to make better, more informed decisions about whether to put their money into a specific investment. This written document provides insight into what the investment is, the goals of the investment, any associated costs, the potential for returns, as well as any possible risks and losses that may result.

Who Should Have an Investment Thesis?

An investment thesis is important for anyone who wants to invest their money. Individual investors can use a thesis to decide whether to purchase stock in a particular company and what strategy they should use, whether it's a buy-and-hold strategy or one where they only have the stock for a short period of time. A company can craft its own investment thesis to help weigh out whether an acquisition or growth strategy is worthwhile.

How Do You Create an Investment Thesis?

It's important to put your investment thesis in writing. Seeing your proposal in print can help you make a better decision. When you're writing your investment thesis, be sure to be clear and concise. Make sure you do your research and include any facts and figures that can help you make your decision. Be sure to include your goals, the potential for upside, and any risks that you may come across. Try to ask and answer some key questions, including whether the investment meets your investment goals and what could go wrong if you go ahead with the deal.

It's always important to have a plan, especially when it comes to investing. After all, you are putting your money at risk. Having an investment thesis can help you make more informed decisions about whether a potential investment is worth your while. Make sure you put your thesis in writing and answer some key questions about your goals, costs, and potential outcomes. Having a concrete proposal in place can spell the difference between earning returns and losing all your money. And that's if your thesis supports the investment in the first place.

Harvard Business School. " Writing a Credible Investment Thesis ."

Lanturn. " What is an Investment Thesis and 3 Tips to Make One ."

Morgan Stanley. " Global Opportunity ."

Medium. " The Data That Built Our Fund's Investment Thesis ."

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Investment Memos: Tips, Templates, and How to Write One

Raising capital from investors can be one of the most challenging tasks for founders. Generating interest, building relationships, and making a compelling case for investment can often seem overwhelming. To overcome these challenges, founders are increasingly turning to investment memos. These concise documents effectively outline crucial information that helps investors build conviction in a business.

In this guide, we'll cover everything you need to know about crafting an investment memo, from tips and templates to step-by-step instructions. Whether you're a first-time founder or an experienced entrepreneur, this guide will help you create a powerful investment memo that showcases your potential and seriousness about fundraising.

What is an Investment Memo?

An investment memo, or investment memorandum, is a structured document used to pitch a company, project, product, or strategy to potential investors. It provides a clear and concise presentation of the strategic vision, rationale, and expectations for the investment. Unlike a pitch deck, which often relies heavily on visuals and brief points, an investment memo delivers a more detailed and comprehensive narrative, helping investors understand the full scope of the opportunity.

Why Are Investment Memos Important?

Investment memos are vital tools in the fundraising process. They serve multiple purposes and provide significant advantages for both founders and investors:

Building Conviction

Investment memos enable stakeholders to develop strong convictions about an idea or business. By presenting detailed information and a well-structured argument, memos help potential investors understand the merits and potential of the investment.

Fostering Relationships

Investment memos can be instrumental in building relationships with investors. Clearly articulating why someone should invest in your startup helps make quick decisions and demonstrates respect for the investor's time and sets the tone for future communications.

Ensuring Alignment

Investment memos create alignment among all stakeholders. For those raising capital, memos keep current and potential investors informed and in sync with your messaging and round status. Within a team, memos ensure everyone is on the same page regarding decisions and project progress, providing a reference point for future discussions.

Related resource: Contributed Capital

Types of Investment Memos

In the context of venture capital, investment memos serve several specific purposes. By understanding these different types of memos, founders can better tailor their documents to meet the expectations and needs of venture capital investors.

• Pre-Investment Memos: Prepared by founders to attract venture capital, these memos outline the business opportunity, market potential, and strategic vision to convince investors to fund their startup.
• Due Diligence Memos: Created by venture capital firms, these documents detail their analysis and findings on a potential investment, including market analysis, competitive landscape, and financial projections.
• Internal Investment Proposals: Used within venture capital firms to present and justify investment opportunities to partners and decision-makers, ensuring everyone is aligned on the potential benefits and risks.
• Post-Investment Memos: These documents summarize the terms of the investment and the expected milestones and performance metrics, serving as a reference for both the investors and the founders.

Who is Reviewing Investment Memos?

Investment memos are reviewed by a variety of audiences, each with their own perspectives and priorities. Understanding who will be reading your memo is crucial to crafting a document that meets their needs and expectations.

To be successful, investment memos need to be clear, concise, and tailored to the specific concerns and interests of these audiences. Providing relevant data, logical arguments, and a compelling narrative will help engage and persuade potential investors.

• Venture Capitalists (VCs): These are the primary audience for investment memos. VCs are looking for compelling business opportunities with strong growth potential. Your memo should clearly articulate the market opportunity, competitive landscape, financial projections, and the unique value proposition of your business.
• Angel Investors: Similar to VCs but often investing at an earlier stage, angel investors seek high-potential startups that align with their investment criteria. The memo should emphasize the innovative aspects of your product or service, early traction, and the founding team's expertise.
• Internal Stakeholders: Within a venture capital firm, partners and analysts will review the memo to evaluate the investment's merits. The memo should provide thorough analysis and data to support the investment thesis, making it easy for internal stakeholders to present and defend the opportunity to the investment committee.
• Corporate Investors: Corporations looking to invest in startups for strategic reasons will review the memo to assess how the startup aligns with their business objectives and strategic goals. Highlighting potential synergies, strategic fit, and long-term benefits is essential for this audience.
• Board Members and Advisors: For companies seeking internal investment or approval for a new project, board members and advisors will review the memo. They will focus on how the investment aligns with the company's overall strategy, potential risks, and expected returns.
• Potential Co-Investors: Other investors who might join the funding round will also review the memo. It's important to present a clear and attractive investment opportunity, demonstrating strong market potential and a well-defined growth strategy.

