angel investing investment thesis

• August 30, 2023

What is an ideal Investment Thesis and Portfolio Size for Angel Investors?

Angel investors provide capital to startups and play a pivotal role in nurturing and guiding early-stage ventures. As these investors navigate the dynamic startup landscape, two key questions arise: Is it important for angel investors to define an investment thesis? And how many deals should they participate in to maximize their chances of success? Let’s delve into these considerations.

Defining an Investment Thesis: Adding Focus and Direction

An investment thesis is a well-defined strategy that guides an angel investor’s decision-making process. It outlines the specific industries, sectors, and startup stages the investor intends to focus on. While some angel investors might be tempted to cast a wide net, having a clear investment thesis offers several benefits:

1. Focus and Expertise

By concentrating on specific sectors or industries, angel investors can develop a deep understanding of market trends, pain points, and opportunities. This expertise can help them identify promising startups with high growth potential.

2. Efficient Deal Sourcing

An investment thesis streamlines the process of sourcing deals. Rather than sifting through a myriad of opportunities, investors can focus on startups that align with their expertise and strategic goals.

3. Consistent Decision-Making

A defined thesis provides a framework for evaluating startups consistently. It helps investors assess whether a startup’s mission, team, and market fit match their investment criteria.

4. Networking and Reputation

A clear investment focus allows angel investors to build a network within their chosen niche. This network can lead to better deal flow, potential co-investment opportunities, and enhanced credibility within the startup ecosystem.

5. Diversification within Focus

Even with a focused thesis, there can be diversification within a specific sector. Angel investors can still diversify by investing in startups with varied approaches, technologies, or target markets within their chosen domain.

Portfolio Size: Quality vs. Quantity

The question of how many deals angel investors should participate in is a balance between achieving portfolio diversification and maintaining quality control. Here are some considerations to ponder:

1. Diversification Benefits

Diversifying your angel investment portfolio reduces the risk associated with any single startup’s failure. A larger portfolio can help mitigate potential losses when startups don’t perform as expected.

2. Quality Over Quantity

While diversification is important, focusing on too many deals can lead to a dilution of attention and resources. Dilution occurs when an investor spreads their investments too thin, preventing them from providing meaningful value to each startup.

3. Active Involvement

Angel investors often contribute more than just capital; they offer mentorship, connections, and strategic guidance. With too many investments, it becomes challenging to actively engage with each startup.

4. Investment Size

The amount of capital an investor commits to each deal matters. Smaller investments may warrant a larger portfolio to achieve meaningful diversification.

5. Personal Capacity

Consider your available time, expertise, and capacity for active involvement. A smaller, focused portfolio might align better with your ability to contribute value.

Achieving a balance between a well-defined investment thesis and an appropriate portfolio size is a nuanced endeavor. While a clear investment thesis provides focus, a larger portfolio offers risk mitigation through diversification. Angel investors should aim for a portfolio size that allows them to provide meaningful support to startups while minimizing dilution of effort.

Ultimately, there’s no one-size-fits-all answer. An angel investor’s investment thesis and portfolio size should be tailored to their expertise, resources, and goals. By combining a strategic focus with a thoughtful approach to portfolio management, angel investors can maximize their potential for success in the dynamic and rewarding world of startup investing.

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How to develop an investment thesis in 3 easy steps as a beginner angel investor

Introduction

Starting your angel investing journey can be both exciting and daunting as a beginner. As an angel investor, there are so many things you need to consider before making your first investment. It can get overwhelming without the right guidance and information. However, if you break it down step by step, angel investing can be a very rewarding activity, both financially and personally. The most important thing is to not invest blindly but to have a clear set of rules that you follow so you don’t get too excited or spend all your money in the first few months once you become a confident and experienced angel investor. One crucial rule of becoming a successful angel investor is the importance of crafting a thesis —a set of guiding principles that shape your investment strategy. In this article, we will show you how we teach students in 3 easy steps how to develop their investment thesis as an angel investor, which will lay the groundwork for successful and purposeful investments.

Here are the 3 easy steps:

Step 1. Identify Your Interests and Expertise

The first step in building your investment thesis is identifying your interests and areas of expertise. Consider industries or sectors where you have relevant knowledge, experience, or a genuine passion. Whether it’s technology, healthcare, consumer goods, or fintech, focusing on areas that align with your background can give you a competitive edge in evaluating investment opportunities. Additionally, think about any unique insights or networks you possess that could provide value to startups in your chosen field. By honing in on your strengths and interests, you can narrow down the universe of potential investments and focus your efforts where you can make the most impact.

Step 2. Define Your Investment Criteria

Once you’ve identified your areas of interest, it’s essential to define your investment criteria. This involves outlining the specific attributes or characteristics you’re looking for in potential startup investments. Consider factors such as stage (early-stage, seed, or Series A), business model, market size, team expertise, traction, and scalability. Additionally, think about your risk tolerance and return expectations. Are you willing to take on higher risk for the potential of greater rewards, or do you prefer more conservative investments? By clearly defining your investment criteria, you can filter out opportunities that don’t align with your objectives and focus on those that have the greatest potential to deliver returns.

Step 3. Continuously Learn and Iterate

Building a thesis as an angel investor is an iterative process that requires continuous learning and refinement. Stay informed about industry trends, market dynamics, and emerging technologies through networking, attending conferences, and reading relevant publications. Engage with other investors, entrepreneurs, and experts to gain new perspectives and insights. As you gain experience and gather feedback from your investments, be willing to adapt and refine your thesis accordingly. What works today may not work tomorrow, so staying flexible and open-minded is key to long-term success in angel investing.

Building a thesis as a beginner angel investor may seem like a daunting task, but by following these three easy steps, you can develop a strong thesis, which will lay the foundation for your successful investment journey. We believe it is smarter to make 25 £1,000 investments rather than invest £25,000 in a single startup. The primary reason being that it provides 25 learning opportunities to learn more about yourself, founders and of course evolve your thesis. 

By identifying your interests and expertise, defining your investment criteria and continuously learning and iterating, you can develop a clear and purposeful investment thesis that aligns with your personal goals and financial objectives. Remember that angel investing is as much an art as it is a science, and success often comes from a combination of intuition, experience, and diligent research. With patience, perseverance, and a well-defined thesis, you can navigate the world of startup investments with confidence and conviction.

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How to build your investment thesis

What is an investment thesis?

An investment thesis serves as a personal guide to narrow down one’s lens for potential investments. While length or breadth of a thesis is less important and entirely personal, knowing your goals, passions, interests, and focus (around founder and industry) can help define what your thesis looks like.

Here are a few questions to ask when beginning that process:

• What is driving your interest in investing?
• What are some industries you follow and are passionate about?
• Where would you say your expertise lies?
• What qualities do you look for in a good founder?
• Is there a certain minority group/founder you want to support?
• What geography do you want to invest in?

Examples of thesis statements

A few examples of investment thesis statements include:

• Broad: I invest in early- and growth-stage companies that may scale effectively, are apt to dominate a given market, and display an exit potential.
• Middle Ground: I target early-stage startups led by ambitious entrepreneurs that solve problems felt by my generation. I target companies that exist in industries where I can leverage my advisor and industry expertise. I am geographically agnostic with a focus on leveraging Midwestern connections.
• Narrow: I invest in startups that are working to reverse the negative environmental impact that governments, corporations, and individuals have on our planet. I look for scalable companies that reimagine how we live, work, and play to be more harmonious with the earth and that are based in the Midwest. I prefer to invest in minority founders who are pioneering the space.

A broader thesis allows you to cast a wider net, but will make finding a focus difficult and, as a result, likely waste time. However, a thesis that is too narrow will limit deal flow and inhibit your ability to create a well-balanced portfolio. While there is no perfect middle ground, reflecting on your own values and interests can guide a baseline parameter that will become more refined and clearer over time.

How often should I revisit my thesis?

Establishing your initial thesis is the first step; however, in order to ensure it still aligns with your goals, passions, and expertise, it is crucial to revisit it once a year. Often, your thesis will adapt with your investment experience. The more deals you are exposed to, the better you will understand your personal values, interests, and strengths.

Pro tip: Set a date on your calendar each year as a reminder to hold yourself accountable.

A few questions that might be helpful to answer when revisiting your thesis:

• Where do you think your knowledge and interests have grown or narrowed over the last year?
• Which geographies do most of your deals come from?
• What are your favorite investments in your portfolio and why?
• Which deals have felt the most exciting? Impactful?
• What lessons have you learned along the way?

This article originally appeared in Groove Capital's blog .

Ava Najafi is an Associate at Groove Capital and a senior at the University of Minnesota’s Carlson School of Management, where she is pursuing her Bachelor’s degree in Finance and Entrepreneurial Management. She also serves as Managing Partner at Atland Ventures, where she helps manage the operations and strategic decision-making of the fund while overseeing investment activities and internal relations. Ava’s favorite part of investing is meeting with founders and sharing their passion for making a difference greater than themselves.

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“Every Angel Investor Should Have an Investment Thesis” (Part 1 of 3)

You’re an Angel investor

What kind of investments have you made? What kind of investments do you want to make? Why? Talk to any successful Wall Street investor or real estate investor, and they will tell you that they have a specific investment strategy that works for them. Angel investing is no different. Angel investing requires a strategy. Far too often, successful entrepreneurs with an exit under their belt basically go out to pasture and “become investors”. There are lots of different reasons for this move. Unfortunately, one of the most common reasons is that they think angel investing is an easier way to make money than building a business from scratch.

Being Opportunistic is Not a Strategy

It’s not. Angel investing is an individual, personal business, and it requires a strategy. Being opportunistic is not a strategy. You’re better than that. To be successful at angel investing, you need to have your very own personal, individual investment thesis. Here are the four reasons I make that statement.

Risk Mitigation

A well thought out thesis allows an Angel Investor to develop a deeper understanding of the risks/opportunities of an investment. The more specific your thesis, the better you already know any opportunity that hits your desk. That step, in and of itself, mitigates a huge amount of your risk.

If you communicate your thesis well to the entrepreneurial community, deal flow will move towards quality vs. quantity. How many deals per month hit your inbox? How many of them never make it past your sniff test? If you knew that every deal that made it to you was worth an hour to read, would that make your deal flow better?

