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The investment thesis explained: everything you need to know.

What's an investment thesis?

Key elements

Investment stage

Follow-on funds

Do your homework

Tailor your pitch

Be realistic

Embrace the long game

Highlight value

Prepare for investment

You've poured your heart and soul into your startup. Now you're ready to take the next big leap – securing venture capital (VC) funding. 

But here's the catch: VCs aren't just looking for great ideas. They're looking for great ideas that fit their specific investment strategy. 

Enter the investment thesis, which guides both how you select suitable VCs and how they decide whether you’re suitable for them.

Read on to uncover the ins and outs of investment theses, how they shape VC decisions, and how you can use this knowledge to your advantage when seeking funding for your company.

What is an investment fund thesis?

An investment thesis is a VC firm's core set of beliefs about the types of investments that will yield the best returns. It's a foundational philosophy that guides their investment decisions.

A typical investment thesis includes:

• Target sectors or technologies
• Preferred company stages (e.g., seed, early-stage, growth)
• Geographical focus
• Ideal company characteristics
• Market trends they believe will be important

The investment thesis informs how a VC firm evaluates opportunities, allocates its fund, and builds its portfolio. It's primarily based around the firm's expertise, market analysis, and predictions about future trends.

For companies trying to raise VC capital, effectively analysing and understanding a VC's investment thesis is an essential skill.

It helps you determine if your startup aligns with what the VC is looking for, increasing your chances of securing funding and building a productive long-term partnership. 

Not to mention, it will save you from wasting time pursuing the wrong VCs!

Key elements of an investment thesis

When researching VCs, here are the main components of their investment thesis to look out for:

1. Fund size

As noted, a fund's size significantly influences the types of investments it can make.

Larger funds need to write bigger checks and often target later-stage companies to move the needle on returns. Smaller funds typically focus on earlier stages, where smaller investments can yield outsized returns.

For example, a $500 million fund might focus on Series B and C rounds, while a $50 million fund might concentrate on seed and Series A investments.

2. Investment stage

VCs usually specialise in certain stages of a company's lifecycle.

Some VCs target smaller companies, offering smaller sums as low as £/$100K or less for early-stage, risky businesses. Others get involved once a business has raised seed and Series A funding.

Broadly speaking, early-stage VCs might be more comfortable with product risk and market uncertainty, while later-stage investors often look for proven traction and clear paths to profitability.

Again, this is often flexible. For example:

• AI startups have been raising immensely large seed and Series A funding, like the French company H, which recently raised $220 million months after its formation.
• US startup Safe Superintelligence Inc. similarly raised an eye-watering $1 billion despite having no product.

3. Industry focus

Many VCs specialise in specific industries or sectors where they have expertise or see particular potential. This could be broad (like "enterprise software") or niche (like "AI-powered fintech for SMEs").

Industry focus is often tied to the partners' backgrounds and the fund's thesis on where future growth opportunities lie.

For instance, a VC firm might focus on health tech because it believes in the sector's growth potential and has partnered with healthcare industry experience.

4. Geographic focus

Some VCs invest globally, while others focus on specific regions or even cities (this is common in US cities like San Francisco and New York).

This often aligns with where they have the strongest networks and can provide the most value beyond capital.

A VC's geographic focus might be influenced by factors like:

• Local ecosystem strength
• Regulatory environment
• Proximity for hands-on support
• Emerging market opportunities

5. Deal size and ownership targets

VCs typically have a range for their initial investments and targets for the percentage ownership they want to acquire.

This helps them manage their portfolio and ensure they have enough stake in their winners to drive fund returns.

For instance, a VC might aim to invest £/$2-5 million for a 15-20% ownership stake in their initial investment. This allows them to have meaningful influence while leaving room for future investors.

6. Follow-on strategy

Most VCs reserve capital to participate in future funding rounds of their portfolio companies. Understanding this provides insights into how they might support you beyond the initial investment.

Some VCs might reserve 50% or more of their fund for follow-on investments, while others might have a more limited follow-on strategy. This can impact how much support you can expect in future rounds.

Using this knowledge to approach VCs

VCs often see a company’s attempt to align with their thesis as a green flag. In fact, many say that failing to consider the thesis when reaching out to VCs is precisely how not to approach VCs. 

Josefa Marzo Pons from Kalonia Venture Partners explained:

If they have researched what kind of investments we make and it is a match it's a welcomed email.