Pitch Deck vs Investment Memo

Both pitch decks and investment memos are essential tools in the fundraising process, but they serve different purposes and offer unique advantages. Understanding when to use a pitch deck versus an investment memo is key. Pitch decks are ideal for initial pitches and quick overviews, while investment memos are better suited for detailed follow-ups and in-depth evaluations.

Control Your Story

A pitch deck relies heavily on visuals and bullet points to tell your story quickly, often requiring the founder to provide verbal context during a presentation. This can sometimes lead to misinterpretation if the deck is shared without explanation. In contrast, an investment memo provides a detailed narrative that stands on its own, ensuring that all key points and context are clearly communicated without the need for additional explanation.

Quick Decisions

Pitch decks are designed for quick consumption, allowing investors to rapidly understand the business at a high level. They facilitate fast decision-making, especially in initial meetings. Investment memos, while more detailed, allow investors to thoroughly evaluate the opportunity on their own time. This thoroughness can lead to more informed and confident decisions, albeit at a potentially slower pace than a pitch deck.

Pitch decks are inherently succinct, typically consisting of 10-15 slides that highlight the most critical aspects of the business. This brevity is useful for capturing attention and providing a snapshot of the opportunity. Investment memos, while still concise, delve deeper into each aspect of the business, offering comprehensive insights that are crucial for serious consideration and due diligence.

What Should Be Included in an Investment Memo?

Creating an effective investment memo involves including several key components that together provide a comprehensive picture of your business and its potential. Here’s what you should include:

Clearly state the objective of the memo. Are you seeking investment, strategic partnerships, or approval for a new project? Define what you hope to achieve and why the reader should care. This section should succinctly capture the essence of your request and its significance.

Identify the problem or pain point your business addresses. Explain why this problem is significant and worth solving. Highlight the current challenges and inefficiencies in the market that your product or service aims to overcome.

Describe your solution to the identified problem. Detail how your product or service works, what makes it unique, and why it is superior to existing solutions. Emphasize the value proposition and the benefits it provides to customers.

Market Size

Provide an analysis of the market size and potential. Include data on the total addressable market (TAM), the serviceable available market (SAM), and your serviceable obtainable market (SOM). This helps investors understand the scale of the opportunity and the potential for growth.

Competition

Analyze the competitive landscape. Identify key competitors and their strengths and weaknesses. Explain how your business differentiates itself from the competition and the strategic advantages you hold. Highlight any barriers to entry that protect your position in the market.

Product Development

Detail the current state of your product development. Include information on the product roadmap, milestones achieved, and future plans. Explain how the capital you are raising will be used to advance product development and achieve key objectives.

Sales and Distribution

Outline your go-to-market strategy. Describe your sales and distribution channels, marketing plans, and any strategic partnerships. Provide data on customer acquisition costs (CAC), lifetime value (LTV), and sales traction to date.

Present key performance metrics that demonstrate your business’s progress and potential. Include data on revenue growth, user engagement, customer retention, and other relevant metrics. Use charts and graphs to make this information easily digestible.

Introduce your team and highlight their qualifications and expertise. Explain why your team is uniquely positioned to execute the business plan and achieve success. Include information on key advisors and board members who bring additional value and credibility.

Tips for Building Your Investment Memo

Creating an effective investment memo requires careful attention to clarity, succinctness, impact, use of visual aids, and crafting a compelling narrative. Here’s how you can achieve these key elements:

Importance of Clarity, Succinctness, Impact, Use of Visual Aids, and Narrative

• Clarity: Ensure your memo is easy to understand. Avoid jargon and complex language. Clear communication helps investors quickly grasp the essentials.
• Succinctness: Be concise. Investors are busy and appreciate memos that get to the point without unnecessary details.
• Impact: Highlight the most compelling aspects of your business. Make a strong case for why investors should care.
• Use of Visual Aids: Visual aids such as charts, graphs, and images can make complex information more digestible and memorable.
• Narrative: Tell a story that engages the reader. A well-crafted narrative can make your memo more persuasive and relatable.

Best Practices

• Use simple, straightforward language.
• Avoid unnecessary details that do not add value.
• Include relevant data and metrics to back up your claims.
• Use charts and graphs to present data clearly.
• Understand what your audience cares about and address those points.
• Highlight aspects of your business that align with their interests and concerns.

Mistakes to Avoid

• Avoid including too much information, which can overwhelm the reader.
• Focus on the most critical points.
• Don’t neglect the power of visual aids to enhance understanding.
• Use visuals to break up text and illustrate key points.
• Be transparent about potential risks and challenges.
• Show that you have a plan to mitigate these risks.

Using Visual Aids

• Use bar charts, line graphs, and pie charts to present financial data and market analysis.
• Create infographics to summarize complex information or processes.
• Include images of your product or screenshots of your software to give a tangible sense of what you are offering.

Crafting Your Narrative

• Begin with a strong opening that captures the reader’s interest and sets the stage for your business case.
• Showcase significant achievements and milestones that demonstrate your progress and potential.
• Paint a clear picture of your long-term vision and how the investment will help achieve it.

Tips for Presenting Your Investment Memo

Delivering a compelling presentation of your investment memo is crucial for persuading potential investors. Here are some tips to improve your presentation delivery:

1. Master Your Vocal Timbre

• Vocal Clarity: Speak clearly and at a moderate pace. Ensure your voice is audible to everyone in the room.
• Tone Variation: Use a dynamic tone to emphasize key points and keep the audience engaged. Avoid a monotone delivery which can be boring.
• Volume Control: Adjust your volume to suit the size of the room and the number of attendees. Ensure you are neither too loud nor too soft.

