how to build an investment thesis

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What Is an Investment Thesis?

• Understanding the Thesis

Special Considerations

• What's Included?

The Bottom Line

• Portfolio Management

Investment Thesis: An Argument in Support of Investing Decisions

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

The term investment thesis refers to a reasoned argument for a particular investment strategy, backed up by research and analysis. Investment theses are commonly prepared by (and for) individual investors and businesses. These formal written documents may be prepared by analysts or other financial professionals for presentation to their clients.

Key Takeaways

• An investment thesis is a written document that recommends a new investment, based on research and analysis of its potential for profit.
• Individual investors can use this technique to investigate and select investments that meet their goals.
• Financial professionals use the investment thesis to pitch their ideas.

Understanding the Investment Thesis

As noted above, an investment thesis is a written document that provides information about a potential investment. It is a research- and analysis-based proposal that is usually drafted by an investment or financial professional to provide insight into investments and to pitch investment ideas. In some cases, the investor will draft their own investment thesis, as is the case with venture capitalists and private equity firms.

This thesis can be used as a strategic decision-making tool. Investors and companies can use a thesis to decide whether or not to pursue a particular investment, such as a stock or acquiring another company. Or it can be used as a way to look back and analyze why a particular decision was made in the first place—and whether it was the right one. Putting things in writing can have a huge impact on the direction of a potential investment.

Let's say an investor purchases a stock based on the investment thesis that the stock is undervalued . The thesis states that the investor plans to hold the stock for three years, during which its price will rise to reflect its true worth. At that point, the stock will be sold at a profit. A year later, the stock market crashes, and the investor's pick crashes with it. The investor recalls the investment thesis, relies on the integrity of its conclusions, and continues to hold the stock.

That is a sound strategy unless some event that is totally unexpected and entirely absent from the investment thesis occurs. Examples of these might include the 2007-2008 financial crisis or the Brexit vote that forced the United Kingdom out of the European Union (EU) in 2016. These were highly unexpected events, and they might affect someone's investment thesis.

If you think your investment thesis holds up, stick with it through thick and thin.

An investment thesis is generally formally documented, but there are no universal standards for the contents. Some require fast action and are not elaborate compositions. When a thesis concerns a big trend, such as a global macro perspective, the investment thesis may be well documented and might even include a fair amount of promotional materials for presentation to potential investing partners.

Portfolio management is now a science-based discipline, not unlike engineering or medicine. As in those fields, breakthroughs in basic theory, technology, and market structures continuously translate into improvements in products and in professional practices. The investment thesis has been strengthened with qualitative and quantitative methods that are now widely accepted.

As with any thesis, an idea may surface but it is methodical research that takes it from an abstract concept to a recommendation for action. In the world of investments, the thesis serves as a game plan.

What's Included in an Investment Thesis?

Although there's no industry standard, there are usually some common components to this document. Remember, an investment thesis is generally a proposal that is based on research and analysis. As such, it is meant to be a guide about the viability of a particular investment.

Most investment theses include (but aren't limited to) the following information:

• The investment in question
• The investment goal(s)
• Viability of the investment, including any trends that support the investment
• Potential downsides and risks that may be associated with the investment
• Costs and potential returns as well as any losses that may result

Some theses also try to answer some key questions, including:

• Does the investment align with the intended goal(s)?
• What could go wrong?
• What do the financial statements say?
• What is the growth potential of this investment?

Putting everything in writing can help investors make more informed decisions. For instance, a company's management team can use a thesis to decide whether or not to pursue the acquisition of a rival. The thesis may highlight whether the target's vision aligns with the acquirer or it may identify opportunities for growth in the market.

Keep in mind that the complexity of an investment thesis depends on the type of investor involved and the nature of the investment. So the investment thesis for a corporation looking to acquire a rival may be more in-depth and complicated compared to that of an individual investor who wants to develop an investment portfolio.

Examples of an Investment Thesis

Portfolio managers and investment companies often post information about their investment theses on their websites. The following are just two examples.

Morgan Stanley

Morgan Stanley ( MS ) is one of the world's leading financial services firms. It offers investment management services, investment banking, securities, and wealth management services. According to the company, it has five steps that make up its investment process, including idea generation, quality assessment, valuation, risk management , and portfolio construction.

When it comes to developing its investment thesis, the company tries to answer three questions as part of its quality assessment step:

• "Is the company a disruptor or is it insulated from disruptive change? 
• Does the company demonstrate financial strength with high returns on invested capital, high margins, strong cash conversion, low capital intensity and low leverage? 
• Are there environmental or social externalities not borne by the company, or governance and accounting risks that may alter the investment thesis?"

Connetic Ventures

Connetic Adventures is a venture capital firm that invests in early-stage companies. The company uses data to develop its investment thesis, which is made up of three pillars. According to its blog, there were three pillars or principles that contributed to Connetic's venture capital investment strategy. These included diversification, value, and follow-on—each of which comes with a pro and con.

Why Is an Investment Thesis Important?

An investment thesis is a written proposal or research-based analysis of why investors or companies should pursue an investment. In some cases, it may also serve as a historical guide as to whether the investment was a good move or not. Whatever the reason, an investment thesis allows investors to make better, more informed decisions about whether to put their money into a specific investment. This written document provides insight into what the investment is, the goals of the investment, any associated costs, the potential for returns, as well as any possible risks and losses that may result.

Who Should Have an Investment Thesis?

An investment thesis is important for anyone who wants to invest their money. Individual investors can use a thesis to decide whether to purchase stock in a particular company and what strategy they should use, whether it's a buy-and-hold strategy or one where they only have the stock for a short period of time. A company can craft its own investment thesis to help weigh out whether an acquisition or growth strategy is worthwhile.

How Do You Create an Investment Thesis?

It's important to put your investment thesis in writing. Seeing your proposal in print can help you make a better decision. When you're writing your investment thesis, be sure to be clear and concise. Make sure you do your research and include any facts and figures that can help you make your decision. Be sure to include your goals, the potential for upside, and any risks that you may come across. Try to ask and answer some key questions, including whether the investment meets your investment goals and what could go wrong if you go ahead with the deal.

It's always important to have a plan, especially when it comes to investing. After all, you are putting your money at risk. Having an investment thesis can help you make more informed decisions about whether a potential investment is worth your while. Make sure you put your thesis in writing and answer some key questions about your goals, costs, and potential outcomes. Having a concrete proposal in place can spell the difference between earning returns and losing all your money. And that's if your thesis supports the investment in the first place.

Harvard Business School. " Writing a Credible Investment Thesis ."

Lanturn. " What is an Investment Thesis and 3 Tips to Make One ."

Morgan Stanley. " Global Opportunity ."

Medium. " The Data That Built Our Fund's Investment Thesis ."

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The Impact Investor | ESG Investing Blog

Investing for financial return is only part of the equation.

How to Create an Investment Thesis [Step-By-Step Guide]

Updated on June 13, 2023

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One of the worst mistakes an investor can make is to sink their money into an investment without knowing why. While this may seem like the world’s most obvious mistake to avoid, it happens every day. Look no further than the stock market for plenty of examples of misguided optimism gone terribly wrong.

That’s where the idea of an investment thesis comes in. An investment thesis is a common tool used by venture capital investors and hedge funds as part of their investment strategy.

Most funds also use it on a regular basis to size up potential candidates during buy-side job interviews. But you don’t have to work at a venture capital fund or private equity firm to reap the benefits of creating an investment thesis of your own.

Table of Contents

What Is an Investment Thesis?