Due Diligence

You can create an expert network to support your due diligence efforts. When the potential investments that you look at have a set of very specific characteristics, the team you require to diligence each deal becomes smaller, closer, and more effective.

The Next Round

Having, and sticking to, your investment thesis enables you to develop a network of friendly VCs that will work with you for ongoing rounds, making you and your deals less susceptible to getting crammed down.

A Job, Not a Hobby

Simply put, your specific, individual, personal investment thesis makes your job – and it is a job, not a hobby – as an angel investor easier. Your investment thesis makes you more effective as an angel investor.

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October 21, 2021

Investment theses aren’t just for VCs. Angels need them too self.__wrap_b(":Raiplm:",0.7)

Having a focus can help you stay efficient and become a better angel investor self.__wrap_b(":reiplm:",1).

Sarah Drinkwater

In the last couple of years, aided by a place in VC Atomico’s angel programme , I’ve fallen in love with angel investing: making small bets on early-stage founders. And over time, I’ve realised how few angels have distinctive investing theses. 

An investing thesis is really a fancy way of saying a mission statement that articulates a point of view and strategy. And mine is that, with few exceptions, I tend to focus on community-directed products. Think contraceptive review platform The Lowdown , audio advice network Anyone or The Stack World, a destination for entrepreneurial women. Whether femtech or economy, these are companies where community is their competitive moat. 

But why would an angel need a thesis? Surely you just meet founders and offer them some cash? Well, yes. But the market’s noisier than ever; capital is becoming cheap. We’re seeing more funds move into pre-seed plus an increasing number of super-angels and having a thesis, even a simple one, helps founders know what you look at. If you’re angel investing alongside a day job, which most of us are, a thesis helps you stay efficient. And lastly, this can lead, I believe, to true mastery; whether in terms of the network you’re building, the trends you follow or the advice you give. 

Angel investing is risky, so it’s smart to start small

Look at funds. You’d never see Felix , known for their angle of “technology/creativity”, or Connect, with their love of opinionated products, do a quantum computing deal.

How to build a thesis

A good investment thesis sits at the intersection of experience, passion and opportunity. 

To build one, first start with you. What’s your professional experience? Who have you worked for or with? What are the networks you have access to? Consider the amount of capital you want to commit and your risk appetite; angel investing is risky, so it’s smart to start small. 

Next, what fields are you most excited about? One way to develop your knowledge here is to see a lot of startups pitch, whether through going to demo days or joining communities like Alma Angels where a lot of dealflow is shared. I’ve seen a legal friend fall passionately in love with healthtech after a family member’s personal experience, and work to understand the blockers and opportunities to ensure she was a great value-add investor to companies in this space. 

Lastly, think about opportunity. With the experience and passion you have, what trends or white spaces do you see that feel overlooked by others? 

The most effective way to get your point of view out there is to repeat it a hundred times

In my case, I’ve spent years building community teams and community strategies in tech companies big and small and, however much “community” is an overused word on tech Twitter this year, there are still very few angels with long-term expertise, and even in the US only a few who specialise in this space. 

Once you have a rough idea, start mapping it out on paper. Then start testing. The most effective way to get your point of view out there is to repeat it a hundred times — tell founders when you meet them, join relevant events, write Twitter threads (or Sifted articles). For inspiration, there are already a few European angels who have shared their theses: my fellow Atomico angel Sameer Singh is all about network effect, while Sophia Bendz has a love of femtech. 

And each company you decide to fund or seriously look at will confirm or shift your thinking. 

Congratulations, you’ve got an angel investing thesis! 

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The Angel Investment Thesis for Focused Startup Investing

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An investment thesis is a compass for angel investors to guide them on their own startup investment journey, guide entrepreneurs they seek to invest in to find their way to them & find guidance, advice, and funding, as well as for their ecosystem to gain insight into their guiding principals to join them along the journey. The thesis is a roadmap for investing, a sense of gravity around what an investor cares about. It guides the investor towards the investments that fit their objectives.

As one of the most useful and insightful tools in the innovation economy, the INVESTMENT THESIS guides, connects & clarifies. From angel investors having their own personal statements to angel groups developing a collective affirmation to VC funds, this simple yet impactful statement should be used as a trust-building tool. For investors, you can keep clear on your objectives for being an investor and not falling in love with a charismatic founder and investing in a deal that you cannot bring any value to and thus, should not be investing in. A strong investment thesis will help guide you to your true north star along your winding path as an investor, will inform how you will source deals, how you will make critical decisions, and ultimately, build a more diverse, impactful, and growing portfolio. For entrepreneurs, you can ask an investor what their investment thesis is to start a wonderful discussion about their passions, aspirations, and experience, allowing for deeper conversations and better investor relations.

Some Caution, bias & patterns.

A good investment thesis sits at the intersection of experience, aspirations, assets, passion, values, and opportunity. It should fit the financial objectives & goals of the investor. You, as an investor, bring so much value to a founder & company, on top of your $$. This will inform your investment thesis. However, be aware of the unconscious bias that our society has placed in front of us from birth about what “successful” patterns to “bet on” and remember diversification. While you should focus on a particular industry or sector that you are familiar with, you can diversify other variables, such as geography, business model, technology, or customer segment to create a more balanced portfolio of angel investments. This should also be calibrated with your personal net worth. Developing a personal angel investment thesis will guide you towards what you want to invest your time, treasure and talent into and guide others to find you, collaborate with you, and syndicate deals for more values-aligned opportunities.

“As an investor, people are always talking about what’s your thesis. And a thesis is important, but it can be really intimidating. You may not know your thesis right away. So think about your why, what do you want to accomplish in investing?” ( 05:41 ) -Caitlin Wege, President of TCA on the  She Invests! Podcast, Episode 37

Creating an Angel Investment Thesis.

Have a clear, simple purpose for the why and what you are investing in. Consider the following considerations to outline:

• What would be your typical check size? Angel investors can invest $5,000 – $200K into a single startup company, typically the average is $10K – $25K.
• What stage will you be investing in? Friends and Family to early Series A is the range of where angel investors are active, but predominantly in the Seed to Seed+ stage.
• Do you want to stick with a specific geography?  In multiple HALO Reports done by the  Angel Capital Association  &  Angel Resource Institute , there is a direct correlation between the success of an investment and how close the investor is in geography to the founder. With our new zoom-heavy world, this has been eroded, but consider how close you want to be and how you can conduct due diligence with the founder & their HQ (albeit manufacturing, offices, labs) to promote a positive & effective due diligence experience.
• Are you specific with the type of founder, team, or investment lens you prefer to invest in?  Will you invest only in women-led startups, cognitive diverse teams, underrepresented founders, 1st-time founders, impact-driven companies or tech-enabled startups?
• What sector are you knowledgeable in or are passionate about?  This could be from your professional experience because you have a specific competitive edge when evaluating companies in your area of expertise or a personal passion in a sector. alternatively, you can also join an angel group to learn and gain expertise from the collective knowledge of other experts in the field you want to invest in.
• Any special sauce needed in a startup that you feel is an opportunity to invest in?  This could be that there needs to be a heavy AI component or Web3.0 strategy or CPG (Consumer Product Goods) companies with a strong community component that produce a stickier customer retention strategy. These all would be indications that you feel would de-risk your investments significantly for you to invest.

Then, put this all together:

You can add some more specificity if you would like…

“I provide [assets you can bring to the company] to all portfolio companies because I am [your background/interest] to [Secret Sauce].”

“I like to [how do you interact with companies/founders], I [prefer/ not prefer] a board seed, and request [typical asks of founders, like information rights, etc]”

“I look for liquidity in less than [typical horizon of investment periods].”

HERE IS MY PERSONAL INVESTMENT THESIS:

“I invest typically $10,000 – $25,000 each deal at the seed stage in the US to fund women-led or BIPOC-led or LGBTQ+ impact-driven startups. I am industry agnostic but prefer tech-enabled solutions. I focus on looking for difficult problems that I believe can be solved with the right team. I can either lead a round* if it is in my wheelhouse of expertise or follow on. I like to take an active role in the advising of the founder, prefer a board seat but not necessary, & request information rights. I look for a liquidity event in 3-5 years and 5-7 years for life science.” -Dr. Silvia Mah  (*note: for me, personally, to lead a round, the startup has to be at the right stage (typically pre-seed) & the right funding opportunity (syndicaion with other individual angel investors or angel groups who accept individual due diligence) or platform (like Wefunder) to bring other investors on board for the benefit of the founder – I know, super-specific, but it's what it takes.)

Having a focus can help you stay efficient and become a better angel investor

Here is some insight from another angel investor about their investment thesis:

“We want to invest in companies with underrepresented founders which means women, people of color, LGBTQIA+. The CEO herself needs to be diverse, but also the founding team needs to represent diversity.” -Sonia Steinway, Stella Angels, TCA, & Village Up San Diego, speaking about her & her wife's investment thesis on the  She Invests! Podcast, Episode 31  ( 22:36 )

The Benefits of an Investment Thesis for ALL

A. for the investor.

An investment thesis keeps you disciplined on your selections and focused on where you want to go with your investments. With a deep understanding of the types of industries and businesses you want to invest in, the risks you’re willing to take (and those you’re not), and the parameters you want to see in companies, you are much better equipped to find the right fit for your money. 

• Being the right investor.  A thesis is a clear indicator to start-up founders of whether you are the right investor for their companies. It's a win-win when the right investor funds the right startup in the industry that they have expertise or interest because capital is a 3-part benefit: Relational/Network Capital, Financial Capital, and Resource Capital.
• Saves time.  PERIOD.
• Share insights.  Provides founders with insight into how you will work with them during due diligence and post-investment.
• Increased communication.  Better communication through a clear thesis with co-investors, entrepreneurs, and your ecosystem, in general, will allow for you to gain access to great deals, help in due diligence needs and post-investment advice.
• Increased referral efficiency.  The efficiency of referral, incoming and outgoing, both are crucial in delivering more value to the innovation ecosystem
• Stay laser-focused.  It's the same principle of going after a customer persona or a specific beachhead market, the more you focus, the better you are in attracting the right customers who will become evangelical customers of your product or offering. A strong investment thesis with laser focus commitment to the startups you want to invest in for the RIGHT reasons will build a stronger individual portfolio with startups exactly in your wheelhouse.
• Become more proactive instead of reactive.  By having a clear direction as to where you as an investor want to allocate your funding of startups, your process becomes more proactive towards finding the right investment instead of reacting to shiny bright opportunities.
• Increased trust with the ecosystem.  Trust is the most valuable currency in investing. By having an investment thesis, transparency increases as does trust amongst entrepreneurs an investor serves and the investors in their networks.
• Decreases anxiety.  Angel investing is a risky endeavor, so knowing the core principles of your investment decisions can lend a grounding presence to your investor activities, conversations, and discussions.
• Helps you gain clarity.  The act of writing an investment thesis in itself can help an investor gain clarity. Then, as a tool for meeting and speaking with entrepreneurs, the thesis affords clarity of the type of startups you want to hear from and those you don't.