2. Use Pauses Effectively

• Emphasize Key Points: Pause briefly after making important statements to allow the audience to absorb the information.
• Avoid Filler Words: Use pauses instead of fillers like "um," "uh," or "like." This makes you appear more confident and in control.
• Natural Breaks: Incorporate natural pauses at the end of sentences and between sections to give yourself and the audience a moment to reflect.

3. Incorporate Anecdotes

• Personal Stories: Share relevant personal experiences that illustrate your passion and commitment to the business.
• Customer Stories: Use anecdotes from customers or clients to demonstrate the impact and value of your product or service.
• Investor Success Stories: Mention past successes or case studies of investors who have benefited from similar opportunities.

4. Cast a Vision for the Future

• Future Goals: Clearly articulate your long-term vision and how the investment will help achieve these goals.
• Big Picture: Help investors see the broader impact of their investment, including market transformation and potential returns.
• Inspirational Messaging: Use inspirational language to motivate and excite your audience about the future possibilities.

Great Investment Memo Examples

Examining successful investment memos can provide valuable insights into what works well and why. These examples highlight the importance of clarity, thoroughness, and strategic foresight in creating an effective investment memo. By following similar principles, you can craft a memo that resonates with investors and effectively communicates your business's potential. Here are two notable examples:

The Y Combinator Investment Memo

Why it works:

• The memo clearly presents key metrics and growth statistics, making it easy for investors to understand the business's current performance and potential.
• It identifies potential challenges and how the company plans to overcome them, showing foresight and preparedness.
• The memo effectively communicates the market opportunity, generating excitement about the potential for success.
• It uses insights from previous investor interactions to address common questions and objections upfront, streamlining the evaluation process.

The YouTube Investment Memo

• The memo provides a real-world example from a proven and successful tech company, lending credibility and relatability.
• It includes thorough growth projections and future models, helping investors understand the long-term potential.
• The memo is structured to simplify the decision-making process for investors, making it easy to share and discuss within the investment firm.
• It strikes a balance between being comprehensive and concise, providing all necessary information without overwhelming the reader.

Helpful Investment Memo Templates

Using templates can streamline the process of creating an effective investment memo. These templates provide a structured approach to crafting investment memos, tailored to different business needs and stages. By choosing the right template, you can ensure your memo effectively communicates your business's value and potential to investors. Here are some useful templates and who they are best suited for:

Y Combinator Investment Memo

• Ideal for startups seeking to attract venture capital investment.
• Suitable for those who can effectively communicate their business model and growth plans in writing.
• Great for companies at an early stage looking to clearly articulate their vision and market potential to investors.

Executive Team Strategic Memo

• Beneficial for companies with expanding executive teams that need improved communication and alignment.
• Ideal for businesses that operate remotely and require asynchronous communication tools.
• Useful for organizations that rely on quarterly or annual planning to set objectives and track progress.

The EVERGOODS Product Brief

• Perfect for companies where product development and innovation are key drivers of success.
• Ideal for businesses that need to prioritize customer feedback and product features in their development roadmap.
• Suitable for companies that want to clearly outline what features are in the pipeline and the reasons behind their development.

Get Started With Investment Memo Templates from Visible

Ready to craft your investment memo? To make the process easier, we've compiled a library of the best investment memo templates available. These templates are designed to help you effectively communicate your business's potential and secure the investment you need.

Not sure where to start? Check out the investment memo template from Y Combinator below, or explore other options tailored to different business needs. These templates will guide you in creating a clear, concise, and compelling investment memo that resonates with investors.

Use the YC Memo Template

By leveraging these templates, you can streamline your fundraising efforts and present your business in the best possible light. Get started today and take the first step towards securing your next round of funding.

Related resource:

• Update Your Investors
• Startup Financials

Does your VC have an investment thesis or a hypothesis?

David Teten

More posts from david teten.

• How to find a job as a scout for a VC firm
• What are the 'jobs to be done' of an investment manager?

Venture capitalists love to talk investment theses: on Twitter, Medium, Clubhouse, at conferences. And yet, when you take a closer look, theses are often meaningless and/or misleading.

OpenVC is a new, open-source initiative to collect and analyze all publicly available VC theses to help founders more efficiently find the right investors — and vice-versa. For the first time, we are sharing here our initial conclusions. We hope you’ll upload your own thesis to benchmark yourself. We’ve identified six common patterns of how VCs articulate their theses and some best practices in doing so.

Our analysis is based on two complementary datasets:

• 125 theses so far submitted by investors into the OpenVC database.
• 36 theses pulled directly from U.S. VC websites by David Teten and Sam Sabin , co-founder of Hireblue .

Our four primary conclusions:

• Public theses are often inconsistent with how firms actually deploy capital.
• VC theses are often so vague that they’re meaningless.
• We found seven categories of VC theses, plus an eighth: the non-thesis.
• Investment theses are just hypotheses; the portfolio shows how accurate the hypothesis was.

For the sake of simplicity, we will consider “investment thesis” and “investment criteria” as equivalent terms moving forward, although we argue that the thesis leads to the investment criteria. We summarize how they interrelate in the table below.

1. Public theses are often inconsistent with how firms actually deploy capital

A typical VC thesis: “We invest in tech startups in Europe at an early stage.” However, our experience shows that in many cases “Europe” means a handful of countries, for instance, France, U.K. and Germany; and “tech” means B2B SaaS/fintech or consumer apps.

Thirty-four VC firms in OpenVC call themselves “early stage.” Yet 30% of those don’t actually invest in pre-revenue startups. The phrase is quite ambiguous; we suggest quantifying check size so that your investment preference is clearer.

Almost every VC says that they invest in the “best” founders. However, according to PitchBook Data, since the beginning of 2016, companies with women founders have received only 4.4% of venture capital deals. Those companies have garnered only about 2% of all capital invested. This is despite the fact that the data show you’re better off investing in women .

This lack of transparency results in confused founders who chase the wrong investors. In turn, investors are overwhelmed with poorly qualified opportunities.

