investment thesis for startup

4 Ways to Create Your Startup Investment Thesis

Investing in startups without an investment thesis is like going on a trip without a GPS; you can do it, but you’ll have no direction.

An investment thesis is a framework that outlines your investment strategy and objectives. It helps you think more clearly by giving you the ability to narrow down what makes a company interesting.

In this blog post, we will discuss how to create an investment thesis so you can start investing with direction.

Table of Contents

Conducting Market Analysis and Identifying Investment Themes

To create a successful investment thesis, you need to conduct market analysis and identify investment themes. This involves the following steps:

Analyze the Market

You should analyze the market to identify trends and opportunities. This may involve conducting interviews with industry experts, attending industry conferences, and analyzing market reports.

Identify Investment Themes

Based on your market analysis, you should identify investment themes. Investment themes are broad areas of focus that guide your investment decisions. For example, you may choose to focus on startups that are developing innovative technology solutions for the healthcare industry.

Establishing Criteria for Investment Selection and Portfolio Construction

Once you have identified investment themes, you need to establish criteria for investment selection and portfolio construction. This involves the following steps:

Investment Selection Criteria

Your investment selection criteria should be based on your investment goals and criteria. This may include factors such as the startup’s market potential, management team, and financial performance.

Portfolio Construction

Your portfolio should be diversified to minimize risk. You should consider factors such as the stage of development, industry, and revenue potential of each startup in your portfolio.

Read more: USV Investment Thesis , Notation Investment Thesis , NewView Investment Thesis

Creating an investment thesis is step one before investing in startups.

Your investment thesis should define your investment goals and criteria, assess your personal investment philosophy and objectives, and identify investment themes. Your thesis should improve your clarity and make it easier to narrow down your investment decisions.

If you’re looking for more examples of investment theses from some of the top funds in the world, check out the Ultimate VC Resource Library to get access to that plus 350+ other venture resources.

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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.

Sutton Capital

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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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.

Key Takeaways

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
• Understand the risk/return trade-offs between investing in different stages
• Recognize and navigate trends that are transforming the venture capital market and uncover upcoming opportunities

Who Should Attend?

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.

Program Modules

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.

Learn how to get — and stay — ahead of the curve with your investment strategies. Learn the differences between structural and cyclical changes, which help you make informed investment decisions.

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Hone business acumen and executive skills with try-it activities that help you redefine your potential

Program Faculty

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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Your verified digital certificate will be issued in your legal name and emailed to you, at no additional cost, upon completion of the program as per the stipulated requirements. All certificate images are for illustrative purposes only and may be subject to change at the discretion of Columbia Business School Executive Education.

Other Recommended Programs

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Startup Insider: How to Build an Investment Thesis

Wherever you are on your investing journey, it’s important to have guiding principles. Once you understand your own interests and strengths as a startup investor, you can start to build an investment thesis to guide your decision making. 

An investment thesis is an argument for a particular investment strategy that’s backed by research and analysis. It gives you a framework to work within so you’re not making investing decisions at random. It can also help you analyze previous investment decisions — and whether those decisions were good or bad.

In this episode of Startup Insider, Vin Narayanan and Allison Brickell discuss the benefits of an investment thesis, what factors investors should consider when crafting one, how many they should have and more.

Thanks for watching!

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Investment Thesis

Enhance your understanding of investment thesis and optimize your strategies for success with Lark's tailored solutions designed for the unique needs of the investment landscape.

In the dynamic landscape of venture capital, an investment thesis holds paramount importance. This article provides an in-depth analysis of the nuances of investment thesis and its pivotal role in the venture capital realm, particularly for startups looking to secure funding and drive growth.

Use Lark Base to plan, execute, track, and deliver. From venture capital firms to your startup office.

Introduction to investment thesis

Before delving into the intricacies of an investment thesis, it is essential to understand its foundational essence in the venture capital landscape. Whether a startup is seeking funding or an investor is looking to allocate resources, the adoption of a robust investment thesis proves to be instrumental. This article aims to provide invaluable insights into the formulation and implementation of an investment thesis, empowering stakeholders to make informed decisions that align with their strategic objectives.

Defining investment thesis and its relevance in the venture capital landscape

Demystifying investment thesis.

An investment thesis represents a strategic framework that guides investors in identifying and evaluating potential investment opportunities. It encapsulates the core principles, market trends, and underlying factors that influence investment decisions. By formulating a comprehensive investment thesis, venture capitalists can effectively evaluate opportunities, mitigate risks, and drive sustainable returns.

The Role of Investment Thesis in the Venture Capital Context

In the ever-evolving venture capital landscape, the formulation of a robust investment thesis is imperative. It acts as a guiding light, steering investors towards opportunities that align with their expertise and vision. Moreover, it facilitates a structured approach to decision-making, enabling investors to channel resources into ventures that exhibit the potential for long-term success.