B. Benefits for the startup founder:

An investment thesis, from very high-level thesis' to super specific, also benefits the entrepreneurs seeking funding. It assists them in gaining a glimpse into the mindset of an investor and understanding if there is a good fit for investment. This can only happen when expectations are delineated clearly from the beginning. so, entrepreneurs, as your investors about their investment thesis and also compile the thesis from what you know about the investor.

• Saves time.  This happens in two ways, (1) pitch to only those investors who want to invest in you and (2) better target your entire list of investors. I know what you are thinking, “how would I know what their investment thesis is?” Well, see what they talk about on social, what they share and reshare on Linked In or post in Twitter and be a detective in finding out what they have already invested in. Secondly, knowing the investment thesis of many investors saves you time in knowing who is actually on your list of investors & what they invest in.
• Increases efficiency.  Understanding the investment thesis of your potential investors narrow down the list of investors to reach out to. You only pitch to and interact with the investors who are interested in investing in your type of company with the amazing team you have amassed.
• Saves energy.  Even the fact of being aware of angel investors having an investment thesis allows for you to save your energy, because the fundraising journey is an energy-draining experience for most, as you research each investor and recognize the signs of a thesis (helps to use the template).
• Focuses conversations. Speaking about the investment thesis  between the founder & funder when conducting a coffee meeting allows for better conversations and during a pitch, a focused question at the very end about the investor's thesis has a personal touch to a typically more transactional pitch. As part of follow-on meetings, a great topic of discussion is the investor's thesis and who else shares the thesis with them (growing your list of the exact investors who would be interested in hearing from you).
• Assist in building your network.  Allows for entrepreneurs to piece together who are the right investors at every stage of their fundraising journey by connecting the thesis' together to build a stronger ecosystem of investor support & guidance.
• Helps in building an investor persona.  Every entrepreneur should have an investor persona built out, knowing WHO is your ideal investor for your industry, team, stage, product, and geography. By anchoring on a certain investors' thesis and building from there allows for you to get super focused on the exact investor who you are pitching to and evolve that persona with more detail as you ask different investors about their own thesis'.

C. Benefits for the Innovation Ecosystem

A clear investment thesis signals professionalism, intentionality, openness, and reciprocity to your growing innovation ecosystem, from other investors to entrepreneurs to service providers to mentors.

• Increased effective deal flow.  Deal flow is very important to the success of angel investors, and those deals often come from other angels, venture capitalists, accelerator directors — other early-stage investors.
• Helps syndication success.  When you syndicate, or share, great deals with other investors or in your angel group, there is an exchange of trust and value. This connectivity helps syndication in knowing through practical & actionable steps that there is success in doing deals with you as an investor.  
• Saves time.  It's easy to know what you want to invest in so your ecosystem can easily know how to bring you value and vice versa.
• Better communication with co-investors.  If you have a focused investment thesis, there are richer communications & cross-collaborations with co-investors from syndication to sale.

Remember, all early-stage investments are risky and can fail even with the best idea, perfected product, aligned product-market fit and amazing team. Building a way to guide you through fantastic & passionate entrepreneurs and their transformational products is key. An investment thesis will decrease your risk as an investor and increase the probability of investment success aligned to your own beliefs & experience.

Do not rush it.

Developing & refining a personal investment thesis as an angel investor should take thought, research, and time. An angel investor's investment thesis is very important to get right because if seriously considered the right investor finds the right entrepreneur in the right industry to make magic happen.

Investors should invest in the innovation & impact they want to see in the world.

There are tangible and intangible benefits not only for the angel investor but for the startups they serve and the ecosystem they collectively build with their trusted network of other investors, experts, mentors and advisors.

• Without an investment thesis, investors are likely to find it difficult to stay disciplined and concentrate on the startups that match their investment objectives.
• Without an investment thesis, investors don't have an intentional compass to guide their deal flow sourcing & make the best investment decisions for their portfolio.
• Without an investment thesis, investors are likely to waste a lot of time talking about the wrong things to the wrong people.

Developing and using a compelling investment thesis as an angel investor not only minimizes their risk and exposure but also increases an investor's ability to help more companies scale, increasing return on investment. As a dynamic tool, the investment thesis can evolve and be refined as an investor grows their portfolio and talks to more founders. Intentionality from the beginning makes for more efficient sourcing, better decision-making, and an efficient way to build the right portfolio with the right types of innovation to make the most impact.

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Why angel investors should have an investment thesis.

Few angel investors have investment theses, short summaries of the person’s strategy for what kinds of startups he or she will fund. Fewer still have these theses written down in a form that can be shared with others.

That’s a mistake. Angels should have clear, written investment theses. Having them imposes discipline on their investment selection and facilitates communication with entrepreneurs and other investors.

Venture capitalists all have investment theses, which they need to raise money from their limited partners. Because venture capitalists have a fiduciary duty to invest the LPs’ money in ways consistent with the approach they have outlined to their limited partners when obtaining capital, they need investment theses. The thesis allows the LPs to verify if the promised approach has been followed.

Because angels don’t raise money from others, they don’t have to have investment theses. But they should.

What is an Investment Thesis?

An investment thesis is a roadmap for investing. It guides the investor towards the investments that fit their objectives. If you invest in start-ups, founders will pitch you for money. Without an investment thesis, you are likely to find it difficult to stay disciplined and concentrate on the start-ups that match your investment objectives. At a minimum, you will find it more difficult to decide which founders to talk to and what questions to ask them. For example, you don’t want to talk to medical device company founders if you only want to invest in companies in lightly regulated industries. And you don’t want to focus your due diligence on start-ups’ financial statements if you only want to invest in pre-revenue companies. Without an investment thesis, you are likely to waste a lot of time talking about the wrong things to the wrong people.

Additional Benefits of an Investment Thesis

An investment thesis is also a clear indicator to start-up founders of whether you are the right investor for their companies. If the only thing founders know about you is the size of your net worth, they are going to ask you for money even when you are not going to give it to them. That’s a waste of their time and yours. Moreover, your investment thesis provides founders with insight into how you will work with them post investment, and what kind of information you will seek from them. This is also important in getting the right kind of founders to match up with.

A third benefit of having an investor thesis is better communication with co-investors. Deal flow is very important to the success of angel investors, and those deals often come from other angels, venture capitalists, accelerator directors — other early stage investors. People do not like to refer deals if the person receiving the referral isn’t interested. That makes the referrer feel like they are bothering the recipient and makes them look like they don’t know what they are doing to founders. Simply put, other investors will find it easier to make referrals to you if you have articulated your investment thesis to them.

While you don’t need an investment thesis to get the capital to invest in start-ups if you are an angel, you should have one. It will make you more disciplined in your approach to investment and allow you to communicate more efficiently with founders and co-investors.

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Learn what it takes to angel invest ‍ Ever wondered what goes into angel investing and how you can get started? This kit will help you understand key investment concepts and frameworks.

Investment Thesis

What is an investment thesis.

An investment thesis is a strategy for making money. It typically communicates what investors invest in (or don't) and why, and their beliefs about what makes startups successful broadly or by stage and/or sector.

Why are investment theses important?

An investment thesis enables consistent, disciplined decision making and investing.

Investors may develop a thesis to use across their entire fund or for each investment . Your investing thesis should evolve over time as you have new experiences and consume new information.

Although every deal is different and can go right or wrong for an infinite number of reasons, one thing you can control is the consistency with which you analyze them. By using a similar methodology with each deal, you will be able to quantify one deal over another and use your hard-earned money on the bets that you deem to be the best for you. This will also help you understand how your investment thesis changes over time, for better or for worse. - Brian Nichols, Angel Squad

The best startup investors are constantly re-evaluating their approach and thesis — I certainly have evolved my own thinking over the past years. - Elizbath Yin, Introducing Angel Squad: enabling the next 10k angel investors

At Angel Squad, we share the Hustle Fund Deal Assessment Framework as a jumping off point to help angel investors create a thesis and consistently grade companies against it. We believe that the best way to become a better investor is to put pen to paper and get a lot of reps of practice in evaluating companies.

Do I have to have an investment thesis to start angel investing?

No! While some investors start their journey with a thesis, many build it over time based on lived experience working with founders and seeing them execute.

What is Hustle Fund's investment thesis?

Our thesis is really simple. We think that the leading indicator of success is a hustle. For us, the hustle is defined as great execution, meets high velocity and we find that teams that ship a lot of code, run a lot of experience, and try very hard at sales pipeline processes tend to grind out the best businesses over time. Pre-seed investing and seed investing is largely an exercise of assessing the potential of the founders. - Eric Bahn

What are some other examples of investment theses?

• Jess Lee's Investment Thesis
• The Search for the RareBreed Entrepreneur
• Precursor Ventures Philosophy

Related resources

• What is an investment thesis? Timan Rebel, Co-founder of NEXT

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Building your investment thesis

Having an investment thesis can help make you a more focused investor, and is a good place to start when setting out to start angel investing. A strong investment thesis will help guide how you will source deals and how you will make decisions.

A strong investment thesis can be the basis for a very strong angel investment portfolio, a weak, or misguided investment thesis, on the other hand, can lead to lower portfolio performance. Some angels and venture capitalists build out very detailed investment theses, whereas others are more general.

Many investors focus their thesis on a specific sector where they have domain expertise as it can can give them an upper hand in creating deal flow and in picking winning companies. Popular sectors today include; Fintech, Cleantech, Digital Health, Hardware, Enterprise Software, Cybersecurity.