2. VC theses are often so vague that they’re meaningless

Christoph Janz from Point Nine Capital wrote on Twitter:

The modal VC thesis is: “We invest in great teams addressing large markets with disruptive solutions.” Who invests in lousy teams addressing tiny markets with outdated solutions? Theses also tend to use the same words across many firms, e.g., “daring” and “bold.”

In particular, in our second dataset, we found a disproportionate number of theses focused on “technical” companies (vaguely defined) and focused on companies attacking “problems of the future rather than the present,” in various permutations of that language.

Why are the investment criteria so imprecise on the VC websites? We have three theories, in descending order of importance:

• Option value. Investors don’t want to be too restrictive and miss out on a deal. However, we’d argue that for most smaller managers who are not brand names, it’s better to be highly identified in your niche than being a generalist. Most limited partners we speak with agree.
• A desire to look “sexy” and politically correct as opposed to being honest. This is probably a major reason. For example, saying publicly, “We invest mostly in white/Asian men who went to Stanford like us” accurately describes numerous VCs, but doesn’t sound very politically correct.
• VCs are afraid to give out their secret sauce. We think this doesn’t make much sense; you can share your criteria without telling the whole logic behind them. Many top-tier VCs share detailed public theses.

3. We found seven categories of VC theses, plus an eighth: the non-thesis

What makes an excellent — or at least clear — investment thesis?

4 essential truths about venture investing

Typically, investors either have a very loose nonrestrictive strategy to investing or maintain a strict focus on a few particular areas. As two extremes:

• Founder Collective describes itself as “deliberately anti-thematic. Visionary founders have shown us that the weird use cases of today can become the hot themes of tomorrow.”
• Check Size: $50,000 to $200,000. Vast majority $100,000 to $150,000.
• Total Round Size: $50,000-$500,000. (Occasional exceptions to $1 million.)
• Valuation: $1 million-$3 million. (Rare exceptions to $6 million with extreme traction.)
• Traction/progress: Almost always $5,000 to $30,000/month in gross profit. No ideas or prototypes.
• Sector: Anything in tech. But you must be doing real engineering of some kind.
• Headcount: Usually at least two full-time founders. Often a few full- or part-time workers.

We take from this that there is little consensus on whether VC investing should be thesis-driven or not. And even the “thesis-driven” VC firms often make investments outside of their stated thesis.

Of the firms that articulate a thesis, most fall into one of, or a combination of, the following seven buckets:

(1) Industry funds . Warren Buffett famously said that “diversification is protection against ignorance. It makes little sense if you know what you are doing.” In venture capital, the industry- or sector-focused funds specifically disavow diversification:

• Andreessen Horowitz, which is a generalist as a whole, has launched dedicated funds across crypto , bio  and fintech .
• AgFunder , focused on the food and agricultural sectors, aims to solve challenges brought by climate change, failing soils and population growth .
• Foundry Group, investing primarily in “ software and internet ,” follows six major themes, e.g., human-computer interaction (HCI) or distribution.
• USV invests in companies that increase “ access to knowledge, capital and well-being by leveraging networks, platforms and protocols .”

Data from OpenVC showed that VCs typically focus on two technology classes. Software is by far the most sought-after class, with 94% of VCs investing in it. Deep tech follows as a distant second with 57%. Hardware and therapeutics lag well behind.

Out of 125 funds in the database, 33 state they invest in one type of technology (e.g., “software”); 43 invest in two types of technology (e.g., “software” and “deep tech”), and so on.

(2) Business-model-defined funds . These firms also sometimes target startups that serve a specific kind of customer (e.g., B2B versus B2C) within the business model preference. For example, Point Nine Capital focuses on B2B SaaS and marketplaces at the seed stage across many industries.

(3) Geography-defined funds . Apart from the usual country-specialist investors and foreign offices of U.S.-based VCs, we see three dynamics at play:

• VCs investing in specific geographies. Avataar Ventures invests exclusively in companies that fit these criteria: $15 million with annual recurring revenues; tech-led B2B and SaaS Companies; core operations in India/Southeast Asia; and open to active partnering. In 2019, according to the CVCA , Real Ventures invested in 42 rounds, with the total value of those rounds equal to that of the next three most active private VC firms combined. Real sees 80% of all seed deals in Canada.
• VCs investing abroad or in binational companies, typically with technology based in a second- or third-tier market, and sales/marketing in a first-tier market. Data from OpenVC suggests that 75% of funds invest in more than one country. These results are consistent for both U.S.- and Europe-based VC firms. Explore why venture capitalists are investing in international startups and why international startups love New York, and vice versa .

(4) Entrepreneur-defined funds . This is most commonly seen in funds that focus on underrepresented founders, but we’ve seen other focused communities as well.

• Female Founders Fund , AmplifyHer Ventures , Halogen Ventures and many others invest exclusively in women-founded businesses.
• a16z’s Cultural Leadership Fund aims to “enable more young African Americans to enter the technology industry.”
• J-Angels “is a community and a VC fund of top American investors (Jewish American and Israeli-born) in Silicon Valley and San Francisco.”
• Diaspora Ventures is a “pre-seed fund … looking to back the next generation of French entrepreneurs building tech companies in the U.S.”

A special subset of this is investors that focus on mission-driven founders and typically have explicit ESG criteria. For example, City Light VC only invests in “companies where there is a direct relationship between financial outcomes and measurable social impact.”

(5) Structure-defined funds . Versatile Venture Capital , Indie.VC  and other revenue-based finance and flexible VC investors state they focus on companies with a short-term focus on profitability. These firms typically invest using a nontraditional “flexible VC” structure, which allows founders to pay back their financial obligation to the fund through a combination of revenue-sharing and/or equity payback.