Materials needed to create a thesis for your investment strategy, a step-by-step guide to creating a solid investment thesis, step 1: start with the essentials, step 2: analyze the current market, step 3: analyze the company’s sector, step 4: analyze the company’s position within its sector, step 5: identify the catalyst, step 6: solidify your thesis with analysis, free tools to help strengthen your investment strategy.

An investment thesis is simply an argument for why you should make a specific investment. Whether it be a stock market investment or private equity, investment theses are all about creating a solid argument for why a certain acquisition is a good idea based on strategic planning and research.

While it takes a little more work upfront, a clear investment thesis can be a valuable tool for any investor. Not only does it ensure that you fully understand why you’re choosing to put your hard-earned money into certain stocks or other assets, but it can also help you develop a long-term plan.

Should an investment idea not go as planned, you can always go back to your investment thesis to see if it still holds the potential to work out. By considering all the information your thesis contains, you’ll have a much better idea of whether it’s best to cut your losses and sell, continue holding, or even add to your position.

An investment thesis includes everything you need to create a solid game plan, making it a foundational part of any stock pitch.

See Related : Best Socially Responsible Stocks To Invest In Today

One of the benefits of an investment thesis is that it can be as complex or as simple as you like. If you actually work at a venture capital firm , then you may want to develop a full-on venture capital investment thesis. But if you’re a retail investor just looking to solidify your investment strategy, then your thesis may be much more straightforward.

If you’re an individual investor, then all you really need to create an investment thesis is somewhere to write it out. Whether it be in a Google or Word doc or on a piece of paper, just make sure you have a place to record your thesis so that you can consult it down the line.

If you’re developing a venture capital investment thesis that you plan to present to an investment committee or potential employers, then there are plenty of great tools online that can help. Slideteam has thousands of templates that can help you create a killer investment thesis , as well as full-on stock pitch templates.

As mentioned earlier, an investment thesis holds the potential to help you plot out a strategy for pretty much any acquisition. But for the sake of simplicity, we’ll assume throughout the examples in the following steps that you’re an investor interested in going long on a stock that you plan to hold for at least a few months or years.

Venture capitalists looking to invest in companies or startups can also apply the same principles to other investment goals. Investors who are looking to short a certain stock should also be able to use these techniques to locate potential investments. The main difference, of course, is that you’ll be looking for bad news instead of good.

First things first. Before you get into doing the research that goes into an investment thesis or stock pitch, make sure you take the time to write out the basics. At the top of the page, include things like:

• The name of the company and its ticker symbol
• Today’s date
• How many shares of the company you already own, if any
• The current cost average for any shares you may already hold
• Whether the stock pays dividends and, if so, how often. You may also want to include the current ex-dividend and dividend payment dates.
• A brief summary of the company and what it does

See Related : How to Start Investing With Purpose

Now it’s time to take a look at the entire market and the direction it’s headed. Why? As Investors Business Daily points out,

“History shows 3 out of 4 stocks move in the same direction as the overall market, either up or down. So if you buy stocks when the market is trending higher, you have a 75% chance of being right. But if you buy when the market is trending lower, you have a 75% chance of being wrong.”

While the overall market direction is definitely an important factor to keep in mind, what you choose to do with this information will largely come down to your individual investing style. Investors Business Daily founder William O’Neil advised investors only to jump into the market when it was trending up.

Another approach, however, is known as contrarian investing, which revolves around going against market trends. Warren Buffett summed up the idea behind this strategy with his famous quote, “Be fearful when others are greedy, and greedy when others are fearful.” Or as Baron Rothschild more graphically put it, “Buy when there is blood in the streets, even if the blood is your own.”

Most investors who are looking for a faster return will likely be better off waiting to strike until the iron is hot. If you align more with the long-term contrarian philosophy, however, bleak macroeconomic outlooks may actually strike you as an ideal investment opportunity .

See Related: How to Invest in Private Equity: A Step-by-Step

Now that you’ve got a look at the overall market, it’s time to take a look at the sector your company fits into. The Global Industry Classification Standard (GICS) breaks down the entire market into 11 sectors. If you want to get even more specific, you can further break down companies into the GICS’s 24 industry groups, 69 industries, and 158 sub-industries.

Once you identify which group your company belongs to, you’ll then want to take a look at that sector’s performance. Fidelity provides a handy breakdown of the performance of various sectors over different time periods.

But why does it matter? Two reasons.

• Identifying which sectors various companies belong to can help you ensure that your portfolio is properly diversified
• The reason that sector ETFs tend to be so popular is that when a sector is trending, many of the stocks within that sector tend to move in unison. The reverse is also true. When a certain industry is lagging, the individual stock prices of the companies in that industry may be affected negatively. While this is not always the case, it’s a general rule of thumb to keep in mind.

The idea behind working sectors into your investment criteria is to give you an overview of what type of investment you’re about to make. If you’re a momentum trader, then you may want to shoot for companies within the strongest-performing sectors this year or even over the past few months.

If you’re a value investor, however, you may be more open to sectors that have historically experienced high growth, even if they are currently suffering due to the overall state of the economy. Some speculative investors may even be interested in an innovative industry with strong potential growth possibilities, even if its time has not yet come.

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If you want to up your odds of success even more, then you’ll want to compare the company you’re interested in against the performance of similar companies in the same industry.

These are the companies that tend to get the most attention from large, institutional investors who are in a position to significantly increase their market value. Institutional investors tend to have a huge amount of money in play and are far less likely to invest in a company without a proven track record.

When choosing an investment, they’ll almost always go with a global leader over a new business, regardless of its promise. However, they also consider intrinsic value, which considers how much a company’s stock is selling for now, as opposed to how much revenue the company stands to earn in the future. In other words, institutional investors are looking for companies that are stable enough to avoid surprises but that also stand to generate considerable capital in the future.

Why work this into your game plan? Because even if you don’t have millions of dollars to invest in a company, there may be hedge funds or venture capital firms out there that do. When these guys make an investment, it tends to be a big one that can actually move a company’s share price upward. Why not ride their coattails and enjoy a solid growth rate as they invest more money over time into proven winners?

That’s why it’s important to make sure that you see how a company stacks up against its closest competitors. If it’s an industry-leading business with a large market share, it’s likely to be a strong contender with solid fundamentals. If not, you may end up discovering competing companies that make sense to consider instead.

See Related : What is a Triple Bottom Line? Definition & Examples

At this point, hopefully, you’ve identified the best stock in the best sector based on your ideal investing style. Now it’s time to find out exactly why it deserves to become a part of your portfolio and for how long.

If a company has been experiencing impressive growth, then there’s bound to be a reason why.

• Is the company experiencing a major influx of business because it’s currently a leader in the hottest sector of the moment? Or is it a “good house in a bad neighborhood” that’s moving independently of the other stocks in its industry?
• How long has it been demonstrating growth?
• What appears to be the catalyst behind its movement? Does the stock owe its growth to strong management, recent world events, the approval of a new drug, the introduction of a hot new product, etc?

One mistake that far too many beginning investors make is assuming that short-term growth alone always indicates the potential for long-term profit. Unfortunately, this is not always the case. By figuring out exactly why a stock is moving, you’ll be far better positioned to decide how long to hold it before you sell.

A strong catalyst can cause the price of a stock to skyrocket overnight, even if it’s laid dormant for years. Even things like social media hype and rumors can cause a stock’s price to shoot up over the course of a given day. But woe to the investor that assumes these profits will last. Many are often left holding the bag when the price increase turns out to be part of a “ pump and dump .”