Significance of investment thesis in venture capital

The Significance of Investment Thesis in Venture Capital transcends beyond mere financial aspects. It orchestrates a strategic alignment between investors and startups, fostering a symbiotic relationship that fuels innovation and market disruption. The following sections delineate the profound impact of investment thesis on startups and the broader venture capital ecosystem.

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Exploring the impact of investment thesis on startups

Navigating the venture capital landscape.

For startups, gaining insights into the investment thesis of potential venture capitalists can be transformative. Understanding the focal points, risk appetites, and sector preferences of investors can empower startups to tailor their pitches and business strategies accordingly, thus amplifying their appeal in the eyes of potential investors.

Unveiling Stakeholder Dynamics

The formulation of an investment thesis involves a meticulous assessment of market trends, consumer behaviors, and technological advancements. Consequently, it not only shapes the investment decisions of venture capitalists but also influences the strategic trajectories of startups. By embracing the tenets of an investment thesis, startups position themselves strategically, aligning their offerings with market demands and capitalizing on emerging trends.

Stakeholders and their involvement in the venture capital ecosystem

The compelling influence of an investment thesis resonates across diverse stakeholders in the venture capital ecosystem. From entrepreneurs and venture capitalists to industry experts and market analysts, each participant is impacted by the tenets of investment thesis in distinct ways.

Entrepreneurs: By discerning the investment theses of potential investors, entrepreneurs can tailor their pitches and business strategies to resonate with the interests and strategies of the investors, thus enhancing their funding prospects.

Venture Capitalists: Investment theses form the cornerstone of decision-making for venture capitalists, guiding them to identify and assess opportunities that align with their expertise and market perspectives.

Industry Analysts: For professionals analyzing market trends and investment patterns, comprehending the prevalent investment theses provides invaluable insights into the directional shifts and emerging opportunities within the venture capital realm.

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Practical implications of investment thesis for startups

Unveiling practical implications.

The practical implications of investment thesis for startups permeate various facets of their strategic and operational endeavors. From gauging capital requirements to aligning business strategies, the following aspects shed light on the tangible implications of investment thesis.

Capital Alignment

A robust investment thesis facilitates alignment between the capital needs of startups and the investment preferences of venture capitalists. By recognizing the investment theses of potential investors, startups can streamline their fundraising efforts, focusing on entities whose investment theses align with the startup's strategic trajectory.

Strategic Validation

In the process of formulating an investment thesis, venture capitalists conduct comprehensive analyses of market dynamics, technological disruptions, and consumer behaviors. For startups, an alignment with the themes and trends underscored in the investment thesis of potential investors validates their strategic direction, fortifying their value propositions in the eyes of the investors.

Stakeholder Collaboration

The convergence of investment thesis and startup strategies often paves the way for collaborative endeavors. Startups that strategically align with the investment theses of venture capitalists stand higher chances of fostering sustainable and symbiotic relationships, transcending mere financial backing to collaborative alliances that drive mutual growth and innovation.

In conclusion, the formulation and adherence to a well-defined investment thesis hold the potential to revolutionize the dynamics of venture capital, particularly for startups navigating the funding landscape. By comprehending the intricate relationship between investment theses and decision-making, stakeholders can make informed choices that resonate with their long-term visions and catalyze transformative outcomes.

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What are the core components of an investment thesis?

An investment thesis typically comprises core components such as market trends, consumer behavioral analysis, sector preferences, risk assessment, and anticipated returns. It encompasses a strategic framework that guides investment decisions and aligns capital allocations with prevailing market dynamics.

How does an investment thesis influence the strategic trajectories of startups?

Investment theses serve as a compass for startups, directing their strategic decisions and operational endeavors towards opportunities that resonate with market trends and the preferences of potential investors. By aligning themselves with prevalent investment theses, startups enhance their appeal in the eyes of venture capitalists and position themselves strategically in the funding landscape.

Can a well-defined investment thesis foster collaborative partnerships between startups and venture capitalists?

Indeed, a well-defined investment thesis has the potential to transcend traditional investment dynamics and catalyze collaborative partnerships between startups and venture capitalists. When startups align with the investment theses of potential investors, it often lays the foundation for value-driven collaborations that drive mutual growth and innovation.

How can startups leverage investor investment thesis to enhance their funding prospects?

Startups can leverage investor investment theses by aligning their pitches, business strategies, and operational endeavors with the prevalent themes and preferences underscoring the investment theses. This strategic alignment enhances their appeal to potential investors and augments their funding prospects within the venture capital landscape.

