Building an Investment Thesis 101
First off, I’d like to start with a disclaimer. I am not an investment guru or an analyst. However, I am simply an enthusiast who works in the space. This is intended to be a series of articles on investments. This post is to report my learnings and my way of doing things. As opposed to
Every investor has a thesis. The parameters change across investors. Some prefer looking at revenues and potential growth. Others look at market size and founder-market fit. A few look for the market size either bottom-up or top-down. I’ve worked with two investors focusing on early-stage startups. I have also looked at several funds and the kind of thesis they build. For the most part, it revolves around these aspects.
Building an investment thesis is difficult. Especially, when early or growth-stage startups are in play. The seasoned VCs have perfected this more or less. The newer VCs have it tough. But it does not stop the ecosystem from moving forward. The following are a few things I’ve learned from building an investment thesis from existing VC funds.
Invest in Industries of deep understanding
More than a shareholder’s meeting, Berkshire Hathaway organizes learning sessions. Warren Buffet and Charlie Munger are the instructors. Or at least Munger was until his death. In a recent shareholder’s meeting, the question of their non-investment in Nike came up. Buffet simply replied that he did not understand the business or the ecosystem of sports well enough to invest.
Harry Saltzman will always be known for his involvement in James Bond films. However, most of his wealth was squandered on business investments. Most investments were businesses he did not understand.
The same concept works with venture capital. For instance, GSV Ventures invests in Edtech startups across stages. 2 am VC invests in Indian startups exclusively. There is another end of the spectrum, however. Accel and Tiger Global are sector-agnostic. And, they invest across stages (seed/pre-series/Series A, etc.). Therefore, the first lesson is to build an understanding of sectors before investing.
Have a foothold in the ecosystem
Building a pipeline of quality startups is not easy. Especially in a funding winter. Therefore, it is important to have a foothold in the ecosystem.
An investor we have worked with has close ties with the Kerala Startup Mission. Sequoia has launched Surge. Axilor and a few others have their own incubators and accelerator programs. Early-stage VC funds unlike the ones listed need to be plugged into the ecosystem. Weekly, VC funds need to do at least 5 initial calls a week. It must be noted that calls only happen should VCs look at funding quality startups. Of these 5, 2–3 should move to the due diligence stages. My thesis for startup evaluation will be covered in a subsequent article.
Hands-on in analyzing business fundamentals
In the past week, I’ve gone through annual and quarterly reports of two VC funds. Both have very different ways of analyzing businesses. However, business fundamentals never change. The fundamentals of a business can be broken down into quantitative and qualitative aspects.
Qualitative evaluation revolves around the financial model. Financial statements, growth projections, and ratios are part of this evaluation. Qualitative evaluation involves the management team, business model, and investment research.
Ideally, this will be covered in the pitch deck submitted.
Checking the feasibility of an idea
The best way to check the feasibility of an idea is to do a survey. I have spoken about the importance of doing primary research in a previous post. For pre-revenue startups, the best way to get VC meetings is to show the result of primary research. Feasibility studies are also crucial for investors. This can help build a thesis in industries and attract startups by publishing reports.