(6)   Situation-defined funds . Some firms optimize around certain aspects of the investment situation. Alpha Partners and Proof provide capital when their partner VCs don’t have pro rata and share the economics on the investments. Correlation Ventures invests in under two weeks when there is “at least one other venture capital firm also making their first investment into the company.”

(7) Stage-defined funds. These funds tend to focus their investments in startups at a specific stage or seeking a certain check size. First Round Capital invests in rounds up to Series A and is often the “first money in,” backing entrepreneurs at the first stages of the company they’re creating.

4. Investment theses are just hypotheses; the portfolio shows how accurate the hypothesis was

We cannot formally prove a priori whether one thesis is better than another. They exist as heuristics, but at the end of the day, deal flow trumps everything. If a fantastic opportunity shows up, most VCs would invest, regardless of their thesis.

Investment theses are marketing assets toward LPs and startups. As such, there are three stakeholders when building a thesis: the investing partners, the LPs and the founders.

We can see in the example above how the thesis is not “pure” from the GP point of view. It incorporates influences from the LP and, more and more, from the founders.

Faced with the daily deal flow, the investment thesis feels like nothing but “a set of strict rules, loosely applied.” Does it mean the investment thesis is just an irrelevant practice that should be ignored or abused? We think not.

In the battle for deal flow, the thesis is at the core of a fund’s value proposition. It’s part of a VC brand and identity. It’s what makes it unique and distinctive.

We’d argue that for most smaller firms, it’s better to be highly identified in your niche than being a generalist. A fund should aim to be identified as “the” specialist in one or a combination of the seven buckets listed above. “Even at a later stage, it’s better to be talked about [as] something than nothing at all,” startup mentor Alexander Jarvis said. “You can always mention you do other things later, as they reach out knowing you are awesome at something.”

Most important, show your data: the number of checks written at each stage; the number of checks in each size level ($500,000-$1 million, $1 million-$5 million and so on); follow-on ratio; etc. Almost every investor is glad to share the winners in their portfolio, but only a few will share detailed analytics. Some worthwhile examples are First Round Capital’s 10 Year Project and FJ Labs’ 2020 Year in Review .

“VCs bury their dead quietly; they write Medium posts when things went well,” Jarvis observed. We hope more firms over time will feel comfortable sharing the real data as to how their data lines up relative to their investment thesis … and their investment hypotheses.

David Teten has advised Real Ventures and Right Side Capital. Thanks to Paulina Symala and Prabhat Gusain for research and analytical help, and to Alexander Jarvis for detailed and thoughtful comments.

11 words and phrases to cut from your VC pitch deck

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What Is an Investment Thesis?

Investing is a process. One important task an investor should perform before putting money into an opportunity is to develop an investment thesis. An investment thesis is a written analysis laying out the case for why an investment opportunity should generate a compelling return.

Here's a closer look at how to build an investment thesis and why it's essential to create one. 

The importance of creating an investment thesis

Many people make the mistake of investing their hard-earned money into opportunities they don't fully understand. Maybe they received a tip on a hot stock at a party or got caught up in the frenzy of  meme stocks  and  cryptocurrencies on social media. Perhaps that investment has now lost value, and they're not sure whether they should buy more , sell , or continue holding .

An investment thesis can help solve this problem. By creating a thesis on why you believe an investment will deliver an attractive return, you can use it as a guide to determine your next step when the investment experiences a large decline or some disturbing news emerges. You can measure those factors against the original thesis to see if it remains intact.

If the thesis hasn't changed, you can continue holding or potentially increase your investment. However, if you found that the thesis is busted, you can sell your investment and move on.

How to write an investment thesis

It's important to take the time to write a well-thought-out and thoroughly researched investment thesis. That will allow you to easily make sense of it for future reference. Here are four easy steps for writing an investment thesis.

Identify the underlying catalyst at play

The first step in writing an investment thesis is to determine and then outline the catalyst driving your investment thesis. For example, are you interested in the long-term upside from a  secular trend  or  economic supercycle , or a shorter-term rebound from the economic  cycle  or a  bear market ? Write out the primary reason you believe this investment has attractive upside potential.

Assess how the investment is positioned within the catalyst

Next, look at how the particular investment opportunity compares to others that benefit from the same catalyst. Is it the largest  publicly traded company  focused on this opportunity? Smaller but with more upside potential? Does it align with a particular  long-term investment strategy ? Will it help you with  balancing your portfolio ? Write out why this investment is a solid choice to benefit from this catalyst.

Consider the biggest risks 

As the saying goes, the best-laid plans often go awry. That's why it's vital to consider what will happen to this particular investment opportunity if something goes wrong. Some examples to consider:

• Can it withstand a recession ?
• Could Congress enact legislation that would damage its prospects?
• Is there a lot of competition within the industry?
• Does it have too much debt, volatile cash flows, or an otherwise weaker financial profile?
• Is the price high? Could that result in underperformance if the catalyst doesn't play out according to plan?

Consider and jot down anything that could negatively impact this investment.

Determine your conviction level

Finally, write down your expected return from this investment and how much conviction you have in its ability to achieve that return. Then, given the catalyst, its position within that catalyst, the risk/reward profile, and your conviction level, is it worth the investment?

By going through these steps and writing a detailed investment thesis, you can proceed with confidence. Further, you can reference it in the future to ensure your thesis is playing out as expected. If not, you can make changes to your investment.

Investment thesis examples

An investment thesis doesn't need to be that long. It just needs to contain the most important factors driving your decision to invest in a particular opportunity. Here's a simplified example based on my investment thesis for Brookfield Renewable  ( BEP -0.3% )( BEPC 0.0% ), one of my largest holdings:

Renewable energy is one of the biggest megatrends of our lifetimes. It will take the global economy three decades and more than $100 trillion of investment to transition its primary power source from fossil fuels to renewable energy.