Kate Brodock from Switch Futures similarly says:

You’d be shocked how many cold outreaches I get that are so clearly outside our thesis.

Here’s how to use your understanding of the thesis to increase your odds of VC outreach success:

1. Do your homework

Before reaching out to a VC, thoroughly research their investment thesis. This information is often available on their website or in interviews with the partners. As our friends at Connectd say:

The first step is always research. You need to have a clear understanding of the ecosystem, what kinds of investors are out there, and then decide who is best suited to your business.

2. Tailor your pitch

Highlight aspects of your startup that align with the VC's thesis. Show them why you're a perfect fit for their portfolio. Our free pitch deck template should put you in good stead.

3. Be realistic

If your startup doesn't align with a VC's thesis, it's probably not worth your time to pitch them. Focus on VCs whose theses match your profile.

4. Understand their perspective

When a VC asks questions or raises concerns, try to view it through the lens of their investment thesis. Are they trying to determine if you fit their strategy?

5. Prepare for the long game

VCs think in terms of fund lifecycles (typically 10 years). Be prepared to discuss your long-term vision and how it aligns with their thesis.

6. Highlight the value you bring

VCs are looking for companies that can provide outsized returns. Emphasise how your startup fits into their thesis in a way that could drive significant value.

A mutual fit matters

Ultimately, securing VC funding isn't just about the cash. It's about entering into a long-term partnership.

The VC's investment thesis should align not just with your current state, but with your long-term vision and goals.

Don't be afraid to ask VCs about their thesis and how they see your company fitting into their portfolio.

This demonstrates your savviness as a founder and helps ensure that any partnership you enter is built on mutual understanding and aligned interests.

The long and short of it is that:

It's not about impressing every VC out there but finding the ones whose investment thesis matches your startup's potential, saving you time and energy in the process. 

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Give Vestd a try for free and see how we can streamline your equity admin while you work on impressing those perfectly-matched VCs.

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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

Defining the purpose and components of a startup investment thesis.

An investment thesis should clearly define your investment goals and the criteria you will use to make investment decisions. Your investment thesis should include the following components:

Investment Goals

Your investment goals should be specific, measurable, achievable, relevant, and time-bound (SMART). You should identify the types of startups you want to invest in and the expected return on investment (ROI).

Investment Criteria

Your investment criteria should outline the characteristics of the startups you plan to invest in. This may include factors such as the startup’s industry, stage of development, management team, and revenue potential. Your investment criteria should be based on your personal investment philosophy and objectives.

Read more: Investment Thesis Fundamentals

Assessing Personal Investment Philosophy and Objectives

Your personal investment philosophy and objectives should guide your investment decisions. Before creating an investment thesis, you should assess your personal investment philosophy and objectives. This involves answering the following questions:

Where Do You Think the World is Going?

Your investment philosophy should be informed by your views on the future. You should assess trends and developments in your industry of interest and identify potential investment opportunities.

What are Your Investment Objectives?

Your investment objectives should be aligned with your personal financial goals. This may include factors such as cash flow requirements, risk tolerance, and investment horizon.

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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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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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, how to navigate your way through the four vc stages of the vc interview process, non-dilutive funding: a simple guide for startups, five steps vcs take to prepare to raise from lps, the 10 commandments of venture capital: rules every successful investor lives by, why venture capitalists are betting big on the middle east & north africa: opportunities, risks, and emerging trends, mind over money: how psychology shapes startup investment decisions, 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.

Understanding a VC Investment Thesis

Understanding a vc investment thesis: a blueprint for startup funding.

Venture Capital (VC) firms are the lifeblood of many startups, providing them with the essential capital needed to grow and scale. However, securing VC funding isn’t a one-size-fits-all endeavor. VCs often have specific investment criteria and focus areas outlined in what is known as their “investment thesis.” In this article, we’ll explore what a VC investment thesis is, why it matters to startups, and how founders can align their pitch with a VC’s thesis for a higher chance of success.

What is a VC Investment Thesis?

A VC investment thesis is a carefully crafted strategy that outlines the types of startups and industries a venture capital firm is interested in funding. It serves as a guiding framework for the firm’s investment decisions and helps define the direction of its portfolio.

A typical investment thesis includes the following components:

1. Industry Focus: It specifies the industries or sectors the VC is interested in, such as technology, healthcare, fintech, or consumer goods.

