Venture capital is a moving beast. Here in Australia, the economic and startup landscapes continue to see shifts in trends and forecasts. Your investment thesis should be a constant that acts as both foundation and anchor to hold you steady through the ups and downs of venture capital investing and guide your investment decision-making.
“Your investment thesis is the most important document you will write as an investor,” says Pedram Mokrian, a Silicon Valley investor and mentor who teaches investors at both Stanford and Wade Institute.
As the foundation on which you build your portfolio, it guides what you invest in, for how long and why. A good investment thesis will also help build your knowledge base and secure buy-in from your team – and founders, whose ideas are key to the country’s (and your portfolio’s) financial future.
“The best entrepreneurs gravitate towards well-prepared investors.”
A good investment thesis should be the bedrock by which all of your investment decisions are made. It can also act like a personal mission statement and can be a reminder of who you are and what you value as an investor.
So how do you write a great investment thesis? Mokrian recommends breaking it down into three steps.
Step 1: Focus
First up, you need to understand the market you’re playing in. You should have solid experience of the industry, and a good understanding of market trends and key players.
Ask yourself which segment you are exploring and why. Is it large and strategic, or emerging? What are the new trends? Are there specific activities that support innovation?
“Develop a taxonomy of the industry covering its sectors, companies and investors,” says Mokrian. “Existing databases and frameworks can be a good start, and you can build out your own data from there.”
Building networks and activating weak ties can be a great way to gain even further insight into an industry and how it works. Gaining access to networks can be challenging, but there are ways to make it happen.
Taking a market perspective will help you understand the ecosystems within the overall market, and what kinds of companies tend to succeed within them. It will also give you a good sense of what new technologies or business models are likely to make an impact.
Step 2: Process
Next, you need a clear process for making decisions. Mokrian suggests defining “company selection filters” (specific internal features of the company). Think about these as filters in a search engine. Selecting your parameters for the search will give you the framework to quickly determine which deals fit and those that don’t.
These filters may include factors like the stage the enterprise is at (early stage means more risk but potentially more return, later stages mean the opposite), the team’s profile, their location, position within the ecosystem, the size of the deal on offer or the characteristics of their co-investors. You may even include mechanisms within your thesis for different economic conditions: if X happens, I need to see Y and Z.
Mokrian gives the example of edtech investors.
“This is a massive new market globally and it’s growing fast,” he says. “An investment thesis in this space might set company selection filters like requiring an experienced and authentic team, an established position within the market for late-stage investments and other co-investors to spread the risk and leverage the broader ecosystem.”
Once you have set your selection filters, you also need to set your decision-making-methodology and your internal processes for executing deals. For example, you might decide to create an investment committee, or that total consensus amongst partners is necessary.
You also need a target for how long it takes to reach a decision after an initial meeting, and a clear process for due diligence.
Step 3: Execution
The third and final step is about building your brand.
“You need to find your superpower,” says Mokrian. “What do you offer as an investor that no-one else can? It is particularly important to be clear about your values, and to make sure your investment thesis is consistent with them.”
Some investors, like VC Catalyst alumna Catherine Robson, define their brand as being a champion for specific founder minorities. In Catherine’s case, it’s women. For others, it’s to support ideas that will help the planet and do good in the world.
The most important step here is to get out and network; identify thought leaders and co-investors in the space and head along to the events they attend. Learn everything there is to know about the industry and sub-industries focussed in your thesis.
Finally, if you have an existing portfolio and it’s consistent with your thesis, then use it. Having a track record that supports your intentions is a great foundation on which to build your brand.
If you don’t have an existing portfolio, then identifying a few target opportunities is a good place to start.
VC Catalyst is our immersive program for active investors to gain best practice tools and skills to make more successful venture capital investment decisions, delivered at Wade Institute of Entrepreneurship. Applications for our 2023 program are now open – express your interest today.
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