The 3 Steps in making a great Investment Thesis – Follow the Venture Capitalists

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Starting from the Bottom

When creating an investment thesis there are so many different approaches that one can take. It’s almost overwhelming.

Regardless of your investment parameters – you should approach an investment thesis like a Venture Capitalist. The thing about VC’s is that you need to become “The Expert” in whatever industry you choose.

Notice how I didn’t say “an expert” – this is because Venture Funds typically get very particular as to what type of investments meet their investment criteria.

Naturally, by having strict standards, it makes your the pool of potential investments a lot smaller. Venture Capital is arguably the most risky type of fund to invest in. Investors are swinging for the fences and going for that “Home Run” when they are giving capital to VC firms. 

When you are putting a VC Investment thesis together there are 3 basic steps to follow. 

  1. Pick your Verticals
  2. Conduct Market Research
  3. Make a Pitch Deck & Get Feedback

#1 Pick your Verticals

When you are developing your thesis/investment parameters you really need to be leaning on you or your team’s industry expertise.

KEY ADVICE : the best way to do this is just like in science class – form your hypothesis and test it out. 

What industry are you going to invest in?? 

Healthcare? Fintech? Supply Chain Companies? Ecommerce? Environmental? Agricultural? Engineering? Industrial? Educational? Instead of listing them out one by one, just think of ANY college major or minor and you’ve got a good starting place.

Once you’ve got your industry figured out, then answer the question:

What stage of companies are you going to invest in??

Early Stage VC – Also referred to as Seed Funding – The first initial capital given to an early entrepreneur & business. (Typically from family or friends) This is where the term Angel Investor comes from too. 

Middle Stage VC – Series B or C

Late Stage VC – Series D or Later

Note: It doesn’t have to be one or the other – it can be a mix. (middle-late stage VC investments)  Read more on Investopedia.

What type of capital are you issuing??

Is it debt? Is it equity? Is it a mix of both? Do you do convertible notes? Do you have concentration limits? 

#2 Conduct Market Research

The next thing you need to do is find the WHY? In your investments.  Start by doing the following exercise:

First, find 5 companies that you think could be potential investments. Then answer the following questions –  

Which company has the best Management Team? Why?

Which company is the most financially stable? Why?

Which company has the best market potential? Why?

Which company is the least risky company to invest in? Why?

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By completing this exercise, you will start to see things that you like or dislike about each company. Maybe one of the companies has a super young management team and you’d rather invest in companies that have more experienced teams. Maybe one company has too much debt and you’d rather invest in a company that has a better runway. Maybe one of the companies has a more diverse product offering and stable cash flows? Maybe one is subject to political risk? 

Write out some of the things you dislike about investing in these companies. 

Then, Cross out the companies that don’t meet your criteria. 

  1. Company A
  2. Company B
  3. Company C
  4. Company D
  5. Company E

If you had to cross out three of the companies, then next thing you need to do is find three more that meet your new standards. If you found them pretty easily, then your investment thesis is probably too vague. If you can’t find any companies that fit, then you are likely either too strict OR you are just in a bad industry.

You should be able to come down to at least ~3 and no more than ~8 deals that fit your investment thesis right now. New companies will arise and other will fall out- but you need to find that balance. 

Once you’ve picked your vertical and conducted market research then Congrats! You’ve got your Investment Thesis Outline!

#3 Make a Pitch Deck & Get Feedback

Feedback is ones of the best tools in life to be successful. Go get feedback from mentors or peers in the industry. See what they think! They may tell you about considerations you haven’t ever even thought about.

If they bring up fatal flaws that you missed, go back to the drawing board and repeat.

Once you’ve got a good thesis that has been vetted – finalize those in your PPM & LPM and you are good to go!

Thanks for following!


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