One of the leaders in this energy transition is Brookfield Renewable. It has one of the largest globally diversified renewable energy platforms and an even bigger pipeline of development projects. Brookfield also has an extensive track record of creating value from the sector, including two decades of steady income and dividend growth , driving superior performance.

Brookfield is also well positioned to navigate the biggest risk facing the industry — access to low-cost capital to finance capital-intensive development projects — due to its rock-solid financial profile backed by a top-notch balance sheet. Given Brookfield's position within this megatrend and its historical success, I have high conviction that it can deliver market-beating total returns for years to come and would consider adding to my position on any meaningful price decline.

This example succinctly lays out the catalyst (the renewable energy megatrend), the investment opportunity's position in the trend (Brookfield is a global leader), its ability to withstand risks (Brookfield has a top-tier financial profile), and my conviction level (high).

An investment thesis isn't just for stocks ; you can craft one for any investment opportunity you're contemplating. For example, you might have the opportunity to invest in a new business venture or a private company. To write an investment thesis for a venture capital or private equity opportunity, you would follow the same outline.

Here's a simplified investment thesis for a new coffee shop:

People love coffee . Demand for the brewed beverage is on track to grow at a more than 8% annual rate through 2025, according to Statista. It also notes that, by 2025, 84% of coffee spending and 21% of the volume consumed will be outside the home. That growing market will benefit coffee shops.

This particular shop would be the first one in a trendy area of downtown that's undergoing a dramatic revitalization. While restaurant retail can be brutal, the group starting the coffee shop has opened several profitable locations around the city in recent years. Their past success, when combined with the coffee industry's growth, suggests this new shop should thrive. Because of that, you have a high conviction that this investment will earn a much greater return than if you invested the money in another retail opportunity. 

With this venture capital investment thesis we've:

• Identified the catalyst: Growing demand for out-of-home coffee consumption.
• Classified this particular investment opportunity's position within the catalyst: First mover in a trendy area.
• Determine all the risks facing this venture: Retail is brutal.
• Considered the conviction level: High compared to other retail opportunities.

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An investment thesis can make you a more successful investor

Thinking through and crafting a thoroughly researched investment thesis can help you make better informed investing decisions. While it's best to write one before you invest, you can also create one for existing holdings. The investment thesis will serve as a guide allowing you to measure whether the opportunity is living up to your thesis — suggesting you hold or buy more — or if that's no longer the case, and it's time to sell.  

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VC investment Thesis: Union Square Ventures

Tl;dr: The four USV investment thesis’ shared from 2012 to 2021 to guide their investment decisions for this venture capital firm. 

I nvestment thesis’ are a great way to learn about a VC firm, but more so it is a super way to impact your thinking about the world and the lens through which others view it. Since 2012, four investment thesis’ have been shared by Union Square Ventures.

Click to scroll to the one you want ( note it will jump just after the title )

• Union Square Ventures Investment Thesis 1.0 (2012) – Posted by Andy Weissman
• Union Square Ventures Investment Thesis 2.0 (2015) – Posted by Andy Weissman
• Union Square Ventures Investment Thesis 3.0 (2018) – Posted by Rebecca Kaden
• USV Climate Fund (2021) – Posted by Albert Wenger

Other reading from USV

• Early Stage Investing – Fred Wilson – Sep 19, 2006
• Our Focus – Brad Burnham – Aug 6, 2006
• Addition by Subtraction – Andy Weissman – Feb 11, 2018

Union Square Ventures Investment Thesis 1.0 (2012)

Venture firms operate a bunch of different ways. Some have a geographical focus, others have a sector focus, still others have a stage focus. Union Square Ventures’ focus has evolved into what we call a “thesis” but is probably better described as a macro level view about the world – the Internet world – that we then (attempt) to structure investment activities around. In short, as described by Brad last year in 140 characters , USV invests in:

Large networks of engaged users, differentiated through user experience, and defensible through network effects.

When we are organizing our activities and thinking about investment decisions then, we parse that a little finer, we unpack some of the components. “ Large ” obviously requires scale – Twitter is a great example. But it can also mean large relative to a specific problem set or community . Stack Exchange is comprised of over 80 question and answer sites. Some of those sites, like Server Fault , are designed for very specific communities, but aim to have most of the potential members of that community as active participants. Similarly, Behance is designed for the world’s creative professionals.

“ Networks ” are of course interconnected groups or systems, but they also come in a few flavors. For example, networks can be centered around person-to-person sharing of an activity ( foursquare , Soundcloud ), facilitating a transaction ( Dwolla ), enabling creativity ( Tumblr , Wattpad ), person-to-person marketplaces ( Etsy , Kickstarter ), or business and personal finance marketplaces ( Lending Club , Funding Circle ). Marketplaces have some of the more interesting network components and use the efficient exchange of information to produce superior economics and create new economies in their area of focus. Examples include the creative projects that wouldn’t otherwise come to fruition if the Kickstarter  marketplace was not active, the individuals finding work through Workmarket’s  labor resource market, or the active secondary market in small business loans (and pieces thereof) being traded through Funding Circle . Finally, networks can also be networks of data, such as what DuckDuckGo (search), Indeed (jobs) and  Flurry (mobile apps) are doing that then provide aggregate data-level benefits to users from that data network aggregation.

We will also look closely at the “ user experience ” of these networks, being most interested in novel (“differentiated”) web and mobile native interface ways to engage users around a solution to the particular problem, one that is consistent with the fabric of the users’ experiences . The foursquare check-in is a good illustration of a native behavior designed in the context of exploring a city, as is  Codecademy’s method of teaching people to program by writing code inside a browser window. Similarly, Canvas provides a unique set of tools to play with images, thereby encouraging the remix and sharing of them, turntable’s entire experience is designed to play music with other people, and tumblr’s dashboard is a method of following and reacting to and with creativity. Unique user experience also extends beyond the user interface – it’s the design of the entire system: how it functions, what is allowed; what isn’t allowed; what values are inherent in the prospective functioning of the service . Kickstarter’s  incentive/pledge system, with minimum goals and rewards, is an example of a unique experience that is well-aligned with the goals of the service itself (participating in creativity). As Albert recently wrote about Etsy: “ the best long term steward of a network will be a company that focuses on value creation for all participants in the network instead of solely for its shareholders .”