What are the key considerations for formulating an impactful investment thesis as a venture capitalist?

When formulating an impactful investment thesis as a venture capitalist, several considerations come into play. These embrace a comprehensive understanding of market dynamics, consumer behaviors, industry trends, sector preferences, risk assessments, and anticipated returns, all culminating in a strategic framework that aligns investment decisions with prevailing market paradigms.

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Investment Thesis Template

Create your own investment thesis slide with this free template

Prior to becoming a Founder for Curiocity, Hassan worked for Houlihan Lokey as an Investment Banking Analyst focusing on sellside and buyside  M&A , restructurings, financings and strategic advisory engagements across industry groups.

Hassan holds a  BS  from the University of Pennsylvania in Economics.

Currently, Adin is an associate at Berkshire Partners, an $16B middle-market private equity fund. Prior to joining Berkshire Partners, Adin worked for just over three years at The  Boston Consulting Group as  an associate and consultant and previously interned for the Federal Reserve Board and the U.S. Senate.

Adin graduated from Yale University, Magna Cum Claude, with a Bachelor of Arts Degree in Economics.

This template allows you to create your own investment thesis slide detailing your overall strategy.

The template is plug-and-play , and you can enter your own text or numbers. The template also includes other slide pages for other elements of a financial model presentation.

According to the WSO Dictionary ,

"An investment thesis aims to take an abstract idea and turn it into a functional investment strategy. An investment thesis helps investors evaluate investment ideas, ideally guiding them in selecting the best ideas that can help meet their investment objectives."

A screenshot below gives you a sneak peek of the template.

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VC investment thesis: OpenOcean Venture Capital

TL;DR: The venture capital investment thesis example from OpenOcean

They start off their thesis with the basics, business model and metrics.

Some of my favorite quotes include:

• We always prefer painkillers and  addictive painkillers  in particular
• Ease of adoption and burning need boil down to something we call “ time to love ”
• For software to reach adoption it has to  smoothly fit in , meaning that it must be compatible with the processes and practices of the organisation

Basically, these guys make “investments in Delicious data-intensive software.”

If you want to change the world, growing a large customer base is great, but if you manage to build a  thriving user community  — then you’re onto something truly astonishing

They are not super explicit about the types of companies they invest in, but they like companies that do things “ like  smart aggregation and use of data , which could, for example, mean that you make sense of huge amounts of data with intelligent processing and machine learning and thereby solve critical business problems. ”

• We look for software startups all over Europe
• We focus on Series A financing rounds (Because an A round can mean different things depending on location and industry we’re somewhat flexible about the stage)
• The initial investment would typically be between 2–4 million euros
• Proof of good initial traction and growth

I’ve helped some VCs with their investment thesis and often find that their stated investment thesis isn’t really where the magic happens, it’s more in portfolio construction. I think this thesis could be a little more lucid, but it’s certainly better than some.

About OpenOcean

OpenOcean is a European early-stage venture capital firm. The company engages in helping entrepreneurs build global software companies.

OpenOcean typically lead or co-lead €5M funding rounds. The investing team has extensive technical, product, and operational experience and each partner works with a maximum of 8 young companies.

They have raised two funds totaling €140M.

Some of their deal involves the below from CrunchBase.

Their venture capital investment thesis example

“So you invest in software. What do you look for?”  That’s something we get often, in particular when talking to investors. Fortunately, it’s a question we love elaborating on.

As former founders with a background deep in technology, we are passionate about software. It’s the reason why OpenOcean exists. Our mission is to help smart entrepreneurs spread software to the broadest use possible. Ideally put it in the hands of millions.

Our investment thesis hasn’t changed dramatically during the past few years. We’ve stayed true to our core mission, but have evolved our thesis to encompass the movements we see forthcoming and have further developed our thinking around aspects we’ve always intuitively looked for.

Delicious software

OpenOcean focuses on investments in Delicious Software. Talking about software in terms of a culinary experience always brings a smile to people’s faces and it might at first glance seem far fetched. It’s, however, the perfect allegory and there are a number of key characteristics that in our view make software delicious.

For a software to reach the broadest usage it has to be extremely  easy to adopt . It helps if there’s a  burning need  for the users to solve something. If we have to choose between vitamins and painkillers, we always prefer painkillers, and  addictive painkillers  in particular.

Ease of adoption and burning need boil down to something we call  “ time to love ” . Ideally, the time to love is very short, preferably just a matter of minutes. That’s when you experience the wow-effect and start talking to your friends and colleagues about what you’ve just tasted.

Our focus is on business software and the days are past when new software was top-down pushed into organisations by IT departments. For software to reach adoption it has to  smoothly fit in , meaning that it must be compatible with the processes and practices of the organisation. Obviously, any new software solution needs to provide a clear  return on investment  as well.

It’s also good to remember that for organisations to really fall in love with delicious software, and gradually start paying for it, it’s not just about how the food tastes and what it contains, but how the whole restaurant works.

Communities and data intensive solutions

If you want to change the world, growing a large customer base is great, but if you manage to build a  thriving user community — then you’re onto something truly astonishing. It can become a force that delivers a unique competitive advantage, something not even the largest players or the best funded startups can match.

We also like  smart aggregation and use of data , which could for example mean that you make sense of huge amounts of data with intelligent processing and machine learning and thereby solve critical business problems, like our portfolio company  Nosto  that helps e-commerce merchants sell more by learning from how tens of millions of users behave.

We very much agree with the now old saying  “Data is the new oil”  and we search for opportunities that challenge the boundaries of how this oil can be refined. When you combine community and innovative aggregation of data you can get to crowdsourcing of strong insight. Some of the most compelling value propositions in the software industry today are built on this approach.

Efficient scalability

What makes a software business scalable? Well, clearly it helps if people love the software and tell their friends about it. However, there aren’t any exact rules for scaling, as no case is identical with another.

In order to understand a software company’s true potential for massive success, we typically review and analyze scalability from a number of different perspectives. In our mindset the actual revenue scaling is not the starting point at all, but more an end result. The revenue side of the business is merely the outcome of the approach chosen, the process implemented, and the actions are taken. Some of the scalability perspectives we look at are listed below:

• Awareness:  How do people become aware of the product and the offering?
• Initial Traction: How is the software being adopted today? Are there metrics that prove Ease of Adoption, Burning Need, and Short Time to Love?
• Engagement:  How do you measure active usage and the delivery of continuous value to users?
• Community:  Do users contribute to you or to others in order to improve the ecosystem around you? Is there viral spreading that can be measured?
• Product offering:  How do you define different product tiers with clear value differentiation between each tier?
• Conversion process — Marketing:  How are users educated on the product tiers, and what motivates them to move? How can this system best be created, measured and optimised?
• Conversion process — Sales:  What segments do you have? What sales methods work best for which segments, and which parts of the funnel?
• Partnership strategy:  Who should you work with and in what way?

European Series A venture capital

We look for software startups all over Europe and we focus on Series A financing rounds. Because an A round can mean different things depending on location and industry we’re somewhat flexible about the stage, but our initial investment would typically be between 2–4 million euros. Regardless of what the round is being called, certain things need to be in place.

There needs to be  a great software solution out there  with proof of good initial traction and growth. Ideally, people are already willing to pay something for the software. There has to be a believable business plan with unit economics that make sense.

A large and exciting market  is also a must. In a best case scenario there are low barriers to rapidly grow in the market, and then while doing so building a strong competitive position significantly preventing others from competing on equal terms.

The startup needs to have  a strategy  that defines how adoption can be maximized and how revenue is best driven from the user base.

Finally, there needs to be  a strong domain expert team  and that’s such an important aspect that it deserves a chapter of its own.

Bold founders with a global outlook

In many cases where the product, traction, and market potential have been great, we’ve still ended up agreeing with the entrepreneurs  not  to invest. How come?

The thing is that in early-stage venture capital investments you invest first and foremost in founders and the team.

To strive for something really big requires an incredible amount of self-confidence, passion, belief, stubbornness, and ambition. There are so many uncertainties to overcome along the way and no-one can rationally beforehand be certain that everything will work out to the best.

It’s no joke to say that many of the most successful entrepreneurs are slightly  “crazy” . This craziness is the trait that makes them disregard several of the risks that otherwise might drive them sleepless on the long journey to build a global winning company.

A founder who’s aiming high has to put aside parts of her rational analysis and simply believe — while relying on and drawing strength from deep domain expertise. We’d like to find and attract precisely those bold and courageous founders.

There’s no point in investing in software without a solid thesis. As circumstances change and new technologies emerge you might have to evolve and sharpen your thesis.

Fortunately, we’ve been able to rely upon and hold on to much of our original core thinking — we invest in extraordinary people building delicious and data-intensive software.

BACK TO THE VC THESIS COLLECTION

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As I’m trying to set-up a VC firm for Western and Eastern Africa, I would be very grateful for this doc

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Does your VC have an investment thesis or a hypothesis?

David Teten

More posts from david teten.

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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.

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Business Advisory: How to build investment thesis clarity for better M&A outcomes

In M&A, clarity on business rationale and investment thesis is critical.

So how do you build it?

Often the lack of specificity in M&A investment thesis leads to poor decision-making. It is crucial to determine at a detailed level “how” and “where” a deal will create value. This involves moving beyond generic assumptions to a detailed vision, rigorous due diligence and a robust implementation plan.