2. Stage of Investment: It outlines the stage of a startup’s development that the VC prefers to invest in, whether it’s early-stage (seed or Series A), growth-stage, or late-stage.

3. Geographic Focus: Some VCs focus on specific geographic regions or markets, while others have a global perspective.

4. Market Trends: It may highlight emerging market trends or disruptive technologies that the VC is particularly interested in.

5. Investment Size: VCs often specify the range of investment amounts they typically provide to startups.

6. Exit Strategy: It may indicate the desired exit strategy, such as acquisition or initial public offering (IPO).

Why Does a VC Investment Thesis Matter to Startups?

Understanding a VC’s investment thesis is crucial for startups for several reasons:

1. Alignment of Goals:

When a startup aligns its pitch with a VC’s investment thesis, it demonstrates a shared vision and goals. This alignment increases the likelihood of securing funding as the startup meets the VC’s specific criteria.

2. Efficient Use of Resources:

Pitching to VCs that are a good fit with your startup’s industry and stage saves valuable time and resources. It allows founders to focus their efforts on investors who are more likely to invest.

3. Strategic Partnerships:

VCs often bring more than just funding to the table. They can offer valuable industry connections, expertise, and mentorship. Aligning with a VC’s investment thesis can lead to strategic partnerships beyond capital.

4. Better Guidance:

VCs who are knowledgeable about your industry are more likely to provide guidance and support tailored to your startup’s needs.

How Startups Can Align with a VC’s Investment Thesis

Here are steps startups can take to align with a VC’s investment thesis effectively:

1. Research VCs Thoroughly:

Investigate the VCs you plan to approach. Study their portfolio companies, past investments, and any public statements or blog posts that provide insights into their investment thesis.

2. Tailor Your Pitch:

Craft a pitch that specifically addresses the VC’s focus areas. Highlight how your startup aligns with their industry, stage, and geographic preferences.

3. Articulate Market Fit:

Clearly explain how your product or service addresses a market need or trend that the VC has expressed interest in. Provide data and evidence to support your claims.

4. Leverage Warm Introductions:

Personal connections and warm introductions can significantly improve your chances of aligning with a VC’s investment thesis. Seek introductions from mentors, advisors, or industry contacts who may have a relationship with the VC.

5. Be Open to Feedback:

During discussions with VCs, be open to feedback and questions related to their investment thesis. Use these interactions as an opportunity to demonstrate your knowledge and commitment to alignment.

6. Maintain Flexibility:

While aligning with a VC’s investment thesis is crucial, it’s also essential to maintain flexibility and adapt your pitch as needed. Market dynamics and investor interests may evolve over time.

Summary – Understanding a VC Investment Thesis

In conclusion, understanding a VC’s investment thesis is paramount for startups seeking venture capital funding. It serves as the blueprint that guides a VC’s investment decisions, defining the industries, stages, and market trends they are interested in. For startups, aligning with a VC’s investment thesis is not only a strategic move but also a way to demonstrate a shared vision and goals, increasing the chances of securing funding from the right investor.

Thorough research into VCs, tailoring pitches to their preferences, and articulating market fit are essential steps in this process. Startups should also leverage warm introductions, maintain flexibility, and be open to feedback during interactions with VCs. By aligning effectively with a VC’s investment thesis, startups can not only access capital but also tap into valuable industry connections, expertise, and strategic partnerships that can propel their growth and success. Ultimately, the alignment between startups and VCs’ investment theses is a crucial element in the intricate dance of securing venture capital funding and realizing entrepreneurial dreams.

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VC Investment Thesis

The investment logic for investing in startups by venture capital fund General Partners. Learn what GPs shared with Limited Partners to close their fund.

• Genuine documents
• Detailed information
• Filter to your need

1839 Venture Funds

1839 say they have a thematic focus but they invest in pretty much anything.

500 Startups

MoneyBall for Startups: Invest BEFORE Product/Market Fit, Double-Down AFTER.

500 Startups Israel

Sub-brand fund for Israel, they have a typically generalized region/stage focus approach to investing.

a16z have sort of an investment thesis, but you have to read it all to try guess what it is.

Allied Venture Partners

Allied Venture have 6 factors they look for but are unsurprisining “tech” focused

Alternative Protein Fund

APF are focused on agriculture and food technology companies.

Alven invest in a relatively broad category of startups, but have 3 categories they are focused on.

Bowery Capital

Bowery is focused on “internet native”. They don’t really have a thesis.