While many day traders can make a nice profit by capitalizing on these situations, such trades are best avoided altogether if you plan to hold a stock long-term. That’s why it’s so important to understand whether a stock is “in play” for the day or whether its growth can be attributed to more permanent factors that support the potential for a high return over time.

See Related : How to Become an Impact Investor [Step-By-Step Guide]

If you’re planning on investing a significant amount of capital in any stock, then a little research may be able to save you from a lot of heartache. Keep in mind that the focus of an investment thesis is to formulate a reasoned argument about why adding an asset to your portfolio is a good idea.

While all investments come with some level of risk, research can be an excellent risk mitigation strategy. There’s nothing worse than watching an investment fail due to an obvious factor you could have spotted with closer analysis. Don’t let it happen to you!

Fundamental analysis can help you ensure that your potential investments have the underlying traits that winning stocks are made of. While there’s a bit of a learning curve involved when you’re first starting out, here are some of the things you’ll want to focus on:

EPS stands for “earnings per share.” It’s a common financial indicator that basically tells you how much a company makes each time it sells a share of its stock. In this regard, a higher EPS is a good thing, but it’s important to look for solid EPS growth over time. Ideally, you’ll want to see consistent growth in a company’s EPS over the past three or more quarters.

Sales and Margins

Investing is all about putting your cash into successful companies, which is why sales and margins are key components to finding worthy investments. Sales indicate how much a business has made from (you guessed it) sales. Sales margin, also known as gross profit margin, is the amount of revenue a company actually gets to keep after you factor in overhead and other production costs. Ideally, a good investment will exhibit strong, consistent sales growth in recent years.

Return On Equity (ROE)

ROE is one of the more commonly used valuation metrics and is calculated by dividing the company’s net income/shareholders’ equity. ROE is basically a measure of how efficiently a company is using the capital it generates from equity fundraising to increase its own value. The higher the ROE, the more likely it is that a company operates with a focus on using its cash flow to increase its profits.

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While these are just a few examples of various analysis methods to work into your investment thesis, they can go a long way toward locating solid companies worth investing in. Interested in learning more about technical and fundamental analysis? There are now plenty of great sites that can help you master the secrets of the training world.

In our opinion, Tradimo is one of the most underrated, as it provides tons of free classes for investors of all levels. Udemy also has some great classes that can help you learn how to beef up your investment thesis with as much quality information as possible.

But keep in mind that these are only suggestions. The most important part of any personal investment thesis is that it makes sense to you and can serve as a valuable tool to help you along your investing journey.

Related Resources

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• Sustainable Investing vs Impact Investing: What’s the Difference?

Kyle Kroeger, esteemed Purdue University alum and accomplished finance professional, brings a decade of invaluable experience from diverse finance roles in both small and large firms. An astute investor himself, Kyle adeptly navigates the spheres of corporate and client-side finance, always guiding with a principal investor’s sharp acumen.

Hailing from a lineage of industrious Midwestern entrepreneurs and creatives, his business instincts are deeply ingrained. This background fuels his entrepreneurial spirit and underpins his commitment to responsible investment. As the Founder and Owner of The Impact Investor, Kyle fervently advocates for increased awareness of ethically invested funds, empowering individuals to make judicious investment decisions.

Striving to marry financial prudence with positive societal impact, Kyle imparts practical strategies for saving and investing, underlined by a robust ethos of conscientious capitalism. His ambition transcends personal gain, aiming instead to spark transformative global change through the power of responsible investment.

When not immersed in the world of finance, he’s continually captivated by the cultural richness of new cities, relishing the opportunity to learn from diverse societies. This passion for travel is eloquently documented on his site, ViaTravelers.com, where you can delve into his unique experiences via his author profile.

How To Make An Investment Thesis: Ultimate Guide To Best Investment Decision

An Introduction to Investment Thesis

An investment thesis forms the basis of an investor's strategy and serves as a framework to direct investment choices as well as articulate the reasoning behind targeting assets or markets. A robust investment thesis clearly outlines the factors that will drive returns while minimizing risks. Developing a thought-out investment thesis is crucial for achieving success in investments.

This guide will take you through the components of creating a compelling investment thesis from beginning to end. We will discuss how to identify promising investment opportunities, analyze target companies, perform valuation modeling, build a portfolio, present the fund's thesis to potential investors, implement the thesis in investment activities, and adapt it as market conditions evolve. By adhering to a disciplined investment thesis, investors can consistently make informed decisions and make choices to outperform the market.

Identifying Investment Opportunities

The initial step in developing an investment thesis involves pinpointing areas of focus that will shape your investment decisions. This entails determining sectors, asset classes, geographical regions, or other frameworks on which you wish to concentrate your research and analysis.

When determining the area you want to focus on, there are four key questions and factors to consider;

• Your expertise and knowledge - It is best to concentrate on areas where you have experience or can gain expertise without stretching yourself
• Macroeconomic trends - Look out for trends that can have an impact. These trends could include shifts, advancements, policy changes, and more. Identify sectors, regions, or asset classes that are likely to benefit from these long-term shifts
• Market inefficiencies - Keep an eye out for market inefficiencies. Opportunities often arise in markets that are fragmented, complex, or experiencing changes
• Investment horizons - Consider the investment horizon required for investment theses. Some ideas may require a time frame to materialize their potential returns while others may offer shorter-term gains

Once you have determined your area of focus, it is crucial to conduct in-depth research on the macro trends shaping that market. Look for trends that will drive growth over the years rather than focusing solely on quarterly fluctuations mentioned in market reports. The objective is to identify factors that can positively impact revenues, margins, and valuations of well-positioned companies.

With an understanding of the landscape established through research, you can then search for companies positioned to take advantage of the identified trends. Look for firms, with products/services/customers/geographical reach or innovative strategies that give them an edge when it comes to capitalizing on these opportunities.

Analyzing the Company

For an investment thesis, it is crucial to assess the company you are considering for investment. This assessment should include an evaluation of the company's drivers of growth, its management team and strategy as well as potential risks and challenges.

Growth Drivers

When analyzing the market value of a company, you'll want to closely examine the products, customers, and competitive positioning that are fueling its growth.

• Products: Look at the company's current product portfolio and pipeline. Do they have innovative products that are gaining market share? How large is their total addressable market and how much of it have they penetrated so far?
• Customers: Evaluate who their key customers are and how loyal they are. Look at metrics like net dollar retention rate to understand how loyal their customers are
• Competition: Analyze the competitive landscape and the company's positioning. Do they have a durable competitive advantage? How do they compare to rivals on factors like pricing, product features, and customer experience?
• Scalability: Do margins get larger or smaller as a customer increases its size? In some cases, unprofitable companies become highly profitable with growth - in other cases, costs increase in line with revenues. 

Management and Strategy

The strategy and execution capabilities of management are critical to a company's success.

• Management Team: Research the background and track record of key executives. Do they have relevant industry experience and a history of generating returns?
• Strategy: Assess management's strategic priorities and plans to drive growth. Do they have a coherent plan to expand their market opportunity?
• Culture & Incentives: Assess how they attract and retain talent. Are employees actively involved and motivated to excel?

Assessing the management will help ascertain whether the company has the leadership to seize the upcoming opportunity.

Risks and Challenges

When conducting an analysis it's important to consider factors;

• Technology Shifts: Take into account innovations that could affect the company's market.
• Regulation: Consider possible changes in regulations that may impact the business model and financial aspects.
• Macro Trends: Look at shifts in the wider economic environment that could influence customer demand.