Common questions relating to the integration of operational platforms and the impacts of divestments need clear, granular answers.

The M&A investment thesis should guide deal objectives and execution performance tracking while ensuring alignment across all organisational levels. Initial stakeholder alignment on success metrics is key and while agility in approach is necessary, the core M&A investment thesis and goals must remain.

Ultimately a detailed understanding of value creation sharpens focus and drives success in M&A.

Access our free guide to build a robust M&A investment thesis for your business.

HOW DLA PIPER BUSINESS ADVISORY CAN HELP YOUR ORGANIZATION WITH M&A

We help clients to address the inherently complex risk of M&A by uplifting capability and overcoming any capacity challenges. Our integrated team accompanies you through the deal lifecycle with a single point of accountability from the pre-deal strategy and preparation, deal execution all the way through to close and integration/separation. We also provide specialised advice in M&A ESG, ventures and joint ventures.

For more information reach out to Guy Fisher .

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Formula for Failure: Common Mistakes in Venture Capital

1. Flawed Investment Thesis

One common mistake in venture capital is having a flawed investment thesis. An investment thesis is the underlying rationale or hypothesis that guides an investor’s decision to invest in a particular startup or industry. A flawed investment thesis occurs when the assumptions or analysis supporting the investment decision are flawed or inaccurate.

For example, let’s say a venture capitalist believes that electric scooters will revolutionize urban transportation and decides to invest heavily in a startup manufacturing electric scooters. However, the investment thesis is flawed because it fails to consider important factors such as regulatory challenges, competition, or consumer adoption rates. As a result, the investment may not yield the expected returns or may even fail.

To avoid a flawed investment thesis, venture capitalists should conduct thorough market research, analyze industry trends, and evaluate the startup’s competitive advantage and potential risks. It’s important to critically assess the assumptions and data supporting the investment thesis to ensure its validity.

Chasing Trends : Investing in hot industries without a clear understanding of the underlying fundamentals can lead to overvalued companies and disappointing returns. We’ll discuss how to differentiate between genuine innovation and fleeting fads.  

–Flawed Investment Thesis: Chasing Trends” refers to the tendency of investors to allocate capital based on popular market trends or fads without thoroughly understanding the underlying fundamentals of the industries they are investing in. This flawed approach can lead to overvalued companies and ultimately result in disappointing returns on investment. When investors are driven primarily by short-term trends rather than a deep analysis of a company’s fundamentals, they may inflate the valuation of companies within hot industries, leading to unrealistic expectations and potential losses.    

  The statement emphasizes the importance of discerning between genuine innovation and passing fads in investment decision-making. It suggests that investors should focus on identifying sustainable business models and technological advancements rather than blindly following market trends. By differentiating between genuine innovation and fleeting fads, investors can make more informed investment decisions, allocating capital to companies with strong fundamentals and long-term growth potential. This approach aims to mitigate the risk of investing in over hyped ventures and increase the likelihood of achieving favorable returns over time       

Lack of Focus: Spreading resources too thin across diverse sectors or technologies increases risk. We’ll explore strategies for developing a focused investment thesis that aligns with your expertise and risk tolerance.     

    The concept of a flawed investment thesis refers to a foundational flaw in the rationale behind an investment strategy. In this context, “Lack of Focus” represents a common flaw where investors spread their resources too thinly across diverse sectors or technologies, which subsequently increases risk. When investors fail to concentrate their efforts on a specific area, they dilute their expertise, attention, and resources, making it challenging to conduct thorough due diligence and identify promising opportunities effectively.       

    A lack of focus can result in sub-optimal decision-making and diminished returns, as investors may struggle to develop a deep understanding of the industries or technologies in which they invest. Moreover, spreading resources too thinly may lead to missed opportunities for strategic partnerships, synergies, or specialization that could enhance investment outcomes.        

To address this flaw, investors should develop a focused investment thesis that aligns with their expertise and risk tolerance. This involves identifying specific sectors, industries, or technologies where they possess a competitive advantage or deep understanding. By concentrating their efforts on a narrower set of opportunities, investors can enhance their ability to conduct thorough research, mitigate risks, and capitalize on high-potential investments, ultimately improving their overall investment performance.   

Unrealistic Expectations: Setting unrealistic return targets or exit timelines can lead to poor decision-making. We’ll analyze historical VC performance data and discuss setting realistic expectations for the asset class.  

–The term “Flawed Investment Thesis” refers to a fundamental flaw or misconception in the underlying rationale guiding an investment strategy. In this context, “Unrealistic Expectations” represent a common flaw where investors set overly ambitious return targets or expect quick exits, leading to poor decision-making like setting a goal that are not attainable,doable, or not practical.