Building Ventures – Construction

Building Ventures are focused on building stuff, what they call “Constructuring”.

Building Ventures – Space

Building Ventures are focused on space as a service

Calm Fund are focused on “funding for bootstrappers”. They invest through a Shared Earnings Agreement.

Cento invest in Southeast Asia startups looking for a Series A investor writing a $1-2m check in industries needing digital tranformation.

Daphni explain what they do and how they execute in Europe rather than being more thematic in focus.

Deep Space Ventures

Deep Space Ventures invests in seed and series-A stage startups primarily in the Esports and B2B spaces.

Draper Cygnus

Draper Cygnus are focused on LATAM, US, and Israel through Pre Seed to Series A that do deep tech and decentralization.

Early Game Ventures

Early Game are focused on Eastern Europe startups with the need for infrastructure innovation.

Earlybird have a European focus and have targeted 9 categories of startups

Escala are focused on the under-capitalisation of LATAM. It’s based on middle-class is getting larger so let’s do stuff.

ExSight invest in startups that focus in eyes.

Thematic investment thesis from Homebrew. It is centered on the concept of the “Bottom Up Economy.”

Iceland Venture Studio

Iceland Vantures are focused on personal data, privacy, sustainability and security startups in Iceland.

InnoCells invest in companies that operate in areas related to Sabadell Group’s core business

Kima Ventures

Kima invest in a lot of startups and very early. Follow on isn’t a focus. This is their approach to investing.

Mammoth Scientific

Mammoth Scientific is focused on life science and bio tech companies.

Maven Ventures

Maven invest in startups with network effects

NextView have a thematic focus on Home, Food, Work & Money, Entertainment and Apparel.

Notation Capital

Notation capital invest small dollar amounts in extremely early technical founders or founding teams in New York

OpenOcean are focused on “investments in Delicious data-intensive software.”

Placeholder

Placeholder are East Coast focused on decentralized information networks

Point Nine Capital

Point Nine have a focus on SaaS, but also cover marketplaces and will be opportunistic. They’re trying to get to no faster.

Frequently Asked Questions

A VC investment thesis is a strategic framework that venture capital firms use to guide their investment decisions. It includes the firm’s investment philosophy, targeted sectors, key criteria for evaluating startups, and expected outcomes. This helps in aligning investments with the firm’s long-term goals and ensuring a systematic approach to venture capital funding.

Creating a VC investment thesis involves defining your investment objectives, conducting thorough market and industry analysis, identifying target sectors, establishing specific investment criteria, and outlining a clear exit strategy. Data-driven insights and market trends play a critical role in shaping a robust thesis.

A VC investment thesis is crucial because it provides a structured approach to identifying and evaluating investment opportunities, reduces investment risks, and aligns the firm’s investments with its strategic vision. It also enhances transparency with limited partners and aids in attracting potential investors by clearly articulating the firm’s investment strategy.

Key components of an investment thesis include market analysis, identification of target sectors, investment criteria, competitive landscape assessment, growth potential analysis, and exit strategy planning. These components help in systematically evaluating investment opportunities and making informed decisions.

A VC investment thesis should be reviewed and updated at least annually or whenever significant changes occur in the market or industry landscape. Regular updates ensure the thesis remains relevant and effective in guiding investment decisions.

Common mistakes include a lack of focus, inadequate market research, unrealistic growth assumptions, failure to adapt to changing market conditions, and overlooking potential risks. To avoid these, ensure thorough research, realistic assumptions, and regular updates to the thesis.

A VC investment thesis focuses on a venture capital firm’s strategy for selecting and investing in startups, while a business plan details a startup’s strategy for growth and operations. Both documents are essential but serve different purposes in the investment ecosystem.

Yes, a well-structured VC investment thesis can significantly influence startup success by guiding VCs to invest in high-potential startups and providing them with the necessary resources, strategic guidance, and support. This alignment enhances the likelihood of successful outcomes for both the investors and the startups.

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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

Our posts may contain links from our affiliate partners. This supports helps support the site as we donate 10% of all profits to sustainability organizations that align with our values. However, this does not influence our opinions or ratings. Please read our Terms and Conditions for more information.

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.

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Your investor has an investment thesis. Here’s why you should care

I work with a bunch of founders who have incredible stories, great pitch decks  and solid businesses — and they get confused when investors turn them down anyway. A lot of the time, it doesn’t matter how good your company is. What matters is whether it matches up with your investor’s investment thesis.