You should be able to list out criteria under your investment thesis, helping to guide what you choose to invest in and what you don’t. By investing in companies that fall within your investment thesis, you should see a greater fit with your ability to help the companies growth through your expertise and connections, and an opportunity for large investment returns, over a period of time.

Once you’ve had an opportunity to think about your own investment thesis, can you think of any successful companies in today’s market that had you seen them in the early days you would have invested, based on your thesis?

If you choose to focus your investments around a particular sector, be sure to diversify on other factors like product, technology, geography, business model, customer segment etc in order to create a balanced portfolio.

When focusing on a sector you can also become much more focused in your deal sourcing. There are venture capital funds and other angels focused on particular sectors that you can align yourself with, for example, RockHealth , a San Francisco accelerator and investment fund for healthcare startups. There are also industry events and tradeshows that you can attend to meet new companies. (For more on dealflow and sourcing deals, see our post on building your pipeline ).

You will find quickly that sectors are very tight-knit communities. Before long — if you put enough effort into connecting with key players in the industry — you will start to see how the ecosystem works and begin to build a name for yourself.

A word of advice if you plan to invest in businesses in the same industry, that may compete now or in the future, the best thing to do to maintain strong relationships with your founders is to be honest about any conflicts up front. By knowing you have a conflict, founders can choose what information to share more selectively given your competing interests.

Note that if you are a company director you may have legal limitations to invest in competing businesses, be sure to check with a lawyer beforehand.

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How to Develop a Strong Investment Thesis in Early Stage

Discover the eight steps to develop a strong investment thesis. Make informed, profitable decisions as a private investor with our guide.

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A well-crafted investment thesis can help investors clarify their goals and evaluate potential investments, ultimately leading to a successful performance of the fund.

What exactly is an investment thesis, and why is it so important?

An investment thesis is a concise statement that outlines an investor's belief about the potential returns and risks of a particular investment. It is a framework that helps investors make decisions about what to buy, sell, or hold in their portfolio, and it is based on a thorough analysis of a company's financials, market conditions, and competitive landscape.

A well-crafted investment thesis can serve as a valuable guide for investors to focus on their long-term goals and avoid making impulsive or reactive decisions based on short-term market fluctuations. By clearly defining their investment goals and criteria, investors can avoid being swayed by emotions or biases and instead make rational and thoughtful decisions.

How can private investors develop a strong investment thesis? 

Here are eight steps to follow:

1. Start by identifying the specific industry or market that you want to invest in. This should be based on your own interests, expertise, and goals as an investor.

2. Research the current state of the market , including trends, challenges, and opportunities. This will help you identify potential investment opportunities and develop a more informed investment thesis.

3. Evaluate the potential investment opportunities in the market, including the founding team, product, and business model of the startups. Look for startups that have strong potential for growth and differentiation in the market.

4. Develop a set of hypotheses or assumptions about the potential returns and risks of investing in early stage startups in the chosen market. This should be based on your research and analysis, and should include both the potential upsides and risks of the investment.

5. Test your hypotheses by gathering additional information and data, and by seeking the perspectives of other experienced investors. This may involve conducting interviews, attending industry conferences, or seeking out expert opinions.

6. Refine your thesis as needed based on the information and insights you gather. Be prepared to adjust your assumptions and expectations as new information becomes available.

7. Communicate your investment thesis clearly and concisely to others, including potential partners or investors. This should include a detailed explanation of your reasoning and a solid plan for realizing the potential returns of the investment.

8. Monitor the performance of the startups you invest in closely, and be prepared to adjust your thesis or exit the investment if it no longer aligns with your goals or if the underlying assumptions change.

Take the next steps with the bunch SPV or fund

Once you have developed your investment thesis, the bunch OS allows you to open standardized investment entities that are a) easy to understand, b) can be managed fully digitally and c) have significantly lower setup and management costs. We are on a mission to enable those who dare to take risks. Talk to us about how to get started with bunch .

We are excited to keep you posted throughout our journey to build the operating system for private market investors . While public markets have come a long way from the time when stock investments were made on costly phone calls, private markets are lagging behind. We want to take out the friction and free up time for fund managers, investors, and founders, allowing them to focus on the projects tackling the challenges of tomorrow. ‍ Subscribe to our newsletter here .

Disclaimer: The content presented herein is solely for informational and discussion purposes only. It is not intended to serve as legal, tax or financial advice or as an endorsement of any investment strategy. bunch does not provide legal, tax or financial advice. Readers should not base their investment decisions on the content presented herein or any other bunch-generated content alone and should seek appropriate professional advice. Nothing contained herein shall constitute or imply an offer to sell, purchase or enter into any transaction in respect of securities. The content contained herein is subject to change without notice. While we aim to present accurate and up-to-date information as part of bunch’s content, we undertake no obligation to update our content from time to time.

Johannes is leading strategic projects at bunch with a particular focus on the German market and the offerings around funds. Prior to joining bunch, he worked for one of Europe's largest and most active Venture Capital funds, building a portfolio of FinTech companies before switching to the operator side.

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Dissertations / Theses on the topic 'Angel investors'

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Rodriguez, Emily M. "Angel Financing: Matching Start-Up Firms with Angel Investors." Scholarship @ Claremont, 2011. http://scholarship.claremont.edu/cmc_theses/136.

Elfsberg, Fredrik, and Sofia Jonsson. "How to fly with business angels : - A qualitative study on business angel investment criteria’s." Thesis, Umeå University, Umeå School of Business, 2008. http://urn.kb.se/resolve?urn=urn:nbn:se:umu:diva-1760.

This study is concerned with business angels’ investments process and which aspects in their choice of target firms are considered important in that process. The problem statement of this thesis is; what aspects play a role in Business angels’ investment decision, and in what way? How do these aspects affect business angels when making investment decisions, and why? The aim subsequently is concerned with discerning what is most important for business angels when choosing their target firms and how business angels make their investment decisions. We also aim to be able to create a deeper understanding of business angels, and contribute to small entrepreneurial firms in their search for financiers. Our research can provide information on how entrepreneurs can attract business angels.

The study is created with previous studies as a framework, and a wide selection of studies have been used. These have been examined and issues which in those studies have been found to be important for business angels have been reviewed and accounted for in the theory chapter.

The approach we used for data collection was through qualitative interviews with the use of an interview guide. This is explained by our aspiration to understand business angels’ investment criteria rather than describe them. Due to this, the view of interpretivism along with constructionism was taken on when constructing the interviews and findings. The respondents were found through business angels networks, and the selection of business angels entailed a fair representation of the researched group. This thesis has been conducted in an academically correct manner, and the results are validated and confirmed by the respondents.

The results we came to from our interviews were that the entrepreneur was most important for business angels in their evaluations, but other aspects also played a role. We analyzed our results with the use of our theory section and hence could see that some things we had come up with were unique, whilst some findings confirmed previous studies. We found that many business angels turn down investments due to their lack of time, which was a rather new emphasize for this study. Some qualities of the entrepreneur the business angels required were that they needed to be sales oriented and not overly optimistic about the future returns and prosperity of their ventures. We have shown that if entrepreneurs are overly optimistic about the value of their own firm it is likely that they will lose the deal. This was also of interest as it has not been stated as clearly in previous studies.

We conclude the thesis by giving advice to entrepreneurs and business angels, what future business angels should keep in mind and also what entrepreneurs should know before they involve themselves with business angels.

Cataldi, Bryan Daniel. "RISKY BUSINESS: HOW REVENUE MEASUREMENT AND RISK DISCLOSURE IMPACT EQUITY INVESTORS' VALUE JUDGMENT OF PRIVATE COMPANIES." OpenSIUC, 2014. https://opensiuc.lib.siu.edu/dissertations/804.

Aspegren, David, Karl Jacobsson, and Martin Bech-Jakobsson. "Attracting capital : The business plan from the investors' perspective." Thesis, Jönköping University, JIBS, Business Administration, 2006. http://urn.kb.se/resolve?urn=urn:nbn:se:hj:diva-316.

For entrepreneurs it can be difficult to attract investors. The business plan is a well-known document for that purpose, and is used widely by entrepreneurs and companies. With this in mind, several questions arise. What information in a business plan is important? Do the criteria for information in a business plan differ between banks, venture capital companies, and business angels? What is the perception of a business plan to these investors? These are questions future entrepreneurs have to deal with before taking action and start searching for investors. This thesis investigates the investors’ perspective on the issue of entrepreneurship and business planning.The purpose of this thesis is to broaden the understanding of the business plan as a mean to attract capital for new ventures. It further aims to investigate the relevance of the business plan and the optimal composition of information, according to the investors. A qualitative method has been used in this thesis. Empirical findings have been captured from interviews with relevant actors in the investing market, and thereafter been analyzed with existing theories. The overall conclusion in this thesis is that there is a very broad view of the business plan as a concept. There are different aspects of the business plans roles as a formal mean to attract capital. Obvious differences between how the three different investors evaluate a business plan have been found as well as that the investors find other things than the business plan to be important in a decision. The investors do not look solely on the business plan and then make the decision whether to invest or not. The third conclusion is that all three investors enter a company with different roles, affecting the business’ activities in different ways. Finally, the business plan as a document is never as formal as the theory states. It is surprisingly different from the theory which claims that formality is an important issue in this kind of documents.

Fox, Joseph D. "Understanding Differences in Expectations in the Anticipatory Socialization Process between Angel Investors and Entrepreneurs in Extended Due Diligence." Ohio University / OhioLINK, 2019. http://rave.ohiolink.edu/etdc/view?acc_num=ohiou1552992685172215.

Braly, Alan R. (Alan Ryan). "The impact of angel investors on founders of new ventures in the medical technology industry." Thesis, Massachusetts Institute of Technology, 2011. http://hdl.handle.net/1721.1/68464.

Carson, Shawn A. "Identifying Critical Risk Factors in the Decision-making Process of Angel Investors and Venture Capitalists: A Delphi Research Study." Digital Commons @ East Tennessee State University, 2018. https://dc.etsu.edu/etd/3360.

Skalická, Martina. "ROLE NEINSTITUCIONALIZOVANÉHO SOUKROMÉHO KAPITÁLU V PODMÍNKÁCH NOVĚ ZAKLÁDANÝCH PODNIKŮ A JEJICH ROZVOJOVÝCH FÁZÍ." Doctoral thesis, Vysoké učení technické v Brně. Fakulta podnikatelská, 2018. http://www.nusl.cz/ntk/nusl-391873.