        When investors establish unrealistic expectations, they often underestimate the complexities and uncertainties inherent in venture capital (VC) investments. VC investments typically involve high levels of risk and uncertainty, with many startups failing to achieve their projected growth or reaching profitability within expected timelines. Therefore, expecting consistently high returns or rapid exits from every investment can lead to disappointment and frustration when reality fails to meet these expectations.

        To address this flaw, investors must analyze historical VC performance data to gain a realistic understanding of the asset class’s risk-return profile. By studying past trends and outcomes, investors can develop more informed expectations regarding potential returns, exit timelines, and overall investment performance. Setting realistic expectations allows investors to make more prudent investment decisions, mitigate the risk of disappointment, and align their investment strategies with the inherent characteristics of the VC asset class.

Confirmation Bias: The tendency to favor information that confirms existing beliefs can lead to overlooking red flags. We’ll discuss strategies for challenging assumptions and conducting objective evaluations.  

 –The concept of a flawed investment thesis refers to a fundamental flaw or misconception in the underlying rationale guiding an investment strategy. In this context, “Confirmation Bias” represents a common flaw where investors exhibit a tendency to favor information that confirms their existing beliefs or hypotheses while disregarding contradictory evidence. This bias can lead investors to overlook red flags or warning signs that may indicate potential risks or flaws in their investment thesis.

    Confirmation bias can impair investors’ ability to conduct objective evaluations of investment opportunities, as they may selectively focus on information that supports their preconceived notions while ignoring evidence that challenges or contradicts their assumptions. This can result in sub-optimal decision-making and increased susceptibility to making costly investment mistakes.     

     To address confirmation bias and mitigate its impact on investment decisions, investors should adopt strategies for challenging their assumptions and conducting more objective evaluations. This may involve actively seeking out diverse perspectives, soliciting feedback from peers or mentors, and subjecting their investment thesis to rigorous scrutiny and testing. By fostering a culture of critical thinking and intellectual humility, investors can reduce the influence of confirmation bias and make more informed and objective investment decisions, ultimately enhancing their overall investment performance.    

2. Inadequate Due Diligence

            Another common mistake in venture capital is inadequate due diligence. Due diligence is the process of conducting a comprehensive assessment of a startup’s business, financial, market potential, and management team before making an investment. When due diligence is insufficient, investors may overlook critical information or fail to identify potential risks and challenges. This can lead to investing in startups with weak financial, inexperienced management teams, or flawed business models.   

To avoid this mistake, venture capitalists should conduct thorough due diligence, including financial analysis, market research, competitive analysis, and background checks on the management team. It’s essential to gather as much information as possible to make an informed investment decision. 

Skimming the Surface: Failing to thoroughly vet a startup can lead to overlooking critical issues.

“Inadequate Due Diligence” is a common mistake in venture capital (VC) investments, where investors fail to thoroughly vet a startup before making an investment decision. This flaw is characterized by “Skimming the Surface,” wherein investors overlook critical issues due to a lack of comprehensive due diligence. To address this, a thorough due diligence framework is necessary, encompassing several key aspects:

Team: Assessing the founders’ experience, capabilities, and track record.

• Assessing the founders’ experience, capabilities, and track record is crucial. Investors should evaluate whether the team possesses the necessary skills and expertise to execute the business plan successfully. Examining the founders’ past successes, industry knowledge, and ability to adapt to challenges can provide insights into their potential for driving the company’s growth.

Market: Analyzing the target market size, growth potential, and competitive landscape.

• Analyzing the target market size, growth potential, and competitive landscape is essential for understanding the startup’s market fit and growth prospects. Investors need to assess whether the startup’s solution addresses a genuine market need, identify potential competitors, and evaluate the startup’s positioning within the market.   

Product: Evaluating the product’s functionality, differentiation, and go-to-market strategy.

• Evaluating the product’s functionality, differentiation, and go-to-market strategy is critical. Investors should assess the uniqueness of the product or service, its potential for market adoption, and the startup’s ability to effectively market and sell the product. Understanding the product’s value proposition and competitive advantages can help investors gauge its potential for success.

Financials: Scrutinizing the startup’s financial health, past performance, and future projections.

• Scrutinizing the startup’s financial health, past performance, and future projections is vital for assessing its investment potential. Investors need to review the startup’s financial statements, cash flow projections, and revenue model to evaluate its sustainability and growth prospects. Additionally, conducting sensitivity analyses and scenario planning can help investors assess the startup’s resilience to potential market fluctuations and risks. 

By following a comprehensive due diligence framework that covers these key areas, investors can mitigate the risk of inadequate due diligence and make more informed investment decisions in the VC space. Thoroughly assessing the team, market, product, and financials enables investors to identify potential red flags, evaluate investment opportunities more accurately, and maximize their chances of success in the venture capital landscape.  

