An investment thesis, or a concise key framework from which to make investment decisions, is important for any investor to develop. It can serve as a measuring stick to compare potential opportunities against during the due diligence process to help align with personal goals, risk tolerance, and key investment principles like diversification. In this blog, learn more about developing your investment thesis, and some key components and considerations.

Developing Your Investment Thesis

At its core, an investment thesis is a written, research-backed roadmap defining why an investor plans to invest in certain assets, outlining strategy, goals, and risk tolerance. A well-defined investment thesis can act as a disciplined guide for investors to help avoid emotional decisions and stay aligned with personal financial objectives.

While there is no universal template, the following are some key points that investors may want to consider when developing their own investment thesis.

Investment Goals and Time Horizon

Investors should consider the goals they hope to achieve through investing in startups. Explicitly defining what an investor aims to achieve can directly inform an investment strategy. Additionally, investors should consider investment time horizons. Private market investments are inherently illiquid, and investors should be prepared to hold their investments for a long period of time to the point of exit, or failure. An investment thesis should acknowledge this illiquidity and align allocations with personal financial goals.

Sector and Stage Focus

Diversifying investments across various industries, stages, and geographical boundaries is an important component of investing. However, on the flip side, attempting to be a generalist can be a common pitfall for new investors. Balancing diversification with a focused thesis, especially if an investor holds domain expertise and professional experience that may translate to informed judgement, can be a competitive advantage. Having a specific focus can help investors conduct effective due diligence and potentially provide more than just capital to founders.

Check Size and Portfolio Construction Strategy

Never invest more than you’re willing to lose. An investment thesis should not only take this overall total dollar value of investments into account, but also a general outline of individual check sizes, such as how much capital an investor is willing to put into each individual investment.

Sourcing and Evaluation Criteria

Investors should also consider how they plan to source deals. Whether reliance on established angel networks, online platforms, or personal networks, investors should have an idea of where deal flow may come from. A thesis should also establish non-negotiable due diligence and evaluation criteria. This can go beyond financial metrics to also include assessments of the founding team, market size, product differentiation, and economic model.

Risk Acknowledgment and Tolerance

Startups are inherently risky and 9 out of 10 startups fail. A credible investments thesis honestly addresses risks, including total loss of capital, dilution, and market timing risk. It also defines risk tolerance. How much capital is an investor willing to lose if a startup is one of the 9? What are personal financial needs and how do they compare to the risks associated with startup investments?

Continual Adjustments

Creating an investment thesis should be not a one-time event The initial thesis should be based on comprehensive market research, including analysis of industry trends, competitive landscapes, and historical performance data within your focus areas. As investors begin to make investments and have changing needs, they should regularly revisit and refine their thesis. The startup ecosystem is dynamic; sectors evolve, new technologies emerge, and macroeconomic conditions shift. Having a core investment thesis that is refined over time as situations change and macroeconomic conditions metamorphosize may be beneficial to private market investors.

Final Thoughts

Having a well-defined investment thesis is important for any investor. It can represent a disciplined approach towards startup investing that can be used as a guide to help align with needs, risk tolerance, goals, and other criteria. However, the process is dynamic and investors should be prepared to refine their investment thesis over time as conditions change, financial needs evolve, and risk tolerances change.

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.

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