Sundström, Johannes, and Nikolas Dresmal. "How Early-Stage Investors Assess Investment Opportunities in the Swedish Video Game Industry." Thesis, Uppsala universitet, Företagsekonomiska institutionen, 2021. http://urn.kb.se/resolve?urn=urn:nbn:se:uu:diva-447617.

Sibanda, Zenzo. "Angel networks as a business start-up financing option in South Africa." Thesis, Rhodes University, 2011. http://hdl.handle.net/10962/d1002780.

Cadle, Schalk Willem. "The importance of knowledge and skills transfer in the private equity, venture capital and angel investing process." Thesis, Stellenbosch : University of Stellenbosch, 2009. http://hdl.handle.net/10019.1/1786.

Karlsson, Gabriel, Elin Johansson, and Mathias Arwidsson. "BUSINESS ANGELS IN SWEDEN : The entrepreneur as an Investment Project and Capital Seeker." Thesis, Jönköping University, Jönköping International Business School, 2006. http://urn.kb.se/resolve?urn=urn:nbn:se:hj:diva-588.

Entreprenörer som startar nya företag kommer troligtvis att behöva antingen kapital, eller kompetens i hur ett företag drivs, men mest sannolikt är att de behöver både och. Affärs-änglar är individer som investerar sina privata pengar mestadels i företag som befinner sig i en utvecklingsfas eller en tidig tillväxtfas. Affärsänglar kan också bidra med icke-finansiella resurser till företag såsom kompetens, färdigheter, kunskap och erfarenhet.

Problem/Syfte

Vad kan entreprenörer som är i behov av både kapital och kompetens göra för att hitta den ”rätta” affärsängeln, hur kan entreprenören attrahera denna, samt vilka faktorer är avgö-rande för att en arbetsrelation med en affärsängel ska bli lyckad? Syftet med denna uppsats är att utifrån entreprenören som investeringsobjekt så väl som kapitalsökare, beskriva olika faktorer som entreprenörer kan beakta för att öka sina möjligheter till att inleda och genomföra ett lyckat samarbete med en affärsängel.

Vi fann ett antal faktorer som kan påverka utgången av en arbetsrelation med en affärsäng-el. Dessa är den personliga relationen, att entreprenörens behov stämmer överens med vad affärsängeln kan erbjuda, överensstämmande avsikter, och ett väl genomarbetat aktieägar-avtal.

Entrepreneurs who start a new venture will probably need either capital, or competence in how to run a business, but most likely they need them both. Business angels are individuals who invest their private money in companies in a start-up or early growth phase. Business angels can also contribute non-financial resources to companies such as competence, skills, knowledge and experience.

Problem/Purpose

What can entrepreneurs who are in need of both capital and competence do to find the “right” business angel, how can they attract these investors, and which factors are decisive for a successful working relationship with a business angel? The purpose of this thesis is, with a starting point in the entrepreneur as an investment project and capital seeker, to de-scribe a number of factors entrepreneurs can consider in order to increase their possibilities in initiating and carrying out a successful working relationship with a business angel.

The authors found a number of factors affecting the outcome of a working relationship with a business angel. These are the personal relationship, a match between the entrepre-neur’s needs and the business angel’s competence, an agreed agenda, and a thoroughly worked out shareholder agreement.

Scherrer, Miles. "Funding of Social Enterprises : A case study of high investor engagement funding practices on for-profit social enterprises." Thesis, Uppsala universitet, Företagsekonomiska institutionen, 2016. http://urn.kb.se/resolve?urn=urn:nbn:se:uu:diva-297872.

Drover, Andrew William. "THE INFLUENCE OF ANGEL INVESTOR CHARACTERISTICS ON VENTURE CAPITALIST DECISION MAKING." OpenSIUC, 2014. https://opensiuc.lib.siu.edu/dissertations/933.

Quaderer, Sascha Robin. "Anlageverhalten von Schweizer Business Angels-empirische Untersuchung ausgewählter Investoren /." Bamberg : Difo-Druck, 2008. http://bvbr.bib-bvb.de:8991/F?func=service&doc_library=BVB01&doc_number=016419987&line_number=0001&func_code=DB_RECORDS&service_type=MEDIA.

Machado, Fabio Gimenez. "Investidor anjo: uma análise dos critérios de decisão de investimento em startups." Universidade de São Paulo, 2015. http://www.teses.usp.br/teses/disponiveis/12/12139/tde-17112015-114041/.

Mayfield, William M. "The determination of developmental process of the relationship between the informal investor and the entrepreneur : an exploratory study." Thesis, Glasgow Caledonian University, 1999. http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.301381.

Fili, Andreas. "Noncontractual Governance Strategies of Business Angels in the Post-Investment Venture Relationship." Doctoral thesis, KTH, Centrum för bank och finans, Cefin, 2014. http://urn.kb.se/resolve?urn=urn:nbn:se:kth:diva-155318.

QC 20141104

Ronnerfors, Rebecka, and Emma Svensson. "Viljan att investera i en bostadsnära solcellsanläggning : Undersökning av investeringsvilja." Thesis, Luleå tekniska universitet, Institutionen för ekonomi, teknik och samhälle, 2020. http://urn.kb.se/resolve?urn=urn:nbn:se:ltu:diva-80088.

Vashkevich, Aliaksandra, and Dong Wei Hu. "Credit Default Swap in a financial portfolio: angel or devil? : A study of the diversification effect of CDS during 2005-2010." Thesis, Umeå universitet, Handelshögskolan vid Umeå universitet, 2010. http://urn.kb.se/resolve?urn=urn:nbn:se:umu:diva-39410.

Grosser, Tomáš. "Metoda budování IT start-upu." Master's thesis, Vysoká škola ekonomická v Praze, 2015. http://www.nusl.cz/ntk/nusl-201684.

Sequeira, Joana Isabel Teixeira Romão. "O financiamento de startups com recurso a financiamento por business angels em Portugal : estudo de caso." Master's thesis, Instituto Superior de Economia e Gestão, 2014. http://hdl.handle.net/10400.5/7499.

Habrnal, Marek. "Faktory hodnoty start-up projektů pro investory v České republice a metody oceňování." Doctoral thesis, Vysoká škola ekonomická v Praze, 2013. http://www.nusl.cz/ntk/nusl-204783.

Cruz, Alexandre Jorge Barros da. "Business angels: a forma como o empresário, o investidor e a empresa influenciam o montante investido." Master's thesis, Universidade de Évora, 2016. http://hdl.handle.net/10174/18718.

Amorim, Ronaldo Alves de. "Os critérios de investimento utilizados pelos investidores anjo no Brasil: uma análise sobre suas priorizações." reponame:Repositório Institucional do FGV, 2016. http://hdl.handle.net/10438/17736.

Schade, Yvonne [Verfasser], Hartmut [Akademischer Betreuer] Schröder, and Stephan [Akademischer Betreuer] Breidenbach. "Social Business Angels – Vision oder Realität? Qualitative Untersuchung zum Investitionsverhalten von privaten Investoren im sozialen Bereich / Yvonne Schade. Gutachter: Prof. Dr. Hartmut Schröder ; Prof. Dr. Stephan Breidenbach. Betreuer: Hartmut Schröder." Frankfurt (Oder) : Europa-Universität Viadrina Frankfurt, 2015. http://d-nb.info/1071060775/34.

Koppitz, David. "Využití rizikového a rozvojového kapitálu pro podporu začínajících inovativních podniků v ČR." Master's thesis, Vysoké učení technické v Brně. Fakulta podnikatelská, 2012. http://www.nusl.cz/ntk/nusl-223659.

Wang, Yung-Hsuan, and 王詠萱. "A Study on Qualifications of Angel Investors." Thesis, 2016. http://ndltd.ncl.edu.tw/handle/63240516932297278023.

Piazza, Alessandro. "Essays on Angel Investing in the Entrepreneurial Ecosystem." Thesis, 2018. https://doi.org/10.7916/D8CJ9WWS.

Escorrega, Rui Manuel Falcão Guerreiro. "The goals and the value business angels perceive from their investment activity." Doctoral thesis, 2021. http://hdl.handle.net/10773/31510.

Kuther, Sophia Katharina. "A proven formula to attract investors? : an empirical analysis on how the entrepreneurial pitch influences the decision-making of Angel Investors." Master's thesis, 2018. http://hdl.handle.net/10400.14/25543.

Vo, Dan H. "Essays on Entrepreneurial Finance." Thesis, 2013. http://hdl.handle.net/1828/5021.

Essalama, Ben. "The attractiveness of the on-demand economy for investors." Master's thesis, 2017. http://hdl.handle.net/10362/28420.

Marçal, Bernardo Miguel Camilo. "Business angels and accelerators : do they look for the same criteria when investing in early stage ventures?" Master's thesis, 2019. http://hdl.handle.net/10400.14/29261.

Chen, Ying-Chun, and 陳映君. "Analyze the General Residence Value by Investor Angle." Thesis, 2015. http://ndltd.ncl.edu.tw/handle/54448573270662933999.

Maxwell, Andrew Lewis. "Failing Fast: How And Why Business Angels Rapidly Reject Most Investment Opportunities." Thesis, 2009. http://hdl.handle.net/10012/4253.

Carneiro, Miguel Soares da Silva Soares. "Investors along the company life-cycle : evidence for Portugal." Master's thesis, 2016. http://hdl.handle.net/10400.14/21721.

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McKinsey Global Private Markets Review 2024: Private markets in a slower era

At a glance, macroeconomic challenges continued.

McKinsey Global Private Markets Review 2024: Private markets: A slower era

If 2022 was a tale of two halves, with robust fundraising and deal activity in the first six months followed by a slowdown in the second half, then 2023 might be considered a tale of one whole. Macroeconomic headwinds persisted throughout the year, with rising financing costs, and an uncertain growth outlook taking a toll on private markets. Full-year fundraising continued to decline from 2021’s lofty peak, weighed down by the “denominator effect” that persisted in part due to a less active deal market. Managers largely held onto assets to avoid selling in a lower-multiple environment, fueling an activity-dampening cycle in which distribution-starved limited partners (LPs) reined in new commitments.