Overreliance on Pitch Decks: A polished pitch deck doesn’t guarantee a successful company. We’ll discuss the importance of going beyond the presentation and digging deeper.     

Inadequate Due Diligence” in venture capital (VC) investments often arises from an “Over reliance on Pitch Decks.” While a well-crafted pitch deck can offer valuable insights into a startup’s vision and potential, relying solely on this presentation can lead to overlooking critical aspects of the investment opportunity.  

Pitch decks are designed to showcase a startup’s strengths and opportunities, often highlighting achievements, market potential, and competitive advantages. However, they may not fully represent the challenges, risks, or weaknesses inherent in the business. Investors who solely rely on pitch decks may fall into the trap of being swayed by surface-level information without delving deeper into the startup’s fundamentals. 

To address this flaw, it’s essential for an investors to recognize the limitations of pitch decks and to supplement their evaluation with thorough due diligence. This involves digging deeper into various aspects of the investment opportunity, such as assessing the team’s capabilities and experience, analyzing the market dynamics and competitive landscape, evaluating the product or service’s differentiation and scalability, and scrutinizing the startup’s financial and operational performance.         

By going beyond the presentation and conducting comprehensive due diligence, investors can gain a more nuanced understanding of the investment opportunity, identify potential risks and challenges, and make more informed investment decisions. While pitch decks can provide valuable insights, they should be viewed as just one piece of the puzzle in the broader due diligence process.

Neglecting Legal Issues: Overlooking potential legal or regulatory hurdles can derail a startup’s growth. We’ll discuss the importance of legal due diligence. 

“Inadequate Due Diligence” in venture capital (VC) investments often manifests as “Neglecting Legal Issues,” where investors fail to thoroughly examine potential legal or regulatory challenges associated with a startup. This oversight can have serious consequences and may impede the startup’s growth or even lead to legal disputes that could harm the investment.   

Legal issues can arise in various aspects of a startup’s operations, including intellectual property rights, contracts and agreements, regulatory compliance, and corporate governance. Failing to address these issues during due diligence increases the risk of encountering legal obstacles down the road, such as lawsuits, intellectual property disputes, or regulatory fines.     

To mitigate this risk, investors must prioritize legal due diligence as an integral part of the investment evaluation process. This involves engaging legal experts or conducting internal reviews to identify and assess potential legal risks associated with the startup’s business model, operations, and industry. Key areas of focus may include reviewing contracts and agreements, assessing intellectual property protection strategies, evaluating compliance with relevant laws and regulations, and ensuring proper corporate governance practices are inplace.     

By addressing legal issues proactively and incorporating legal due diligence into the investment decision-making process, investors can minimize the risk of encountering costlylegal challenges and better protect their investment. Additionally, thorough legal due diligence demonstrates a commitment to responsible investing and enhances confidence in the startup’s long-term viability and sustainability.       

3. Ignoring Market Dynamics

             A critical mistake often observed in venture capital (VC) investments, where investors fail to adequately consider the broader market conditions, trends, and shifts when evaluating an investment opportunity. This flaw can lead to sub-optimal investment decisions and missed opportunities for identifying high-potential startups.        

              An example of “Ignoring Market Dynamics” could involve investing in a startup without  considering the evolving needs and preferences of consumers. For instance, let’s say a VC firm decides to invest in a brick-and-mortar retail business without thoroughly analyzing the increasing trend towards e-commerce and online shopping. Despite promising projections presented by the startup, the VC firm fails to recognize the changing dynamics of the retail industry, ultimately leading to a poor investment outcome as the business struggles to adapt to shifting consumer behavior.        

             To address this flaw, investors must conduct comprehensive market research and analysis as part of their due diligence process. This involves evaluating factors such as market size, growth potential, competitive landscape, regulatory environment, technological advancements, and emerging trends. By gaining a deep understanding of the market dynamics, investors can identify attractive investment opportunities with strong growth prospects and mitigate the risk of investing in ventures that are not well-positioned to succeed in the market.

           And represents a significant flaw in VC investments, highlighting the importance of thorough market analysis and awareness of industry trends to make informed investment decisions and avoid costly mistakes. By staying attuned to market dynamics, investors can adapt their investment strategies and identify opportunities that align with evolving market trends, thereby increasing their chances of success in the VC landscape.

Underestimating Competition: Failing to consider the competitive landscape can lead to a rude awakening. We’ll explore strategies for analyzing the competitive landscape and identifying potential threats.         