Thoroughly examining the company across these dimensions provides the information and perspective to build confidence in your investment thesis. It helps you understand the business model, growth trajectory, management capabilities, risks involved, and valuation potential.

Conducting Valuation

Whilst a company's valuation is largely based purely on how much an investor or acquirer is willing to pay, there are a number of methodologies that help to guide valuations:

Choosing the Appropriate Valuation Method

DCF valuation is typically preferred when assessing situations where reliable projections can be made. However, for early-stage or volatile companies, it may be more appropriate to consider comparable multiples based on similar industry peers.

Making Projections and Assumptions

When making projections and assumptions it is essential to conduct research to establish credible forecasts.

Projections should encompass metrics such as revenue growth, margins, capital expenditure requirements, and working capital needs. Additionally, explicit assumptions should be made regarding elements like market size, market share, pricing strategies, and costs among others. Conducting sensitivity analysis can help stress test these assumptions.

Ensuring Upside to Current Valuation

Once you have determined the value of a company you can compare this value against its market capitalization. Look for the ultimate goal of valuation is to support your thesis that the company is undervalued. If the current market price exceeds your estimate of value it may be prudent to reassess your assumptions and analysis. The greater the upside potential identified within your analysis the stronger your conviction becomes in considering an investment opportunity.

Constructing Your Portfolio

When constructing your portfolio based on your investment thesis, you should diversify your holdings and size your positions appropriately based on conviction and risk tolerance.

Diversification

Your investment thesis should guide how you diversify your portfolio. For example, if your thesis focuses on emerging market consumer stocks, you would want exposure across multiple countries and consumer product categories. Diversifying appropriately helps manage overall portfolio risk. You want to avoid overexposure to any single company, sector, or country.

Position Sizing

When determining position sizes within your portfolio, larger positions should be allocated to your highest conviction ideas based on your investment thesis. However, position size should also be constrained based on your risk tolerance. Larger positions will drive portfolio performance but also increase volatility. 

Rebalancing

As market conditions change, rebalancing your portfolio involves  realigning holdings in line with your investment thesis. If certain positions have increased significantly in size, trimming them down and reallocating to underweight areas can improve diversification and risk-adjusted returns. Revisiting your thesis and rebalancing at regular intervals instills discipline in sticking to your core investment tenets.

Presenting to Investors

When presenting your investment thesis to investors it's crucial to communicate and address important information right from the start. Your objective is to explain your insights and build confidence in your ability to generate returns.

To begin - guide investors through your thesis, research process, and valuation methodology. Elaborate on the trends you've identified and analyze the company's growth drivers and competitive position. Share how you arrived at your valuation.

Next, emphasize your "edge”. The expertise, relationships, or analytical skills that give you an advantage in assessing this opportunity. Provide examples of investments you've made in the past by leveraging an edge to establish credibility

Lastly, demonstrate your risk management abilities by addressing challenges and risks. Outline the assumptions underlying your thesis and discuss scenarios where they may not hold true. Describe how you plan to monitor and mitigate risks related to regulations, supply chains, customer demand, or management execution. 

Implementing the Thesis

Once you have developed an investment thesis the next step is executing trades to construct a portfolio that aligns with your thesis. It is crucial to approach this process with strategic planning in order to achieve results.

When making investments it is important to allocate positions based on your level of confidence in each holding while also ensuring diversification. Generally speculative or higher risk assets should be given allocations that don’t jeopardize the portfolio as a whole.

Ongoing portfolio management necessitates actively monitoring performance against the expectations outlined in your investment thesis. By keeping track of metrics, business drivers, and macroeconomic factors you can gauge whether your thesis remains valid.

As new data emerges over time adjustments and rebalancing of your portfolio will likely be required. This involves reducing exposure to holdings where the original thesis has weakened or deteriorated while increasing exposure to emerging opportunities. 

Continuously refining your portfolio ensures that it remains closely aligned with your investment thesis as market conditions evolve. Successful investors remain adaptable. Adjust their allocations while keeping their long-term perspectives intact.

Updating the Investment Thesis

As time progresses it is crucial to revisit and update your investment thesis accordingly.

Markets are constantly changing and it is crucial to stay updated with information that emerges. Your initial assumptions may not always hold true which can lead to poor investment decisions if you stick to an investment thesis.

To ensure the relevance of your investment thesis periodically reassess all your assumptions and projections. Take a look at your growth estimates, address any emerging threats, and analyze how market sentiment has shifted. If there have been changes in the investment narrative it's essential to update your thesis

Incorporate insights from sources such as earnings reports, industry conferences, macroeconomic data, and more. I. Objectively evaluate if adjustments need to be made based on the information at hand.

The key here is flexibility; being able to adapt to information sets good investors apart from the average ones. 

Common Mistakes to Avoid When Developing an Investment Thesis

To ensure the success of your investment thesis it's important to steer clear of pitfalls. Here are a few common ones;

Lack of Diversification

Having an overconcentration in a sector, geography, or asset type can leave a portfolio vulnerable. For example, an investment thesis focused solely on fast-growing US tech companies could miss opportunities in emerging markets. 

Biased Assumptions

It's easy to fall into the trap of making projections that confirm your existing bias about a company's growth potential. Avoid exaggerated assumptions that are not grounded in facts, and remember that “hope” has historically been a bad investment strategy 

Ignoring New Information

Markets and companies are dynamic, so no investment thesis holds true forever. Do not blindly stick to your original assumptions if new data suggests your thesis is no longer valid. Be ready to change course if your investment case deteriorates. Failing to adapt can turn gains into losses.

To summarize this guide - here are the most important factors in an investment thesis ;

• Identifying economic trends and sector-specific opportunities to focus on when making investments.
• Conducting a thorough analysis of potential companies, for your portfolio including their products, customers, competitors, and management.
• Using valuation models such as discounted cash flow (DCF) analysis to determine a target value based on your projections.
• Creating a diverse portfolio by considering your confidence level and risk tolerance for each position.
• Clearly presenting your investment strategy and unique advantage to inspire confidence in investors.
• Consistently implementing your investment strategy when making buy or sell decisions.
• Monitoring your portfolio and assumptions, updating the thesis as needed based on new data.

Creating a thoughtful investment thesis takes rigorous research and ongoing discipline. However, it also establishes a framework to capitalize on the upside potential of emerging trends. Investors who take the time to develop a compelling thesis are more apt to outperform the market. With the right blend of macro perspective and individual security analysis, your investment thesis can unlock substantial value creation.

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Writing a Credible Investment Thesis

by David Harding and Sam Rovit

Every deal your company proposes to do—big or small, strategic or tactical—should start with a clear statement how that particular deal would create value for your company. We call this the investment thesis . The investment thesis is no more or less than a definitive statement, based on a clear understanding of how money is made in your business, that outlines how adding this particular business to your portfolio will make your company more valuable. Many of the best acquirers write out their investment theses in black and white. Joe Trustey, managing partner of private equity and venture capital firm Summit Partners, describes the tool in one short sentence: "It tells me why I would want to own this business." 10

Perhaps you're rolling your eyes and saying to yourself, "Well, of course our company uses an investment thesis!" But unless you're in the private equity business—which in our experience is more disciplined in crafting investment theses than are corporate buyers—the odds aren't with you. For example, our survey of 250 senior executives across all industries revealed that only 29 percent of acquiring executives started out with an investment thesis (defined in that survey as a "sound reason for buying a company") that stood the test of time. More than 40 percent had no investment thesis whatsoever (!). Of those who did, fully half discovered within three years of closing the deal that their thesis was wrong.

Studies conducted by other firms support the conclusion that most companies are terrifyingly unclear about why they spend their shareholders' capital on acquisitions. A 2002 Accenture study, for example, found that 83 percent of executives surveyed admitted they were unable to distinguish between the value levers of M&A deals. 11 In Booz Allen Hamilton's 1999 review of thirty-four frequent acquirers, which focused chiefly on integration, unsuccessful acquirers admitted that they fished in uncharted waters. 12 They ranked "learning about new (and potentially related) business areas" as a top reason for making an acquisition. (Surely companies should know whether a business area is related to their core before they decide to buy into it!) Successful acquirers, by contrast, were more likely to cite "leading or responding to industry restructuring" as a reason for making an acquisition, suggesting that these companies had at least thought through the strategic implications of their moves.

Not that tipping one's hat to strategy is a cure-all. In our work with companies that are thinking about doing a deal, we often hear that the acquisition is intended for "strategic" reasons. That's simply not good enough. A credible investment thesis should describe a concrete benefit, rather than a vaguely stated strategic value.

This point needs underscoring. Justifying a deal as being "strategic" ex post facto is, in most cases, an invitation to inferior returns. Given how frequently we have heard weak "strategic" justifications after a deal has closed, it's worth passing along a warning from Craig Tall, vice chair of corporate development and strategic planning at Washington Mutual. In recent years, Tall's bank has made acquisitions a key part of a stunningly successful growth record. "When I see an expensive deal," Tall told us, "and they say it was a 'strategic' deal, it's a code for me that somebody paid too much." 13

And although sometimes the best offense is a good defense, this axiom does not really stand in for a valid investment thesis. On more than a few occasions, we have been witness to deals that were initiated because an investment banker uttered the Eight Magic Words: If you don't buy it, your competitors will.

Well, so be it. If a potential acquisition is not compelling to you on its own merits, let it go. Let your competitors put their good money down, and prove that their investment theses are strong.

Let's look at a case in point: [Clear Channel Communications' leaders Lowry, Mark, and Randall] Mayses' decision to move from radios into outdoor advertising (billboards, to most of us). Based on our conversations with Randall Mays, we summarize their investment thesis for buying into the billboard business as follows:

Clear Channel's expansion into outdoor advertising leverages the company's core competencies in two ways: First, the local market sales force that is already in place to sell radio ads can now sell outdoor ads to many of the same buyers, and Clear Channel is uniquely positioned to sell both local and national advertisements. Second, similar to the radio industry twenty years ago, the outdoor advertising industry is fragmented and undercapitalized. Clear Channel has the capital needed to "roll up" a significant fraction of this industry, as well as the cash flow and management systems needed to reduce operating expenses across a consolidated business.

Note that in Clear Channel's investment thesis (at least as we've stated it), the benefits would be derived from three sources:

• Leveraging an existing sales force more extensively
• Using the balance sheet to roll up and fund an undercapitalized business
• Applying operating skills learned in the radio trade

Note also the emphasis on tangible and quantifiable results, which can be easily communicated and tested. All stakeholders, including investors, employees, debtors, and vendors, should understand why a deal will make their company stronger. Does the investment thesis make sense only to those who know the company best? If so, that's probably a bad sign. Is senior management arguing that a deal's inherent genius is too complex to be understood by all stakeholders, or simply asserting that the deal is "strategic"? These, too, are probably bad signs.

Most of the best acquirers we've studied try to get the thesis down on paper as soon as possible. Getting it down in black and white—wrapping specific words around the ideas—allows them to circulate the thesis internally and to generate reactions early and often.

The perils of the "transformational" deal . Some readers may be wondering whether there isn't a less tangible, but equally credible, rationale for an investment thesis: the transformational deal. Such transactions, which became popular in the exuberant '90s, aim to turn companies (and sometimes even whole industries) on their head and "transform" them. In effect, they change a company's basis of competition through a dramatic redeployment of assets.

The roster of companies that have favored transformational deals includes Vivendi Universal, AOL Time Warner (which changed its name back to Time Warner in October 2003), Enron, Williams, and others. Perhaps that list alone is enough to turn our readers off the concept of the transformational deal. (We admit it: We keep wanting to put that word transformational in quotes.) But let's dig a little deeper.

Sometimes what looks like a successful transformational deal is really a case of mistaken identity. In search of effective transformations, people sometimes cite the examples of DuPont—which after World War I used M&A to transform itself from a maker of explosives into a broad-based leader in the chemicals industry—and General Motors, which, through the consolidation of several car companies, transformed the auto industry. But when you actually dissect the moves of such industry winners, you find that they worked their way down the same learning curve as the best-practice companies in our global study. GM never attempted the transformational deal; instead, it rolled up smaller car companies until it had the scale to take on a Ford—and win. DuPont was similarly patient; it broadened its product scope into a range of chemistry-based industries, acquisition by acquisition.

In a more recent example, Rexam PLC has transformed itself from a broad-based conglomerate into a global leader in packaging by actively managing its portfolio and growing its core business. Beginning in the late '90s, Rexam shed diverse businesses in cyclical industries and grew scale in cans. First it acquired Europe's largest beverage-can manufacturer, Sweden's PLM, in 1999. Then it bought U.S.–based packager American National Can in 2000, making itself the largest beverage-can maker in the world. In other words, Rexam acquired with a clear investment thesis in mind: to grow scale in can making or broaden geographic scope. The collective impact of these many small steps was transformation. 14

But what of the literal transformational deal? You saw the preceding list of companies. Our advice is unequivocal: Stay out of this high-stakes game. Recent efforts to transform companies via the megadeal have failed or faltered. The glamour is blinding, which only makes the route more treacherous and the destination less clear. If you go this route, you are very likely to destroy value for your shareholders.

By definition, the transformational deal can't have a clear investment thesis, and evidence from the movement of stock prices immediately following deal announcements suggests that the market prefers deals that have a clear investment thesis. In "Deals That Create Value," for example, McKinsey scrutinized stock price movements before and after 231 corporate transactions over a five-year period. 15 The study concluded that the market prefers "expansionist" deals, in which a company "seeks to boost its market share by consolidating, by moving into new geographic regions, or by adding new distribution channels for existing products and services."

On average, McKinsey reported, deals of the "expansionist" variety earned a stock market premium in the days following their announcement. By contrast, "transformative" deals—whereby companies threw themselves bodily into a new line of business—destroyed an average of 5.3 percent of market value immediately after the deal's announcement. Translating these findings into our own terminology:

• Expansionist deals are more likely to have a clear investment thesis, while "transformative" deals often have no credible rationale.
• The market is likely to reward the former and punish the latter.

The dilution/accretion debate . One more side discussion that comes to bear on the investment thesis: Deal making is often driven by what we'll call the dilution/accretion debate . We will argue that this debate must be taken into account as you develop your investment thesis, but your thesis making should not be driven by this debate.

Simply put, a deal is dilutive if it causes the acquiring company to have lower earnings per share (EPS) than it had before the transaction. As they teach in Finance 101, this happens when the asset return on the purchased business is less than the cost of the debt or equity (e.g., through the issuance of new shares) needed to pay for the deal. Dilution can also occur when an asset is sold, because the earnings power of the business being sold is greater than the return on the alternative use of the proceeds (e.g., paying down debt, redeeming shares, or buying something else). An accretive deal, of course, has the opposite outcomes.

But that's only the first of two shoes that may drop. The second shoe is, How will Wall Street respond? Will investors punish the company (or reward it) for its dilutive ways?