About the authors

This article is a summary of a larger report, available as a PDF, that is a collaborative effort by Fredrik Dahlqvist , Alastair Green , Paul Maia, Alexandra Nee , David Quigley , Aditya Sanghvi , Connor Mangan, John Spivey, Rahel Schneider, and Brian Vickery , representing views from McKinsey’s Private Equity & Principal Investors Practice.

Performance in most private asset classes remained below historical averages for a second consecutive year. Decade-long tailwinds from low and falling interest rates and consistently expanding multiples seem to be things of the past. As private market managers look to boost performance in this new era of investing, a deeper focus on revenue growth and margin expansion will be needed now more than ever.

Perspectives on a slower era in private markets

Global fundraising contracted.

Fundraising fell 22 percent across private market asset classes globally to just over $1 trillion, as of year-end reported data—the lowest total since 2017. Fundraising in North America, a rare bright spot in 2022, declined in line with global totals, while in Europe, fundraising proved most resilient, falling just 3 percent. In Asia, fundraising fell precipitously and now sits 72 percent below the region’s 2018 peak.

Despite difficult fundraising conditions, headwinds did not affect all strategies or managers equally. Private equity (PE) buyout strategies posted their best fundraising year ever, and larger managers and vehicles also fared well, continuing the prior year’s trend toward greater fundraising concentration.

The numerator effect persisted

Despite a marked recovery in the denominator—the 1,000 largest US retirement funds grew 7 percent in the year ending September 2023, after falling 14 percent the prior year, for example 1 “U.S. retirement plans recover half of 2022 losses amid no-show recession,” Pensions and Investments , February 12, 2024. —many LPs remain overexposed to private markets relative to their target allocations. LPs started 2023 overweight: according to analysis from CEM Benchmarking, average allocations across PE, infrastructure, and real estate were at or above target allocations as of the beginning of the year. And the numerator grew throughout the year, as a lack of exits and rebounding valuations drove net asset values (NAVs) higher. While not all LPs strictly follow asset allocation targets, our analysis in partnership with global private markets firm StepStone Group suggests that an overallocation of just one percentage point can reduce planned commitments by as much as 10 to 12 percent per year for five years or more.

Despite these headwinds, recent surveys indicate that LPs remain broadly committed to private markets. In fact, the majority plan to maintain or increase allocations over the medium to long term.

Investors fled to known names and larger funds

Fundraising concentration reached its highest level in over a decade, as investors continued to shift new commitments in favor of the largest fund managers. The 25 most successful fundraisers collected 41 percent of aggregate commitments to closed-end funds (with the top five managers accounting for nearly half that total). Closed-end fundraising totals may understate the extent of concentration in the industry overall, as the largest managers also tend to be more successful in raising non-institutional capital.

While the largest funds grew even larger—the largest vehicles on record were raised in buyout, real estate, infrastructure, and private debt in 2023—smaller and newer funds struggled. Fewer than 1,700 funds of less than $1 billion were closed during the year, half as many as closed in 2022 and the fewest of any year since 2012. New manager formation also fell to the lowest level since 2012, with just 651 new firms launched in 2023.

Whether recent fundraising concentration and a spate of M&A activity signals the beginning of oft-rumored consolidation in the private markets remains uncertain, as a similar pattern developed in each of the last two fundraising downturns before giving way to renewed entrepreneurialism among general partners (GPs) and commitment diversification among LPs. Compared with how things played out in the last two downturns, perhaps this movie really is different, or perhaps we’re watching a trilogy reusing a familiar plotline.

Dry powder inventory spiked (again)

Private markets assets under management totaled $13.1 trillion as of June 30, 2023, and have grown nearly 20 percent per annum since 2018. Dry powder reserves—the amount of capital committed but not yet deployed—increased to $3.7 trillion, marking the ninth consecutive year of growth. Dry powder inventory—the amount of capital available to GPs expressed as a multiple of annual deployment—increased for the second consecutive year in PE, as new commitments continued to outpace deal activity. Inventory sat at 1.6 years in 2023, up markedly from the 0.9 years recorded at the end of 2021 but still within the historical range. NAV grew as well, largely driven by the reluctance of managers to exit positions and crystallize returns in a depressed multiple environment.

Private equity strategies diverged

Buyout and venture capital, the two largest PE sub-asset classes, charted wildly different courses over the past 18 months. Buyout notched its highest fundraising year ever in 2023, and its performance improved, with funds posting a (still paltry) 5 percent net internal rate of return through September 30. And although buyout deal volumes declined by 19 percent, 2023 was still the third-most-active year on record. In contrast, venture capital (VC) fundraising declined by nearly 60 percent, equaling its lowest total since 2015, and deal volume fell by 36 percent to the lowest level since 2019. VC funds returned –3 percent through September, posting negative returns for seven consecutive quarters. VC was the fastest-growing—as well as the highest-performing—PE strategy by a significant margin from 2010 to 2022, but investors appear to be reevaluating their approach in the current environment.

Private equity entry multiples contracted

PE buyout entry multiples declined by roughly one turn from 11.9 to 11.0 times EBITDA, slightly outpacing the decline in public market multiples (down from 12.1 to 11.3 times EBITDA), through the first nine months of 2023. For nearly a decade leading up to 2022, managers consistently sold assets into a higher-multiple environment than that in which they had bought those assets, providing a substantial performance tailwind for the industry. Nowhere has this been truer than in technology. After experiencing more than eight turns of multiple expansion from 2009 to 2021 (the most of any sector), technology multiples have declined by nearly three turns in the past two years, 50 percent more than in any other sector. Overall, roughly two-thirds of the total return for buyout deals that were entered in 2010 or later and exited in 2021 or before can be attributed to market multiple expansion and leverage. Now, with falling multiples and higher financing costs, revenue growth and margin expansion are taking center stage for GPs.

Real estate receded

Demand uncertainty, slowing rent growth, and elevated financing costs drove cap rates higher and made price discovery challenging, all of which weighed on deal volume, fundraising, and investment performance. Global closed-end fundraising declined 34 percent year over year, and funds returned −4 percent in the first nine months of the year, losing money for the first time since the 2007–08 global financial crisis. Capital shifted away from core and core-plus strategies as investors sought liquidity via redemptions in open-end vehicles, from which net outflows reached their highest level in at least two decades. Opportunistic strategies benefited from this shift, with investors focusing on capital appreciation over income generation in a market where alternative sources of yield have grown more attractive. Rising interest rates widened bid–ask spreads and impaired deal volume across food groups, including in what were formerly hot sectors: multifamily and industrial.

Private debt pays dividends

Debt again proved to be the most resilient private asset class against a turbulent market backdrop. Fundraising declined just 13 percent, largely driven by lower commitments to direct lending strategies, for which a slower PE deal environment has made capital deployment challenging. The asset class also posted the highest returns among all private asset classes through September 30. Many private debt securities are tied to floating rates, which enhance returns in a rising-rate environment. Thus far, managers appear to have successfully navigated the rising incidence of default and distress exhibited across the broader leveraged-lending market. Although direct lending deal volume declined from 2022, private lenders financed an all-time high 59 percent of leveraged buyout transactions last year and are now expanding into additional strategies to drive the next era of growth.

Infrastructure took a detour

After several years of robust growth and strong performance, infrastructure and natural resources fundraising declined by 53 percent to the lowest total since 2013. Supply-side timing is partially to blame: five of the seven largest infrastructure managers closed a flagship vehicle in 2021 or 2022, and none of those five held a final close last year. As in real estate, investors shied away from core and core-plus investments in a higher-yield environment. Yet there are reasons to believe infrastructure’s growth will bounce back. Limited partners (LPs) surveyed by McKinsey remain bullish on their deployment to the asset class, and at least a dozen vehicles targeting more than $10 billion were actively fundraising as of the end of 2023. Multiple recent acquisitions of large infrastructure GPs by global multi-asset-class managers also indicate marketwide conviction in the asset class’s potential.

Private markets still have work to do on diversity

Private markets firms are slowly improving their representation of females (up two percentage points over the prior year) and ethnic and racial minorities (up one percentage point). On some diversity metrics, including entry-level representation of women, private markets now compare favorably with corporate America. Yet broad-based parity remains elusive and too slow in the making. Ethnic, racial, and gender imbalances are particularly stark across more influential investing roles and senior positions. In fact, McKinsey’s research  reveals that at the current pace, it would take several decades for private markets firms to reach gender parity at senior levels. Increasing representation across all levels will require managers to take fresh approaches to hiring, retention, and promotion.

Artificial intelligence generating excitement

The transformative potential of generative AI was perhaps 2023’s hottest topic (beyond Taylor Swift). Private markets players are excited about the potential for the technology to optimize their approach to thesis generation, deal sourcing, investment due diligence, and portfolio performance, among other areas. While the technology is still nascent and few GPs can boast scaled implementations, pilot programs are already in flight across the industry, particularly within portfolio companies. Adoption seems nearly certain to accelerate throughout 2024.

Private markets in a slower era

If private markets investors entered 2023 hoping for a return to the heady days of 2021, they likely left the year disappointed. Many of the headwinds that emerged in the latter half of 2022 persisted throughout the year, pressuring fundraising, dealmaking, and performance. Inflation moderated somewhat over the course of the year but remained stubbornly elevated by recent historical standards. Interest rates started high and rose higher, increasing the cost of financing. A reinvigorated public equity market recovered most of 2022’s losses but did little to resolve the valuation uncertainty private market investors have faced for the past 18 months.

Within private markets, the denominator effect remained in play, despite the public market recovery, as the numerator continued to expand. An activity-dampening cycle emerged: higher cost of capital and lower multiples limited the ability or willingness of general partners (GPs) to exit positions; fewer exits, coupled with continuing capital calls, pushed LP allocations higher, thereby limiting their ability or willingness to make new commitments. These conditions weighed on managers’ ability to fundraise. Based on data reported as of year-end 2023, private markets fundraising fell 22 percent from the prior year to just over $1 trillion, the largest such drop since 2009 (Exhibit 1).

The impact of the fundraising environment was not felt equally among GPs. Continuing a trend that emerged in 2022, and consistent with prior downturns in fundraising, LPs favored larger vehicles and the scaled GPs that typically manage them. Smaller and newer managers struggled, and the number of sub–$1 billion vehicles and new firm launches each declined to its lowest level in more than a decade.