“Underestimating Competition,” a critical mistake that can lead to significant setbacks for startups and their investors. This flaw occurs when investors fail to thoroughly analyze the competitive landscape and overlook the presence of formidable competitors, ultimately leading to a rude awakening as the startup struggles to gain market share or differentiate itself in a crowded market.

An example of “Underestimating Competition” could involve investing in a tech startup developing a new social media platform. Despite promising features and functionalities, the investors neglect to conduct a thorough analysis of the competitive landscape. They fail to recognize that the social media space is dominated by established giants like Facebook,Twitter, and Instagram, each with significant user bases and strong brand recognition. As a result, the startup faces fierce competition and struggles to attract users and advertisers, ultimately leading to disappointing performance and diminished investor returns.         

To address this flaw, investors must prioritize analyzing the competitive landscape as part of their due diligence process. This involves researching and assessing existing competitors, evaluating their strengths, weaknesses, and market positioning, and identifying potential threats and opportunities. Additionally, investors should encourage startups to develop strategies for differentiation, such as focusing on niche markets, offering unique features or services, or leveraging innovative technologies to gain a competitive edge.

By acknowledging and understanding the competitive landscape, investors can make more informed investment decisions, mitigate the risk of underestimating competition, and position startups for success in dynamic and competitive markets. Thoroughly analyzing the competitive landscape is essential for identifying potential threats and opportunities and maximizing the chances of a successful investment outcome in the VC space.        

Market Saturation: Entering a saturated market with limited room for growth can lead to disappointing outcomes. We’ll discuss methods for assessing market saturation and identifying white space opportunities.         

Where investors overlook the level of competition and the limited growth potential within a particular market. This flaw occurs when investors fail to recognize that a market is already overcrowded with similar products or services, leaving little room for new entrants to gain traction or differentiate themselves effectively.      

An example of “Market Saturation” could involve investing in a startup that offers a ride-sharing service in a city where multiple well-established ride-sharing companies already operate. Despite the startup’s promising features and business model, the market is saturated with competitors, making it difficult for the startup to attract customers and achieve sustainable growth. As a result, the investment yields disappointing outcomes as the startup struggles to gain market share amidst fierce competition. 

To avoid falling into the trap of market saturation, investors must assess market dynamics thoroughly during the due diligence process. This involves evaluating factors such as the number and strength of existing competitors, the level of customer demand, and the potential for differentiation or disruption. Additionally, investors should explore methods for identifying “white space” opportunities—undeserved or unexplored segments within the market where there is room for innovation and growth.      

By recognizing the risks of market saturation and actively seeking out white space opportunities, investors can make more informed investment decisions and increase the likelihood of backing startups with strong growth potential. Thoroughly assessing market dynamics and identifying untapped opportunities are essential steps in avoiding the pitfalls associated with market saturation and maximizing the chances of success in the VC landscape.  

Regulatory Blind Spots: Emerging regulations or unexpected policy changes can significantly impact a startup’s operations. We’ll discuss the importance of staying informed about relevant regulations and potential regulatory risks.  

“Regulatory Blind Spots,” where investors overlook the potential impact of emerging regulations or unexpected policy changes on a startup’s operations. This flaw occurs when investors fail to recognize the regulatory risks associated with the industry in which the startup operates, leading to potential disruptions or setbacks for the investment.        

An example of “Regulatory Blind Spots” could involve investing in a fintech startup offering innovative payment solutions without thoroughly assessing the regulatory landscape. Despite the startup’s promising technology and growth potential, changes in financial regulations or compliance requirements could significantly impact its ability to operate or expand its services. As a result, the investment may face unexpected challenges or delays due to regulatory hurdles that were not adequately considered during the due diligence process.    

To address this flaw, investors must prioritize regulatory due diligence as part of their investment evaluation process. This involves assessing the regulatory environment relevant to the startup’s industry, understanding current regulations and compliance requirements, and identifying potential regulatory risks or uncertainties that could impact the startup’s operations.         

Additionally, investors should stay informed about emerging regulations and policy changes that may affect the startup’s business model or market dynamics. By actively monitoring regulatory developments and maintaining open communication with legal experts or regulatory advisors, investors can proactively identify and mitigate regulatory risks, ensuring a more robust and resilient investment portfolio.  

In summary, “Regulatory Blind Spots” highlight the importance of considering regulatory dynamics as part of the due diligence process in VC investments. By addressing regulatory risks and staying informed about relevant regulations, investors can minimize the impact of unexpected regulatory changes and increase the likelihood of successful investment outcomes in dynamic and regulated industries.

A report submitted for the subject of Venture Capital by Ms. Rhea Ebora and Mr. Reymart De Chavez, third-year college students taking up a Bachelor of Science in Business Administration majoring in Financial Management at the Teodoro M. Luansing College of Rosario in Rosario, Batangas.

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