The last component of this thesis relates to businesses that create barriers to entry through “ network effects “, in which the value of a service to a user increases as others use it. This can potentially arise in a number of ways: for example a proprietary data asset ; the marketplace dynamics of having a robust set of sellers and buyers; or through the development of a community that openly shares and exchanges information. In an era where the initial cost to develop the prototype of a product has been dramatically reduced, where there are mature and scalable open source tools and services to utilize for that development, and where cloud infrastructure is available on demand and at a variable cost, defensibility may no longer be found in the technology underpinnings – the code or IP – of a service . Defensibility may however arise through the growth of service that gets more valuable, and more interesting, with each new participant. One nice example of this is Twitter , which is so potentially valuable because, put simply, that’s where the Tweets as well as the personal follower/following relationships reside. The value of these businesses tends to be composed of the very networks they have created.

Taken together, these components comprise how USV looks at the Internet at large to find places where we should invest and where we can be good partners. Of course, the components are not monolithic and are subject to nuance and interpretation (see for example “ Do Network Effects Span Geographies “; “ How Strong Are Network Effects Online, REALLY “), but again, of course, that’s what makes them most interesting.

Union Square Ventures Investment Thesis 2.0 (2015)

Union Square Ventures has always been a “thesis” driven firm. We maintain specific principles about the internet that guide our investment decisions. While other things like stage and to a lesser extent geography, also matter, our thesis or point of view is the primary thing that guides our decision making.

We last wrote about this a few years ago, in  Investment Thesis@USV , where we attempted to describe this view of the world. There, we also tried to describe how dynamic the thesis is, or can be. A few years later, we have a better idea of how our thesis has evolved and now presents, circa 2015.

Since USV was founded, we have focused on the applications layer of the internet. The layer that sits on top of the relatively open and robust infrastructure of the internet, the infrastructure that allows for permissionless connectivity.

Initially, the investments related to that applications layer were what we called “ large networks ” – that is – broad based, mostly consumer-oriented networks that could, or at least aspired to, touch many many people (hundreds of millions or more).

Brad reduced this to  140 characters  a number of years ago:

USV in 140 characters: invest in large networks of engaged users, differentiated by user experience, and defensible though network effects — Brad Burnham (@BradUSV)  June 8, 2011

This thesis brought us to companies like  Twitter ,  Tumblr ,  Etsy  and  Soundcloud  – large networks that, to this day, have proven defensible through network effects.

Over time, it became harder – and it’s  still hard  – for newer entrants, newer broad consumer networks – to gain scale because to do so requires them to displace the time users devote and spend on the new incumbent networks, such as Facebook.

As a result we turned our attention and applied the thesis to those services that support the larger networks – so called “enabling technologies” – that were horizontal in nature, yet also broad with respect to the numbers of networks they could potentially support.

These enabling technologies are basically businesses that provide essential services to the new crop of web companies.

These are investments such as  Twilio  (a communications service),  MongoDB  (a database service),  Cloudflare  (a network and security service),  SiftScience  (fraud protection), and  Firebase  (a synchronization service). And a more recent investment –  Clarifai  (image and visual recognition service).

Then, roughly in the 2012 time frame, we also turned our attention to thinking about market-specific networks: networks in high-value niches that are differentiated and defensible, partially because they are domain-specific. These networks generally have more subtle or less obvious network effects, precisely because they involve something more specific and tight.

These often fall into specific categories – like education or learning ( Edmodo ,  Codecademy ,  Skillshare ,  Duolingo ,  Quizlet ,  Stack Exchange ), financial marketplaces ( Lending Club ,  Funding Circle ,  Circle Up ,  C2FO ) healthcare and medicine ( Figure 1 ,  Human DX ,  Clue ), science and engineering ( Science Exchange ,  SimScale ), the law ( Casetext ) and company ownership management ( eShares ).

These more subtle network effects also include platform shifts, such as mobile ( Amino ,  Figure 1  or  Duolingo ), venue shifts (enterprise security delivered in the cloud, such as  Cloudflare ), and data networks like  SiftScience , which delivers fraud protection by aggregating data points across thousands of domains.

Finally, and more recently we have been thinking and talking about the blockchain and bitcoin. When we analyze the network effects of the large internet platforms, it appears that part of their defensibility is through the centralization of data – user data, interaction data and transaction data.

We started to see that blockchains – by basically being a decentralized data layer – could over time erode those advantages.

So we turned the thesis to the exploration of services that could undermine larger networks by decentralizing the data asset that the large networks have. While this area is obviously early, we have made a handful investments in this decentralized layer including  Coinbase  (banking and brokerage),  OB1  (buy and sell marketplaces) and  Onename  (identity).

Finally, as infrastructure providers gravitate towards the applications layer, they are underinvesting in connectivity itself at a time when the demand is growing and new technologies are available. Inasmuch as the internet itself is an enabler of creation and creativity, we believe that businesses like  Veniam  (the “internet of moving things”) and one other unannounced investment we have made will be foundational layers for future generations of technology. So, we have also made a few investments in those telecommunications infrastructure companies with innovative technologies or business models (Access 2.0).

Importantly, the way in which we invest against this thesis is also cumulative – we don’t simply stop investing in any one area as we uncover other ones. It looks something like this, a chart of our active investments over time from 2004-present:

To capture this image into a current version of our investment thesis, we’ve reduced it again today to 140 characters.