Despite the decline in fundraising, private markets assets under management (AUM) continued to grow, increasing 12 percent to $13.1 trillion as of June 30, 2023. 2023 fundraising was still the sixth-highest annual haul on record, pushing dry powder higher, while the slowdown in deal making limited distributions.

Investment performance across private market asset classes fell short of historical averages. Private equity (PE) got back in the black but generated the lowest annual performance in the past 15 years, excluding 2022. Closed-end real estate produced negative returns for the first time since 2009, as capitalization (cap) rates expanded across sectors and rent growth dissipated in formerly hot sectors, including multifamily and industrial. The performance of infrastructure funds was less than half of its long-term average and even further below the double-digit returns generated in 2021 and 2022. Private debt was the standout performer (if there was one), outperforming all other private asset classes and illustrating the asset class’s countercyclical appeal.

Private equity down but not out

Higher financing costs, lower multiples, and an uncertain macroeconomic environment created a challenging backdrop for private equity managers in 2023. Fundraising declined for the second year in a row, falling 15 percent to $649 billion, as LPs grappled with the denominator effect and a slowdown in distributions. Managers were on the fundraising trail longer to raise this capital: funds that closed in 2023 were open for a record-high average of 20.1 months, notably longer than 18.7 months in 2022 and 14.1 months in 2018. VC and growth equity strategies led the decline, dropping to their lowest level of cumulative capital raised since 2015. Fundraising in Asia fell for the fourth year of the last five, with the greatest decline in China.

Despite the difficult fundraising context, a subset of strategies and managers prevailed. Buyout managers collectively had their best fundraising year on record, raising more than $400 billion. Fundraising in Europe surged by more than 50 percent, resulting in the region’s biggest haul ever. The largest managers raised an outsized share of the total for a second consecutive year, making 2023 the most concentrated fundraising year of the last decade (Exhibit 2).

Despite the drop in aggregate fundraising, PE assets under management increased 8 percent to $8.2 trillion. Only a small part of this growth was performance driven: PE funds produced a net IRR of just 2.5 percent through September 30, 2023. Buyouts and growth equity generated positive returns, while VC lost money. PE performance, dating back to the beginning of 2022, remains negative, highlighting the difficulty of generating attractive investment returns in a higher interest rate and lower multiple environment. As PE managers devise value creation strategies to improve performance, their focus includes ensuring operating efficiency and profitability of their portfolio companies.

Deal activity volume and count fell sharply, by 21 percent and 24 percent, respectively, which continued the slower pace set in the second half of 2022. Sponsors largely opted to hold assets longer rather than lock in underwhelming returns. While higher financing costs and valuation mismatches weighed on overall deal activity, certain types of M&A gained share. Add-on deals, for example, accounted for a record 46 percent of total buyout deal volume last year.

Real estate recedes

For real estate, 2023 was a year of transition, characterized by a litany of new and familiar challenges. Pandemic-driven demand issues continued, while elevated financing costs, expanding cap rates, and valuation uncertainty weighed on commercial real estate deal volumes, fundraising, and investment performance.

Managers faced one of the toughest fundraising environments in many years. Global closed-end fundraising declined 34 percent to $125 billion. While fundraising challenges were widespread, they were not ubiquitous across strategies. Dollars continued to shift to large, multi-asset class platforms, with the top five managers accounting for 37 percent of aggregate closed-end real estate fundraising. In April, the largest real estate fund ever raised closed on a record $30 billion.

Capital shifted away from core and core-plus strategies as investors sought liquidity through redemptions in open-end vehicles and reduced gross contributions to the lowest level since 2009. Opportunistic strategies benefited from this shift, as investors turned their attention toward capital appreciation over income generation in a market where alternative sources of yield have grown more attractive.

In the United States, for instance, open-end funds, as represented by the National Council of Real Estate Investment Fiduciaries Fund Index—Open-End Equity (NFI-OE), recorded $13 billion in net outflows in 2023, reversing the trend of positive net inflows throughout the 2010s. The negative flows mainly reflected $9 billion in core outflows, with core-plus funds accounting for the remaining outflows, which reversed a 20-year run of net inflows.

As a result, the NAV in US open-end funds fell roughly 16 percent year over year. Meanwhile, global assets under management in closed-end funds reached a new peak of $1.7 trillion as of June 2023, growing 14 percent between June 2022 and June 2023.

Real estate underperformed historical averages in 2023, as previously high-performing multifamily and industrial sectors joined office in producing negative returns caused by slowing demand growth and cap rate expansion. Closed-end funds generated a pooled net IRR of −3.5 percent in the first nine months of 2023, losing money for the first time since the global financial crisis. The lone bright spot among major sectors was hospitality, which—thanks to a rush of postpandemic travel—returned 10.3 percent in 2023. 2 Based on NCREIFs NPI index. Hotels represent 1 percent of total properties in the index. As a whole, the average pooled lifetime net IRRs for closed-end real estate funds from 2011–20 vintages remained around historical levels (9.8 percent).

Global deal volume declined 47 percent in 2023 to reach a ten-year low of $650 billion, driven by widening bid–ask spreads amid valuation uncertainty and higher costs of financing (Exhibit 3). 3 CBRE, Real Capital Analytics Deal flow in the office sector remained depressed, partly as a result of continued uncertainty in the demand for space in a hybrid working world.

During a turbulent year for private markets, private debt was a relative bright spot, topping private markets asset classes in terms of fundraising growth, AUM growth, and performance.

Fundraising for private debt declined just 13 percent year over year, nearly ten percentage points less than the private markets overall. Despite the decline in fundraising, AUM surged 27 percent to $1.7 trillion. And private debt posted the highest investment returns of any private asset class through the first three quarters of 2023.

Private debt’s risk/return characteristics are well suited to the current environment. With interest rates at their highest in more than a decade, current yields in the asset class have grown more attractive on both an absolute and relative basis, particularly if higher rates sustain and put downward pressure on equity returns (Exhibit 4). The built-in security derived from debt’s privileged position in the capital structure, moreover, appeals to investors that are wary of market volatility and valuation uncertainty.

Direct lending continued to be the largest strategy in 2023, with fundraising for the mostly-senior-debt strategy accounting for almost half of the asset class’s total haul (despite declining from the previous year). Separately, mezzanine debt fundraising hit a new high, thanks to the closings of three of the largest funds ever raised in the strategy.

Over the longer term, growth in private debt has largely been driven by institutional investors rotating out of traditional fixed income in favor of private alternatives. Despite this growth in commitments, LPs remain underweight in this asset class relative to their targets. In fact, the allocation gap has only grown wider in recent years, a sharp contrast to other private asset classes, for which LPs’ current allocations exceed their targets on average. According to data from CEM Benchmarking, the private debt allocation gap now stands at 1.4 percent, which means that, in aggregate, investors must commit hundreds of billions in net new capital to the asset class just to reach current targets.

Private debt was not completely immune to the macroeconomic conditions last year, however. Fundraising declined for the second consecutive year and now sits 23 percent below 2021’s peak. Furthermore, though private lenders took share in 2023 from other capital sources, overall deal volumes also declined for the second year in a row. The drop was largely driven by a less active PE deal environment: private debt is predominantly used to finance PE-backed companies, though managers are increasingly diversifying their origination capabilities to include a broad new range of companies and asset types.

Infrastructure and natural resources take a detour

For infrastructure and natural resources fundraising, 2023 was an exceptionally challenging year. Aggregate capital raised declined 53 percent year over year to $82 billion, the lowest annual total since 2013. The size of the drop is particularly surprising in light of infrastructure’s recent momentum. The asset class had set fundraising records in four of the previous five years, and infrastructure is often considered an attractive investment in uncertain markets.

While there is little doubt that the broader fundraising headwinds discussed elsewhere in this report affected infrastructure and natural resources fundraising last year, dynamics specific to the asset class were at play as well. One issue was supply-side timing: nine of the ten largest infrastructure GPs did not close a flagship fund in 2023. Second was the migration of investor dollars away from core and core-plus investments, which have historically accounted for the bulk of infrastructure fundraising, in a higher rate environment.

The asset class had some notable bright spots last year. Fundraising for higher-returning opportunistic strategies more than doubled the prior year’s total (Exhibit 5). AUM grew 18 percent, reaching a new high of $1.5 trillion. Infrastructure funds returned a net IRR of 3.4 percent in 2023; this was below historical averages but still the second-best return among private asset classes. And as was the case in other asset classes, investors concentrated commitments in larger funds and managers in 2023, including in the largest infrastructure fund ever raised.

The outlook for the asset class, moreover, remains positive. Funds targeting a record amount of capital were in the market at year-end, providing a robust foundation for fundraising in 2024 and 2025. A recent spate of infrastructure GP acquisitions signal multi-asset managers’ long-term conviction in the asset class, despite short-term headwinds. Global megatrends like decarbonization and digitization, as well as revolutions in energy and mobility, have spurred new infrastructure investment opportunities around the world, particularly for value-oriented investors that are willing to take on more risk.

Private markets make measured progress in DEI

Diversity, equity, and inclusion (DEI) has become an important part of the fundraising, talent, and investing landscape for private market participants. Encouragingly, incremental progress has been made in recent years, including more diverse talent being brought to entry-level positions, investing roles, and investment committees. The scope of DEI metrics provided to institutional investors during fundraising has also increased in recent years: more than half of PE firms now provide data across investing teams, portfolio company boards, and portfolio company management (versus investment team data only). 4 “ The state of diversity in global private markets: 2023 ,” McKinsey, August 22, 2023.

In 2023, McKinsey surveyed 66 global private markets firms that collectively employ more than 60,000 people for the second annual State of diversity in global private markets report. 5 “ The state of diversity in global private markets: 2023 ,” McKinsey, August 22, 2023. The research offers insight into the representation of women and ethnic and racial minorities in private investing as of year-end 2022. In this chapter, we discuss where the numbers stand and how firms can bring a more diverse set of perspectives to the table.

The statistics indicate signs of modest advancement. Overall representation of women in private markets increased two percentage points to 35 percent, and ethnic and racial minorities increased one percentage point to 30 percent (Exhibit 6). Entry-level positions have nearly reached gender parity, with female representation at 48 percent. The share of women holding C-suite roles globally increased 3 percentage points, while the share of people from ethnic and racial minorities in investment committees increased 9 percentage points. There is growing evidence that external hiring is gradually helping close the diversity gap, especially at senior levels. For example, 33 percent of external hires at the managing director level were ethnic or racial minorities, higher than their existing representation level (19 percent).

