Get your foundations right to set your portfolio up for success
Your investment thesis may be the most important document you write as an investor.
As the foundation on which you build your portfolio, it will guide 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 the rest of your team.
And, most importantly, a good thesis leads to good investments.
“Good entrepreneurs gravitate towards the well-prepared investors,” says Pedram Mokrian, a Silicon Valley investor and mentor who teaches investors at both Stanford and Wade Institute.
“The glaringly obvious opportunities lie at the intersection of a well-synthesised thesis and the marketplace.”
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.”
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.
Define your company selection filters (specific internal features of the company) so you’re clear about what you’re looking for. These may include factors like the stage they’re at (early stage means more risk but potentially more return, later stages mean the opposite), the team’s profile, their location, position within the eco-system, the size of the deal on offer or the characteristics of their co-investors.
Mokrian gives the example of edtech investors.
“This is a massive new market 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.”
Consider how are you currently perceived in the market and how would you like to be perceived. Then get out there and network; find the events thought leaders and co-investors are attending. Learn everything there is to know about the industry and sub-industries 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.
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