How To Develop An Investment Thesis

Investing is a process, it’s not just a simple quick transaction like buying groceries from the supermarket. At the start of this intricate process lies a pivotal task for investors?—?the development of an investment thesis. This article delves into what constitutes an investment thesis, its necessity, motivations driving angel investing, the dichotomy between two categories of VCs, the key distinctions between VCs and Angels, and a sample personal investment thesis.

Start with Your Why (Motivation)

Embarking on the journey of angel investing begins with understanding your core motivation. Your thesis is an extension of your unique makeup and is contingent on your personal situation. Reflecting on your primary motivation is paramount. Investors aren’t not only capital contributors; they add value beyond finances, driven by a profound reason for investing. For instance, choosing to invest in Africa filters out opportunities elsewhere.

Some Motivations behind Angel Investing

• Supporting entrepreneurs is exhilarating, even if you don’t have a business idea yourself.
• Deep-root purpose for a place or continent, because it matters to you to contribute back where you originated from.
• Delving into fascinating industries, such as AI, Blockchain etc, becoming an expert, and investing to enhance credibility in the industry.
• Connecting with ambitious founders who are making a meaningful impact.
• The prospect of returns coupled with the excitement of investment opportunities.

(Remember that your money is at risk when you’re investing in a startup. More so why an Investment Thesis is important, to guide you on what you’re investing in and how much you’re investing in each deal).

What is an Investment Thesis:

A set of guiding principles to help you make informed investment decisions. While passion and interest drive your choices, pragmatism and checks and balances are imperative to making sound investment decisions.

Why Write a?Thesis?

Similar to companies reviewing their strategies, maintaining an investment thesis keeps you on track, serving as a personal guideline. It aids founders in understanding your fit, imposes discipline on investment selection, and provides a clear filter for quick decision-making.

Exploring The Two Categories of VCs (Thesis-driven & Coverage-driven)

Thesis-driven VCs: A small, concentrated portfolio, betting on the best companies you can find.

Coverage-driven VCs: Build as large a portfolio as possible, acting like a sort of index of the market.

Ultimately, fund size dictates strategy.

Key Difference between VCs and?Angels

• Fund Source: VCs raise funds as financial institutions from limited partners. Angels source funds from their individual savings, earnings, or inheritances.
• Accessibility: VCs market themselves through websites, events, and content marketing Whereas Angels are more fragmented, necessitating the importance of syndicates to increase reach and visibility.
• Ticket Size: VC ticket sizes can be substantial, up to ￡100K, While angels can start with as little as ￡1,000.
• Ownership: VCs typically own 5%-20%, While angels own 0.1%-3%.
• Value-add: Both institutions and individuals contribute capital, networks, and knowledge.

Sample of a Summarized Angel Investment Thesis

Ticket Size: ￡1K?—?￡30K

Geography: Africa?

Theme: Healthcare, Fintech, AI?

Founders: Technical Founders?

Business Model: B2C (Business to Customers)

“I invest because I love helping entrepreneurs and witnessing their growth. I am driven by my personal motives and values.”?—?Ron Conway, SV Angels

Remember, the fluidity of an Investment Thesis allows for iterative improvements over time. The goal is not only to invest but to invest with purpose and a clear understanding of your unique contribution to the entrepreneurial ecosystem.

This discussion was part of our monthly AMA Sessions, joined by Andy Ayim of Angel Investing School and Joe Kinvi, a Managing Partner at HoaQ. You can listen in here.