An investment thesis is sometimes a detailed document, sometimes a deck and sometimes something as vague as “we know it when we see it.” What it has in common, though, is that this is a set of “rules” that the VC has. It presents this thesis to its own investors — the LPs — so they have a feel for what the venture firm will be investing in. Investing outside of this thesis is sometimes possible for deals that are too good to pass up, but it will often take some managing on the VC/LP side of things.

What makes a “wrong” investor?

For some funds, this thesis might be really broad — “all early-stage companies in California” — while others get pretty narrow: “$1 million checks into crypto startups founded by college graduates from New Jersey that have blue hair.”

If you fall outside of their “thesis,” some investors might still invest — if an extremely promising opportunity comes along, they will at least consider it — but remember that the “thesis” is what the investment partners used to raise money from their limited partners (LPs). If a fund starts deploying a bunch of cash into startups that are outside the scope of the thesis, the LPs will start getting twitchy and could lose faith.

What goes into a thesis?

Investment theses will usually include some combination of the below. Some funds care a lot about some of these things, and others are less sensitive. To some, these things may be a deal-breaker — and others take a more flexible approach.

• Investment amount — Most funds have a minimum and maximum check size, and a min/max round size. This is often expressed as such: “We invest $2 million to $4 million into $4 million to $8 million rounds.”
• Lead versus follow — Some funds only “follow” — i.e., invest into rounds where a lead investor has already negotiated and vetted the deal. Other funds prefer to lead; they will negotiate a term sheet with the startup for the deal. Others are more agnostic and prefer a portion of each across the portfolio. The driving factor here is often that lead investors tend to take a board seat, and there are only so many boards you can support at any given time. Not leading a round because the lead investor is a great board member is a valid choice.
• Target audience — Some funds focus on business-to-business (B2B) companies, where the core sales dynamic tends to be a small number of large sales. Others focus on business-to-consumer (B2C) companies, typically making a large number of smaller sales. Others again invest in B2B2C — companies that supply businesses that supply consumers.
• Verticals — Some funds only invest in specific verticals, while others may explicitly say they avoid certain verticals. Example verticals might be medical tech, education tech, deep tech, space, crypto companies, surveillance companies, advertising technology, etc.
• Ownership targets — Some funds will only invest if they can own a certain percentage of the company they invest in at the end of the investment round.
• Institutional ties — Some funds are set up specifically to support graduates from a particular school or alumni network. These tend to raise money from the alumni network, too. Others might invest only in founders coming out of a certain company — for example, the Slack diaspora (i.e., companies founded by ex-Slack employees).
• Demographic — Some firms focus on investing along demographic boundaries — young founders, older founders, Latinx founders, founders of color, female founders, founders who have been in prison, etc.
• Geographic location — Almost all investment firms have geographic boundaries for where they source deals. They may invest only within — or outside of — certain areas, states, countries or regions.
• Opportunity size — Most investors invest in companies that have at least the possibility of an outsize return. In venture capital, most funds try to make investments where there is at least a possibility that every investment “returns the fund.” In other words: If they have a $100 million fund, and they make $5 million investments, they can make 20 investments in total. Each of these investments should have at least the outsize possibility of a 20x return — turning the $5 million investment into a $100 million return on investment. If your investment looks interesting, but the investors believe that you would be a 3x return at best, you probably wouldn’t raise money.

So, is that all? Well, not quite.

All of the points above are specifically tied to the thesis of the investor. If you tick all of those boxes, that isn’t the end of your journey — that’s the beginning . You still have to have a good team, solve a meaningful problem with a good solution in a huge market, with some traction and believability for the market you’re about to enter — and be able to wrap a great narrative around all of that as part of your pitch.

So, how do you know if your company is a good fit for the thesis? Ask them. Most investors are happy to tell you what their thesis is, at least in broad lines. Presenting your company or pitch deck will often get you a very quick thumbs up or thumbs down regarding the thesis. Ask the question: “What do you typically like to invest in?” and “Do you think my company is a good fit with your thesis?”

If you get a no, it’s OK to ask what aspect of your company isn’t a good fit. It’s possible that they have misunderstood something, and that it’s possible to correct the confusion at this point. You wouldn’t be the first startup to have been turned down over a misunderstanding — but counteracting that all starts with having a deeper understanding of the dynamics of how and why VC firms invest.

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