Yet, the scope of the challenge remains substantial. Women and minorities continue to be underrepresented in senior positions and investing roles. They also experience uneven rates of progress due to lower promotion and higher attrition rates, particularly at smaller firms. Firms are also navigating an increasingly polarized workplace today, with additional scrutiny and a growing number of lawsuits against corporate diversity and inclusion programs, particularly in the US, which threatens to impact the industry’s pace of progress.

Fredrik Dahlqvist is a senior partner in McKinsey’s Stockholm office; Alastair Green  is a senior partner in the Washington, DC, office, where Paul Maia and Alexandra Nee  are partners; David Quigley  is a senior partner in the New York office, where Connor Mangan is an associate partner and Aditya Sanghvi  is a senior partner; Rahel Schneider is an associate partner in the Bay Area office; John Spivey is a partner in the Charlotte office; and Brian Vickery  is a partner in the Boston office.

The authors wish to thank Jonathan Christy, Louis Dufau, Vaibhav Gujral, Graham Healy-Day, Laura Johnson, Ryan Luby, Tripp Norton, Alastair Rami, Henri Torbey, and Alex Wolkomir for their contributions

The authors would also like to thank CEM Benchmarking and the StepStone Group for their partnership in this year's report.

This article was edited by Arshiya Khullar, an editor in the Gurugram office.

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Why you should say goodbye to buffett's latest investment.

Insurance stocks may not capture a lot of attention, but they will definitely make headlines when Warren Buffett invests in one. That's what happened when it was revealed Buffett took a $6.7 billion stake in insurance company Chubb ( CB ). In the latest edition of Good Buy or Goodbye , Barron's Associate Editor Al Root makes the case for skipping Chubb and investing in a different insurance stock instead.

Root says American International Group, better known as AIG , is worth consideration. There are a few reasons why. First, it has an attractive valuation, he says. Root also argues the business's fundamentals are improving and that CEO Peter Zaffino is in a "sweet spot" given where he is in his tenure at the company.

Root is less enthusiastic about Chubb. The stock isn't cheap following the "Buffett bump," he says, also noting that Buffett operates on a different time horizon than most. He also argues there isn't a lot of expected profit improvement. What could change his thesis on Chubb? The company's execution is better than expected, causing profit to grow or it gets bought by Buffett's Berkshire Hathaway ( BRK-B , BRK-A ).

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Stephanie Mikulich.

Video Transcript

It's a big, noisy, universal stocks out there.

Welcome to goodbye or goodbye.

To help cut through that noise to navigate the best moves for your portfolio.

Today we're dialling in on the narrative divergence of two property and casualty insurers, joining me here to discuss bar and senior writer I out.

Good to see you.

Thanks for being here.

So let's get to the stock you like, first of all in this property and casualty universe and it's a IG an international group.

So let's go through why you like it.

The stocks done pretty well over the past year, but despite that, you say it still looks cheap on a PE basis.

Yeah, a couple of things.

One is, uh, performance is improving.

So on 2025 numbers, it's trading at about seven times uh, operating profit, which is a very attractive level relative to the group.

It's also trading for about 1.2 times book value, also relatively attractive to the group.

All of these are are good things if you're looking for a good buy and this at a time when we are seeing some of the underlying profit metrics improve, yeah, Now we're gonna do the, uh, we'll we'll unveil its challenger in a second here.

But, uh, the overall trends for property and casualty insurance, right?

Insuring you and me and all of our stuff, they're fairly, uh, positive.

Um uh, profitability improving return on equity is improving.

Um, rates are going up.

We all know we're paying more for our insurance.

That's that tends to benefit these players.

And I still think to a certain extent, people when we were just talking lump a IG they have this flashback to the great financial crisis.

It's a totally different, uh, company with different leadership.

And it's really poised.

I think, to, uh, start to close the gap, uh, versus some of the leaders, which we'll talk about.

I mean effectively.

It's back to being a boring old insurance business, which, sometimes as we learn from the financial crisis, is not a bad thing.

Right, that you're not in these complex financial instruments.

You alluded to the leadership here.

Peter Zaffino took over a couple of years ago.

And you think he's in a good place.

We It's interesting, right?

Value investors and investors all the time like to go to the management transition.

Oh, what's the and?

And we sort of jump right in.

But actually, the data shows that about two years in is a really good time to sort of revisit, uh, management cha changes.

Takes about a year to, uh, get all the people you want at the first level of management another year to implement all of your processes and lay out your vision to everybody else.

Uh, Zaffino has been there for a couple of years.

He sold, uh, some of the life insurance business in the UK.

He's exited the reinsurance business and it, you know, based on that theory, uh, it's it's really good time.

Um, we're chatting with Bill Nygren of Oakmark Funds and he is a big fan of Z zaffino and, uh, thinks that right now is a good time for, uh, him and we, you know, see his vision and expanding profitability in the next couple of years.

Interesting.

OK, so what could go wrong here?

Big picture economic risks.

Well, big picture.

It's an insurer, and it's a financial.

So, uh, you know, Jamie Dimond retiring, Could knock, can knock, uh, multiple for all financial stocks down as we see today, however, it pretty much is, uh, a PNC cycle issue.

So I don't see to put it this way.

I don't see the big risk being execution, right?

You know, looking back over the last 16 quarters just before a new CEO got there, they haven't missed estimates.

It's become a much more leaner, stable business.

So it's much more about the PNC cycle turning right now.

Things are fine, but, uh, you know, if if, uh, curves get inverted and things like that happen, it'll it'll it'll knock this one down.

Quick question for you on the phenomenon we've seen of insurers pulling out of certain states or certain regions that they are finding more difficult to insure.

Is that something that affects a IG?

This is much more traditional, uh, property and personal lines business.

So, um, to the extent that you're just insuring your house or you're just insuring, uh, contents and things like that, it's It's not as big a deal.

Reinsurers these are.

These are questions for the Warren Buffetts of the world more than a IG in these days.

All right, so speaking of Warren Buffett, let's move to the stock that you don't like as much because it's one that Warren likes, which is surprising.

So it's chub.

The stock obviously got a big leg up after it was revealed that this was one he was investing in.

But it's near all time highs.

Now, this is the problem.

We, uh, love to, uh, follow Warren.

We love his investment logic and reasoning.

The problem is, he was buying this much lower.

The the Buffett bump sent it to all time highs.

Uh, it has a pristine track record.

Um, but the bottom line is, there's less.

I am a big fan of the rate of improvement.

There's sort of no improvement.

It's already a top insurer, as evidenced by Warren's By so Wall Street doesn't expect much operating improvement over the next, uh, two years in terms of, uh, profit margins and absolute, uh, dollar of of profit generated.

So that leaves it trading at about, uh, 12 times operating profit on 25 numbers versus that seven times we have for a IG, uh, Evan Greenberg.

He's great.

He's a legend.

It's already has, you know, 20% 21% return on equity.

You don't see that improving much from here.

So that whole combination says Warren knows what he's doing, but I'll avoid it.

Yeah, and so kind of what you were saying.

No, I mean, they've already gotten that profit.

They've already squeezed the profit out of the business is what you're saying.

Yeah, and it's the same sort of trends, right?

The PNC business is performing well, and you know, they're beating estimate and doing things like this.

It's just a question of, um how much do you want to pay for it?

If you just look at Wall Street target prices, which I, which I like to do just as a as a guide.

You know, Buffett's bump took it to beyond where analysts the average target price was a two was 270.

The stock was trading at 274.

So it's sort of, you know, all of the good news got reflected.

You know, the reverse is true.

You know, there's still some upside based on price targets for a IG.

So, uh, while I to venerate Warren, I'm gonna throw that one over the top.

And one more thing to consider.

You talked about that?

He was buying lower than when he revealed it.

Obviously, the other thing is he's probably gonna hold it longer than most people do.

Yeah, Now I come from barons, right?

And we tend to do things our stock picks on a one year, uh, basis, right?

One or two years is our typical time horizon.

And and I think that I think Warren will be happy owning this for a decade or 20 years, and he'll revisit it, Um or, you know, whoever it will be, Berkshire behi will revisit it in 10 years, and and they have a longer term time horizon.

They're folding it into their other insurance operations and looking for synergies.

I just think that the outlook for I over the next 12 to 24 months is much stronger.

All right, let's talk about what could go right for Chubb, though that would make you know that would make it do better.

It's just that it does better than expected.

It's always, uh, an execution story, right To some extent, I'm saying that a I can can catch Chubb, but, you know, strong execution from Chubb and smart moves from Mr Greenberg will continue to help that.

What are the chances Berkshire would outright buy a chub?

We That that's the risk, right?

So I'm saying throw it over.

Uh, you know, our Andrew Berry predicted.

Well, maybe, you know, Warren is interested in it.

Maybe he could pay 3.

He was doing some math.

That's about 20% above recent levels.

So the risk is Berkshire says, You know what?

I'm going to take over the whole thing.

That hasn't happened in a while.

There's no guarantee he owns about 6% now.

That was what was disclosed that sent that stock up so much.

So I can't tell you it won't happen.

But, uh, the the biggest risk would be that he does something that he does something like that.

Hopefully that would revalue the entire sector.

And a I would get a bump.

But that's that's a bit of wishful thinking.

Yes, well, OK, let's summarise what we're telling people.

By the way, we wanna remind folks, um, any of the people who come to talk with us from barons do not own the underlying stocks we do not talk about.

And neither do we, for that matter.

If you don't know that here at Young Finance, it's a policy among most journalists.

In fact, let's tell people what Al, let's sum up what Al is saying here by American International Group.

It's cheaper than Chubb.

Business is improving.

It's at that point where it's in a place to outperform the CEO S in a sort of sweet spot on the other side, you say, Avoid chub.

It has now become expensive after Warren Buffett pushed the stock to all time highs.

And there's not much more upside in the next 12 months, either in the stock price or maybe much more profit improvement.

Thanks so much for being here.

And thank you so much for watching goodbye or goodbye.

We will be bringing you new episodes three times a week at 3:30 p.m. Eastern

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