Aware of this two-shoes-dropping phenomenon, many CEOs and CFOs use the litmus test of earnings accretion/dilution as the first hurdle that should be put in front of every proposed deal. One of these skilled acquirers is Citigroup's [former] CFO Todd Thomson, who told us:

It's an incredibly powerful discipline to put in place a rule of thumb that deals have to be accretive within some [specific] period of time. At Citigroup, my rule of thumb is it has to be accretive within the first twelve months, in terms of EPS, and it has to reach our capital rate of return, which is over 20 percent return within three to four years. And it has to make sense both financially and strategically, which means it has to have at least as fast a growth rate as we expect from our businesses in general, which is 10 to 15 percent a year. Now, not all of our deals meet that hurdle. But if I set that up to begin with, then if [a deal is] not going to meet that hurdle, people know they better make a heck of a compelling argument about why it doesn't have to be accretive in year one, or why it may take year four or five or six to be able to hit that return level. 16

Unfortunately, dilution is a problem that has to be wrestled with on a regular basis. As Mike Bertasso, the head of H. J. Heinz's Asia-Pacific businesses, told us, "If a business is accretive, it is probably low-growth and cheap for a reason. If it is dilutive, it's probably high-growth and attractive, and we can't afford it." 17 Even if you can't afford them, steering clear of dilutive deals seems sensible enough, on the face of it. Why would a company's leaders ever knowingly take steps that would decrease their EPS?

The answer, of course, is to invest for the future. As part of the research leading up to this book, Bain looked at a hundred deals that involved EPS accretion and dilution. All the deals were large enough and public enough to have had an effect on the buyer's stock price. The result was surprising: First-year accretion and dilution did not matter to shareholders. In other words, there was no statistical correlation between future stock performance and whether the company did an accretive or dilutive deal. If anything, the dilutive deals slightly outperformed. Why? Because dilutive deals are almost always involved in buying higher-growth assets, and therefore by their nature pass Thomson's test of a "heck of a compelling argument."

Reprinted with permission of Harvard Business School Press. Mastering the Merger: Four Critical Decisions That Make or Break the Deal , by David Harding and Sam Rovit. Copyright 2004 Bain & Company; All Rights Reserved.

[ Buy this book ]

David Harding (HBS MBA '84) is a director in Bain & Company's Boston office and is an expert in corporate strategy and organizational effectiveness.

Sam Rovit (HBS MBA '89) is a director in the Chicago office and leader of Bain & Company's Global Mergers and Acquisitions Practice.

10. Joe Trustey, telephone interview by David Harding, Bain & Company. Boston: 13 May 2003. Subsequent comments by Trustey are also from this interview.

11. Accenture, "Accenture Survey Shows Executives Are Cautiously Optimistic Regarding Future Mergers and Acquisitions," Accenture Press Release, 30 May 2002.

12. John R. Harbison, Albert J. Viscio, and Amy T. Asin, "Making Acquisitions Work: Capturing Value After the Deal," Booz Allen & Hamilton Series of View-points on Alliances, 1999.

13. Craig Tall, telephone interview by Catherine Lemire, Bain & Company. Toronto: 1 October 2002.

14. Rolf Börjesson, interview by Tom Shannon, Bain & Company. London: 2001.

15. Hans Bieshaar, Jeremy Knight, and Alexander van Wassenaer, "Deals That Create Value," McKinsey Quarterly 1 (2001).

16. Todd Thomson, speaking on "Strategic M&A in an Opportunistic Environment." (Presentation at Bain & Company's Getting Back to Offense conference, New York City, 20 June 2002.)

17. Mike Bertasso, correspondence with David Harding, 15 December 2003.

interpretive economics

• Feb 27, 2023

How to Write the Perfect Investment Thesis

For investment managers, finding investment opportunities is only half the challenge. Often the harder part is raising funds. To do this they need to create the perfect investment thesis to set out a convincing argument as to why their investment strategy will generate a return on investment for their clients. In this article, we’ll explore the importance of crafting a perfect investment thesis and provide insights into how to write one.

What is an Investment Thesis?

An investment thesis outlines a fund manager’s investment strategy and rationale for investing in a particular market or niche. It’s a crucial document that investment managers use to provide investors with the information and data they need to decide whether or not to invest in a fund. It can be turned into a variety of marketing materials for the fund including white papers, one-pagers, and investment decks.

The investment thesis should be concise and articulate the investment logic and framework for why a particular market or niche presents an attractive investment. It should outline the investment strategy and how it aligns with the fund manager’s hypothesis. The thesis should also address potential risks and benefits to investors.

Successful investment theses typically include an analysis of market trends, an assessment of the competitive landscape, and an explanation of why the investment opportunity presents an attractive opportunity.

In 2013, Ron Baron, a fund manager, invested in Tesla. At the time the stock was trading at $25 per share. However, Baron believed that electric cars were the future , and he was convinced that Tesla would become the leader in the EV industry. Ten years later, Tesla’s stock is trading at over $200 per share, making it one of the most successful investments in recent years.

Step-by-Step Guide to Writing the Perfect Investment Thesis

Crafting the perfect investment thesis is not an easy task. It requires a great deal of research, analysis, and writing skills. Follow our step-by-step guide to write a perfect investment thesis.

Step 1: Define Your Investment Strategy

Determine your investment goals and objectives.

To define your investment strategy, you need to first need to understand your investment goals and objectives. Are you looking to invest in high-growth companies or established companies that generate a stable return? What is your investment horizon? What is risk profile? How much capital do you need to raise?

Identify investment opportunities

Once you have defined your investment goals and objectives, you need to identify your target market and investment opportunities in that market.

Define your investment strategy

Having determined your goals, risk tolerance and capital requirements you need to create a high-level investment strategy. This is a set of principles that will help the fund achieve its investment goals and guide investment decisions. This can be refined as you conduct market research and receive feedback from investors and industry-peers.

Step 2: Conducting Market Research

An investment thesis that is not backed by data is just opinion. To write the perfect investment thesis you need to conduct market research. This includes analyzing market trends, identifying potential risks and benefits, and conducting competitive analysis.

How to analyze market trends using data

To analyze market trends, you need to collect and analyze data. Data can come from a variety of sources including industry reports, financial statements, and news articles to identify trends in the market. You can also use tools such as Google Trends to identify search trends for specific keywords. There are also opportunities to use official data to back up claims, for example census data to prove an investment thesis based on demographic trends.

A variety of alternative data sources are available. these include:

Web scraping : Scraping data from online sources including social media sites, e-commerce or news stories. This data can be analyzed using natural language processing techniques (categorization, sentiment analysis).

Open data : There is a growing trend of organizations making data freely available. Good examples include traffic patterns on metro networks such as TFL in London .

Sensors and satellites : A growing industry of data providers is providing access to alternative data sources. From satellite data showing agricultural production to IoT sensor devices.

Polls and Surveys : Surveys provide insights into the collective consciousness. From tangible economic behaviors such as buying and shopping habits, customers expectations, information on personal finances, to social and political views.

Identifying market opportunities and potential risks

Having analyzed market trends, you need to identify market opportunities and potential risks. Investors need to be aware of different types of investment risks, such as market risk, credit risk, and liquidity risk associated with your investment thesis. A thorough analysis of potential risks helps investors make informed decisions and ensure that the investment is aligned to their risk appetite. The analysis should cover both systematic and unsystematic risks, There are a variety of statistical methods than can be used to measure risk and volatility including standard deviation, Sharpe ratio, beta, value at risk (VaR), conditional value at risk (CVaR), and R-squared.

Conducting competitive analysis

You may also want to include a competitive analysis. This looks at the competition in your target market. Who are the main players in the industry, their strengths, weaknesses, and competitive advantage.

Step 3: Developing Your Investment Hypothesis

The best investment theses include a well structured investment hypothesis. An investment hypothesis summarises why an investment opportunity exists in a given market. It should be based on your research and analysis and articulated in a clear and concise manner.

What is an investment hypothesis?

An investment hypothesis is a proposed explanation for a specific investment opportunity. It’s a statement that describes the investment opportunity and how it aligns with the investment manager’s investment goals and objectives.

Formulating an investment hypothesis based on your research and analysis

To develop a strong investment hypothesis, you need to review the data and information collected during your market research. Using this you need to identify key trends, opportunities, and risks and determine an investment strategy that allows you to achieve investment goals and objectives. This is the time to revisit and critique your initial investment strategy.

H4: Articulating the investment thesis in a clear and concise manner

Once you have developed your investment hypothesis, you need to articulate it in a clear and concise manner. This includes a clear investment logic and analytical framework for why a particular market or niche presents an attractive investment. You should also outline the investment strategy and how it aligns with your hypothesis.

Step 4: Writing the Investment Thesis

Having created the perfect investment thesis you need to structure the thesis and include key elements to make it persuasive.

The structure and format of a successful investment thesis

A successful investment thesis typically follows a structure that includes an executive summary, market analysis, investment hypothesis, investment strategy, and potential risks and benefits. The thesis should also include data and visual aids, such as graphs and charts.

Key elements to include in your investment thesis

To make your investment thesis persuasive, you need to include key elements such as a clear articulation of the investment opportunity, a detailed explanation of the investment hypothesis, an overview of the investment strategy, and describe the risks and benefits for potential investors.

Writing with clarity and brevity

To make your investment thesis easy to read and understand, you need to write with clarity and brevity. Use simple language and avoid jargon. Keep the thesis concise and to the point.

What type of resources and marketing materials do you need to create

Having defined your investment thesis you know need to create a variety of marketing materials in order to present to potential investors. These will vary depending on the type of investors and the regulatory framework you operate under. Some common investor marketing materials include:

Investor decks

An investor deck is a summary of your investment thesis. It should include a summary of your investment hypothesis, market opportunity with data, investment strategy, expected outcomes, risks, and benefits to investors. The investor deck should be concise and easy to understand. Avoid lengthy text and present the opportunity using relevant data points. Employing a professional designer will maximize the impact of your investment thesis.

The structure of an investment deck forces you to focus only on the key points, consequently a clear analytical framework or investment logic is essential.

White papers

A white paper is a more detailed description of your investment thesis. It should include an in-depth analysis of the market trends, competitive landscape, and investment opportunity. The white paper should also include an overview of your investment strategy and potential risks and benefits.

Investment one-pager

An investment one-pager is a brief summary of your investment hypothesis, market opportunity, and risks and benefits. It should be a one-page document that investors can quickly review to understand your investment opportunity.

Step 5: Refining and Perfecting Your Investment Thesis

The final step in writing a perfect investment thesis is to refine and perfect it. You need to continuously refine and improve your thesis to ensure it’s persuasive and effective.

Revising and editing your investment thesis

Once you have written your investment thesis, you need to revise and edit it. Review the thesis for grammar, punctuation, and spelling errors. Ensure that the thesis is clear, concise, and persuasive. Nothing will damage your credibility more than easily fixed errors or incorrect data.

Seek feedback from peers and industry experts

You should seek feedback from peers and industry experts to ensure that your investment thesis is persuasive and effective. Aim to get feedback from colleagues, mentors, or industry experts all of whom can offer a unique outside perspective.

Continuously refining and improving your investment thesis

Investment managers should continuously refine and improve their investment thesis. They should review the thesis periodically and update it as needed to reflect changes in the market or investment strategy.

Crafting a perfect investment thesis is a crucial task for investment and fund managers. The investment thesis is a document that outlines the investment strategy and rationale for investing in a particular market or niche. A good investment thesis provides investors with a clear understanding of the investment opportunity, the risks and benefits, and the potential return on investment.

To write a perfect investment thesis, investment managers need to define their investment strategy, conduct market research, develop an investment hypothesis, craft the thesis, and refine and perfect it. They should also create marketing materials such as an investor deck, white paper, and investment one-pager to summarize their investment opportunity. Investment managers should continuously refine and improve their investment thesis to ensure it’s persuasive and effective.

How Interpretive Economics can help you write the perfect investment thesis

At Interpretive Economics, we help investment managers, asset managers, venture capital, family offices and other investment professionals create a variety of investment marketing materials including investment white papers, investor decks and investment one-pagers. We are experts at economic analysis, sourcing and analyzing data and crafting investment hypotheses. Get in touch to see how we can help you create the perfect investment thesis.

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VC Decision Making (Online): Developing an Investment Thesis

Navigate the changing trends in venture capital

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Create Your Own Venture Capital Strategy

Venture capital funding has experienced exponential growth in recent years. While the peak for venture capital in terms of dollar value has passed in the face of the global economic slowdown, the field continues to be one of tremendous opportunity — if you know where to find it.

In order to thrive in this fast-paced, volatile environment, venture capital professionals must stay abreast of trends and develop a solid investment thesis to help them navigate uncertainty and pinpoint viable opportunities.

Lead faculty Angela Lee is the founder of 37 Angels, an investing network that has evaluated 20,000 startups, invested in 90+ startups, and currently activates new investors through a startup investment boot camp. Join us to learn how to create a successful investment strategy and decision-making framework to improve venture fund performance and intelligently diversify your portfolio.

Global venture capital funding surged to $621B in 2021, two times more than in 2020, and around 10 times the level of 10 years ago.

Source: CB Insights

$132B invested in financial services in 2021, which is 169 percent year-over-year growth and 21 percent of total venture funding.

62 percent of all venture capital deals are early-stage deals.

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By the end of the program, you will be able to:

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Compare existing startup investment strategies and determine the investment strategy that works best for your portfolio.

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Professor of Professional Practice in Finance, Faculty Director, the Eugene Lang Entrepreneurship Center, Columbia Business School

Angela Lee Professor of Professional Practice in Finance, Faculty Director, the Eugene Lang Entrepreneurship Center, Columbia Business School Angela Lee is an award-winning professor and former Chief Innovation Officer at Columbia Business School, where she teaches venture capital and leadership programs. She started her career in product management and then moved to consulting at McKinsey. She founded 4 startups and is also the founder of 37 Angels, an investing network that has evaluated over 20,000 companies and invested in over 90+ companies. She also serves as a venture partner at Fresco Capital, an early-stage venture fund that focuses on the future of work, digital health, and sustainability. She was awarded the Dean's Award for Teaching Excellence at Columbia Business School in 2020 and won the Singhvi Prize for Scholarship in the Classroom in 2022. Angela has spoken at the White House and NASA and is an expert in teaching online and making learning scalable. She is a sought-after expert on CNBC, Bloomberg TV, MSNBC, and Fox Business. She was recognized by Inc . as one of 17 Inspiring Women to Watch, by Entrepreneur Magazine as one of 6 Innovative Women to Watch, and by Crain’s as a Notable Women in Tech.

Elliott Robinson Partner, Growth Equity, Bessemer Venture Partners Elliott Robinson is a partner and co-founder of the growth investment practice at Bessemer, where he focuses primarily on cloud software investments, and is a board member of a number of organizations. Prior to Bessemer, he was a partner with M12, a vice president at Georgian Partners, and an associate with Syncom Venture Partners (where he led investments in organizations such as Canva, Forter, and Statespace). He earned his MBA from Columbia Business School and his BS from Morehouse College.