This is USV, 2015:

As the market matures, we look for less obvious network effects, infrastructure for the new economy, and enablers of open decentralized data. — Andy Weissman (@aweissman)  December 15, 2015

Union Square Ventures Investment Thesis 3.0 (2018)

The commitment to a thesis is part of the fiber of USV–a shared set of ideas creates a framework that allows us to operate with focus and work on what matters most to our team. But what that thesis is has evolved over time and will continue to evolve. It reflects both a changing world as well as the shifting interests of our partnership. Recently, we have been working on its third iteration.

In its earliest days, USV started with a focus on the application layer of the web. The team quickly realized that network effects play a central role in all of these applications and Thesis 1.0 emerged: Invest in large networks of engaged users, differentiated by user experience, and defensible through network effects.  This post  breaks down the components, but the crux of this thesis involved primarily consumer focused businesses where the value of the service to a user increases as others use it, too. These network effects create defensibility and lead to scale.

This thesis drove USV’s investments in businesses such as Twitter, Etsy, Tumblr, Foursquare, Behance, and Kickstarter. It proved to be a productive filter and guidepost. But the success of businesses that benefited from network effects dominated consumer internet to a point where it became extremely difficult for new networks to emerge, which remains true today. As a result, USV revised the thesis to include 3 new buckets which Andy broke down in  this post . 1) Vertical networks and marketplaces such as those in financial services (e.g.  Lending Club ,  Funding Circle ,  CircleUp ,  Stash ); health and healthcare ( Nurx ,  Figure1 ,  Science Exchange ,  Clue ); education ( Duolingo ,  Quizlet ,  Tophat ,  Skillshare );  and ownership management ( Carta .) 2) The underlying technology of networks and emerging businesses (e.g.  MongoDB ,  Twilio ,  Cloudflare ,  Sift Science ,  Shippo ) 3) enablers of open and decentralized data which have the potential to counteract the centralizing force of the large internet networks. The last one is the root of USV’s blockchain portfolio  (e.g.  Coinbase ,  Blockstack ,  Algorand ,  CryptoKitties .)

Throughout these categories, a focus on companies that broaden access emerged as a common thread. This theme has become a driving force across the business models and sectors our portfolio covers. In education, for example, Duolingo allows users to learn new languages around the world, on their phones and from their couches, for free. In healthcare, Nurx creates new ability for consumers to access medical care at dramatically reduced cost. Coinbase makes an emerging asset class accessible to mass markets. Twilio allows developers anywhere to easily access the world’s voice and text communications infrastructure.

We believe we are still at the beginning of the opportunity to broaden access with the most critical implications ahead of us. As a result, we decided to revise our thesis into a third version:

USV backs trusted brands that broaden access to knowledge, capital, and well-being by leveraging networks, platforms, and protocols.

We think of knowledge, capital, and well-being as each encompassing multiple components. Knowledge includes education and learning, but also data driven insights and access to new ideas. With capital, we include financial capital from financial services innovation, whether in the current system or emerging financial platforms like crypto, but also human capital and technology infrastructure. And with well-being, we think about health and wellness, but also entertainment, connection, community, and fun.

The goal of these businesses is to build trusted brands–products and services that not only serve a purpose, but integrate into the hearts and minds of their customer in a way that is durable and important. Trust comes from true alignment and convincing the customer that their values and priorities are shared. The bar for this is higher than ever but the best businesses will continually meet it.

Many of our most recent investments fit in this thesis already, including  Stash , which is opening up high quality financial services products to new markets;  Algorand , which is creating a new scalable, decentralized currency and transaction platform; and  Flip , which is allowing users the freedom to move around without worrying about long leases by creating an open marketplace. But the new articulation will help us continue to use our thesis as a guide for our team in shaping our portfolio.

If you are an entrepreneur building a trusted brand that will broaden access in a new way, we would love to talk to you.

USV Climate Fund (2021)

At USV we  describe ourselves  as a “thesis-driven venture capital firm.” For our core fund, we have been investing against  Thesis 3.0  for some time. Over the last couple of years, we have been  developing a separate Climate Thesis , including making investments in companies such as  Leap  and  Wren .  We are excited to announce that we now have a $162 million Climate Fund specifically for that. Like our Opportunity Fund, this new Climate Fund will be managed by all the existing USV partners.

At the highest level, the Climate Thesis can be summarized as follows: The USV Climate Fund invests in companies and projects that provide mitigation for or adaptation to the climate crisis.

Mitigation is working on the causes of the climate crisis through either emissions reduction or drawdown of existing greenhouse gases from the atmosphere. Adaptation is working on the consequences of the climate crisis, such as increased risk of crop failure. Adaptation is part of the thesis in recognition that the climate crisis is not some distant future event but rather playing out in the here and now.

We will be breaking down this high-level thesis into specific ideas, much as we have done for Thesis 3.0. We will be publishing these as a series of blog posts going forward. The first such idea is using satellite imaging to enable high powered incentives for maintaining and improving forests (and eventually starting new ones). This idea has already resulted in an investment in  SilviaTerra , which we are also  announcing today .

The USV Climate Fund is a straight-up venture fund. We believe that decarbonizing the economy and dealing with past emissions (and their consequences), offers many opportunities for building important new companies that can produce venture type returns. The transformation of all aspects of the physical world over the coming decades will be on par with the changes brought about by digital technology. Unlike other USV funds which have focused primarily on bits, the Climate Fund will invest in both bits and atoms. Like our core funds, we will be targeting primarily Series A opportunities, which for us means something has been built that we can kick the tires on. That something can be as little as an early prototype and companies can definitely be pre-revenue.

We thank the limited partners who are trusting us with capital for this new thesis. And we are looking forward to backing entrepreneurs and teams working to help address the climate crisis.

BACK TO THE VC THESIS COLLECTION

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