A guide to writing a good investment thesis (with updates from a few mentors)
I was recently tasked to write an investment thesis, a brief one, about 3 pages long. I also reviewed other reports that were sent my way. I have since then understood a good framework to approach an investment thesis.
Purpose of an Investment thesis:
An investment thesis is a detailed review of a sector or an industry in a sector that flows into insights and recommendations on how to act on the information that is provided.
The information should include a good mix of qualitative and quantitative information to give your readers the conviction to pursue the proposed industry as their target investment space.
Usually, depending on the firm, the stage of the investment, the risk appetite, the investment thesis is tailor-made. So there is no one size fit all pill. But the post aims to give general guidelines.
Why Investment Thesis? All GPs, LPs, CVCs, and institutional investors keep updating their investment thesis to include new sectors, drop markets/ sectors/ that don’t align with their investment strategy or simply to not be left out.
In my previous blog post, actionable guide to getting into VC, I have mentioned investment thesis and how they are important for any investor. In this post, I will unpeel how to write them well and show some examples.
Note: This is different from an Investment Memo — which you write for a particular investment. Bessemer Venture Partners are great at this. You can read their memos here.
Components of an investment thesis: (will be called thesis henceforth):
- Literature Review — not in the sense of a true literature review that is published in white papers. But a quick look into what’s been happening in the industry.
- This is the summary of what happened in the sector ( the birds-eye view) and how the industry has been growing over the last 5 to 10 years. After covering in a few words the global data or the progress, quickly narrow down the scope of the thesis to cover the geography your fund invests in or the geography you are excited about.
It is important to narrow down the scope because the report that you produce has to be thorough. You need to be able to justify and support your thesis and make it leakproof with data, examples and case study. This is possible — without the report becoming too long, too time consuming — only with a tight and clear scope.
Here is an example of how to scope your thesis:
A report on how fintech is changing the future → A report on how fintech is changing the future of UK → How fintech is changing SME business in UK → A report on how BNPL is changing SME business in the UK.
I think this is a good thesis to support. You have narrowed down your geography, a technology within Fintech Universe, a Target business sector.
- Try to define the market/technology the way you see it. You can use a 2x2 matrix, a Venn diagram or a table to show the readers how you segment the market. This is an interesting good to have. This bit gives you a brownie point as you are uniquely adding your perspective to the subject. But again, don't invent the wheel.
- Include the market size, its CAGR for the future. Try and explain what is causing this growth.
This is a good segway into the next section.
2. Trends that you see currently
The immediate growth or sudden boost in the industry will be triggered by an event, need, changing behaviour, etc. Find out when there has been a spike in the tend. Google word search is a good example to illustrate how trendy an idea or concept has become in recent days.
- Change in regulation, recent product releases, or invention could also start a new trend and led to the development of an entire
- This could also just be to follow where most of the investor money is going into.
3. Active players both investors, startups, and notable exits
Once a particular trend is established there are always a few market makers that will pave the way for early innovations, startups and educate the rest of the industry. For example, Pantera Capital, @A16z, COINBASE are a few early funds that were extremely focussed on crypto and blockchain-based startups. This comforts other investors. Now @Coatue, Sequoia, Index Ventures all have a separate crypto fund. Map these investors by the stage, if you can.
- Along with these, also map all the notable startups and the funds raised by these firms. Could you also pull out the valuation of these and compare it with other comparable industries. For example, EV companies vs. other auto companies are valued very differently even though they all make cars by the end of the day ( Telsa vs all other car makers).
- It will be interesting to pick a few top players in the industry ( not the ones that are too famous, because everyone knows these ones and reads about them). Browse their social media, website to understand who their partners are.
- Also note exit activities in terms of IPOs, M&A, etc. It could also be when a VC cashes out its stake in a company.
These three buckets are a good enough summary of what is happening in the market. The next sections are about your contribution and recommendations for the firm or team you are presenting the thesis.
1. Opportunities — How to make above-market returns?
This is the most interesting section. This is a place where you can uniquely add value. This section should contain your recommendations.
I usually struggle with this, i.e. Am I so thorough with the subject that I can provide something new? Without knowing everything there is, is anything I say even valuable?
Then, I realized the thesis is not for the industry stalwarts. It is for the ones who aren’t experts in the field. It is a conversation starter and your best-calculated guess at the future. Show your work, Austin Kleon — the book is an excellent starter for those who would like to show their work more.
Some tips on how to think about these recommendations:
- Consumer trends — Do you think more people will buy into the new trend?
A great example of this is, how Notion has created so many opportunities for freelance creators, everyday users to make money by creating templates and selling them. Apart from that, there are YouTubers that have mini-courses etc. This is an example of an ecosystem that is created around a product, ground-up sales/adoption strategy.
- Think in terms of basic Micro Economics 101 — Supply, Demand, purchasing power, willingness to pay, discretionary spending vs everyday needs.
- Look at possible SME opportunities. Who will sell the new trend? where will source it from? Does it change the way people do businesses — speed, security, efficiency, transparency, online/offline, experience etc?
Here is an example of an excellent thesis that Lightspeed has put forth on Metaverse and web3.0. Look at how they have shared their opinions. Super cool!
2. Risks
- Risks are not a part of any investment thesis. But in the case of crypto, metaverse or any new tech that is in the nascent stages does raise questions and doubts about it being a bubble. So if there are such valid questions do bring them up. If there are prominent people who short the idea, quote them.
3. Summary
- Always give a TLDR — This was conventionally called the executive summary. Please include the summary at the top/ beginning and signpost your article. This piques everyone’s interest.
- Also by writing a summary you are opening up the chances of someone reading your text. It encourages them to test the subject and the style.
Answer these questions when writing your investment thesis:
- Who is the target audience?
- What is the intention of this thesis, it is more educational to bring everyone on to the same page, in case of some deep tech concept, or is it recommending the next steps for the fund?
- Have you read everything on the topic that is available on the internet?
- Have you crunchbased all the startups in the scope of your thesis?
I will keep this post updated as I learn more and get better.
Further Reading:
