Last week I published a post on venture capital theses myths.
This week, I’ll dive a bit deeper and outline elements that may help you get started with your investment thesis.
If you’re in private equity, this will help you. If you’re an entrepreneur, not so much. But I foresee value in understanding how VC’s set up funds (or, at least, are supposed to):
Six Steps in Creating a Venture Capital Investment Thesis:
I. Specialization is Critical: PE Hubs’ dead pool is growing with venture capital generalists.
II. Maco-level Analysis: Before getting into what space you wish to invest in, bigger questions must be asked:
- Economic Trends: Is there a significant threat that arises through the following sectors: GDP Trends, Exchange Rate, Interest rate, Money Supply, Inflation Rates, Unemployment, Wage/price controls, Disposable & Discretionary Income
- Technology Trends: Is there a significant threat that arises through the following sectors: Total federal spending for R&D, Total industry spending for R&D, Focus of technological efforts, Patent Protection, New product platform, New developments of technology, Productivity improvements through automation
- Political-Legal Trends: Is there a significant threat that arises through the following sectors: Antitrust regulations, Environmental protection laws, Tax laws, Special incentives, Foreign trade regulations, Attitudes toward foreign company activity, Stability of government
- Sociocultural Trends (Fads): Lifestyle changes, Career expectations, Consumer activism, Rate of family formation, Growth rate of population, Age distribution of population, Regional shifts in population, Life expectancies Birth rates
III. Industry Focus: Next, outline the industry you will focus on (for smaller funds, select just one–maybe two)
IV. Sub-sectors: Within the industry select sub-sectors that you specifically are seeking to invest in. For example, if your industry is the internet, define specific sub-sectors (cloud-computing platforms, productivity solutions, social networks, etc.)
V. Trend Analysis: Next, outline the trends you expect to take place within the industry using the following mechanisms
- Primary Research: Speak with other investors in the sector you’re focusing on. What do they think? What trends do they see? What are people saying about the space today?
- Secondary Research: Scan the net for articles on investment activity in your space during the past year. What investments were made? Why were they selected? How are they doing today?
VI. Distinctions: From the trend analysis, uncover certain characteristics of successful investments, and implement them into your thesis as a philosophy. For instance, if you notice that over 70% of the investments in social networks failed; and over 80% of investments within the enterprise 2.0 space are still operating today, state that you seek to avoid social networking platforms–and instead are aiming to invest in sustainable, value-oriented enterprise platforms.
That should get you started.
Your investment thesis, like a business plan, contains no specific recipe–just general elements you should include.
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