An investment thesis is a definitive statement that outlines what types of investments you will make, and why.
Before going any further, understand one thing: the word “thesis” is weird. It’s plural form is “theses” (pronounced “Thee-seas”). English language rants aside, a thesis is an important principle–especially in the venture capital sector.
In school, you were required to place your thesis statement at the end of your opening/introductory paragraph. It states the main idea of the essay. For venture capitalists, an investment thesis states the main idea of their fund–essentially, why your venture fund exists, and what it proposes to invest in.
Four misconceptions that are widely held in the sector:
Myth One: Investment Theses must be elaborate and comprehensive
This is wrong. Investment theses must clearly state your investment philosophy and strategy. Each time you look at a prospective investment, you should already know why you would want to invest in the company. Investment theses focus on macro-level metrics: For instance, does the company mesh well with our macro-economic analysis? Are they operating in a market we understand? What are the future expectations of the sector?
That’s it. Keep them extremely simple.
Myth Two: Everyone uses an investment thesis
You may already know this is not true. Surprisingly, many venture capital firms don’t have investment theses. Those firms also tend to not last.
“Investment thesis? That’s rubbish! They’re only for billion dollar hedge funds! The venture fund environment is too malleable, too risky. There’s no need for investment theses because everything’s constantly changing.”
You may have heard this, you may even believe this. All I can say is this: like writing software, cutting corners will hurt you in the long-run. If you want to set yourself up for future speedbumps because your team doesn’t have the discipline to sit in a room and decide your purpose, then God bless you. Good luck.
Bottom line: while investment theses may seem like an academic exercise, it’s critical to your fund’s long-term success.
Myth Three: Creating an investment thesis must follow a standardized process
In reality, you have a leg up if you’ve merely put a one-sentence investment strategy on the back of a napkin. Like writing a presentation/business plan/executive summary, there’s no set procedure for creating an investment thesis. Yet, there are certain guidelines that you should follow (new post coming soon).
Myth Four: Once an investment thesis is set, stick to it
In reality, investment theses only last a couple years–if you’re lucky. Chances are, if you’re in a fast-moving sector, this can be much shorter. Your firms’ investment thesis will most likely be constantly tinkered with. Certain markets will open up that weren’t even considered initially (think microblogs).
{ 2 trackbacks }