Hilary Gosher Managing Director, Insight Partners Since joining Insight Partners two decades ago, Hilary has played a role in some of the most exciting growth journeys in SaaS history. She founded and leads Insight Onsite, a team that accelerates growth at Insight's portfolio organizations. In addition, she is an adjunct associate professor at Columbia Business School. She holds an MBA from INSEAD in France along with a BA and LLB from the University of Kwa-Zulu Natal, South Africa.

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How to Develop Your Own Investment Thesis: A Critical Step for Aspiring Venture Capitalists

s an aspiring venture capitalist, you hold the key to unlock the untapped potential of startups, propelling them to soaring heights and reshaping industries. But in this electrifying landscape of opportunities, how do you navigate through the ever-changing tides? The answer lies in the essence of venture capital success: developing your own investment thesis.

What exactly is an Investment Thesis?

An investment thesis is your North Star, an illuminating beacon that guides you through the vast ocean of startups, helping you navigate toward the brightest prospects. It's a strategic framework, meticulously crafted to align your investment approach, criteria, and aspirations.

With an investment thesis, you define the types of companies you want to invest in, the industries you're interested in, and the stages of startups you believe have the most potential. It's like setting your preferences and priorities before you begin the journey.

Why is an investment thesis so critical for aspiring venture capitalists? The answer is simple—this well-defined roadmap sets you apart from the crowd and gives you the edge to thrive in this fiercely competitive world. It empowers you to make informed decisions, uncover hidden gems in the startup ecosystem, and unlock the true potential of visionary entrepreneurs.

In this blog post, we will explore the essential steps to create a compelling and potent investment thesis

Getting Started With Your Investment Thesis: Conducting Market Research

At the core of any successful investment thesis lies comprehensive market research. Understanding industry trends, evaluating market opportunities, and assessing the competitive landscape are vital steps to identify lucrative investment prospects. 

Keep a finger on the pulse of the business landscape and stay attuned to shifts and disruptions. Analyze the forces shaping various sectors, from cutting-edge technologies and regulatory changes to changes in consumer behavior. Identifying and understanding these trends will enable you to anticipate the future landscape, positioning you as an astute investor who can spot opportunities before they materialize.

With a keen understanding of industry trends, venture capitalists must evaluate market opportunities with a discerning eye. Look beyond the surface and assess the long-term growth potential of markets and industries. Identify white spaces and areas where innovation is likely to flourish. Be mindful of macroeconomic factors, such as GDP growth, inflation rates, and demographic shifts, as they can profoundly influence market dynamics. A comprehensive evaluation of market opportunities will empower you to focus your investments on ventures that have the potential to become tomorrow's industry leaders.

In the vibrant world of startups, competition is the norm. As such, to excel as a venture capitalist, you must also gain a panoramic view of the competitive landscape. Analyze existing players and their strengths, weaknesses, opportunities, and threats (SWOT analysis). Identify startups that have the potential to disrupt established markets and challenge the status quo. Furthermore, seek out market gaps, where unmet needs and underserved customer segments await innovative solutions. Investing in startups that address these gaps can lead to remarkable returns on investment and foster a positive impact on society.

Market research is not a mere exercise of intuition and speculation; it thrives on data-driven insights. Leverage data analytics, market reports, and industry research to augment your understanding of market trends. Embrace technology and data tools that can provide you with a wealth of information at your fingertips. By making data-driven decisions, you'll foster a more robust investment thesis and bolster your credibility as a venture capitalist.

While conducting market research, it's crucial to remember that the startup ecosystem is dynamic and ever-changing. Be prepared to pivot and adapt your investment thesis in response to new information and shifts in the market. Stay agile and flexible, allowing your investment strategy to evolve as you gain deeper insights. Successful venture capitalists are those who can navigate uncertainty, staying attuned to emerging trends and swiftly adjusting their course to capitalize on unforeseen opportunities.

Defining The Investment Criteria for your Investment Thesis

Once you've gathered market insights, now it’s the fun part - it's time to define your investment criteria. Determine the stages of startups you want to invest in, such as seed, early-stage, or late-stage companies. Consider the industries you're passionate about or have domain expertise in. 

Additionally, establish your preferred investment size and the level of diversification you aim to achieve within your portfolio. Having clear investment criteria will streamline your decision-making process and keep your investments focused on your goals.

Determining the Stages of Startups

Venture capitalists invest in startups at various stages of their lifecycle, each offering distinct opportunities and risks. Deciding which stage aligns best with your expertise and risk appetite is pivotal. Consider if you want to invest in seed-stage companies, which are in their infancy and require significant support, or if you prefer early-stage startups with a product and initial traction. Alternatively, you may focus on later-stage companies that are scaling and need capital to expand rapidly. Your chosen stage will dictate your involvement level and the potential return horizon of your investments.

Geographical Preferences and Target Industries

Venture capital is a global endeavor, and you can choose to invest locally, regionally, or even globally. Geographical preferences may be influenced by factors like your network, knowledge of specific markets, and comfort with regulatory environments. Moreover, identifying the industries you're passionate about or have domain expertise in is crucial. Investing in industries you understand well will allow you to provide strategic value to the startups you support, beyond just financial backing.

Investment Size and Portfolio Diversification

The size of your investments and portfolio diversification strategy are interlinked. Determine the average investment size you are comfortable with, as this will influence the types of startups you can back. Some venture capitalists prefer larger, concentrated bets on a select few startups, while others spread their investments across a broader range of smaller companies to diversify risk. Striking the right balance is key—too few investments can expose you to concentrated risk, while too many might dilute your ability to provide adequate support to each startup.

Alignment with Personal Values and Objectives

As an aspiring venture capitalist, your investment criteria should be in harmony with your personal values and long-term objectives. Consider what impact you want to make through your investments. Are you driven by social impact, environmental sustainability, or a particular mission? Aligning your investment criteria with your values will not only enhance your satisfaction as an investor but may also attract entrepreneurs who share your passion, fostering a mutually rewarding relationship.

Market Fit and Growth Potential

While defining your investment criteria, focus on identifying startups that exhibit strong market fit and immense growth potential. Market fit refers to the startup's ability to address a specific problem or need in the market effectively. Investigate whether the startup's product or service resonates with its target audience and has the potential for widespread adoption. Moreover, evaluate the scalability of the business model, as this will determine the startup's growth trajectory and its potential to become a market leader.

Synergy with Your Expertise and Network

Leverage your expertise and network to your advantage when defining your investment criteria. Aligning with startups that can benefit from your insights and connections will create a symbiotic relationship. As an investor, you can offer more than just financial support; your guidance and connections can be invaluable in helping startups navigate challenges and scale their businesses. Synergy with your expertise and network can significantly enhance your value proposition as a venture capitalist.

Balancing Risk and Return

Investing in startups inherently involves risk, and your investment criteria should reflect your risk appetite and tolerance. Strive for a balance between risk and potential return that aligns with your investment objectives. High-growth startups often carry higher risk, but they can also offer substantial rewards.

On the other hand, more established companies may provide a steadier return, albeit with potentially lower growth potential. Understanding this balance is essential in defining your investment criteria and building a well-rounded portfolio.

Balancing risk and potential returns is a fine art, and your investment thesis should outline how you plan to approach this delicate balance. Furthermore, learn to measure and quantify risk in the startup ecosystem using various risk assessment techniques to make informed investment choices.

Identifying Key Performance Indicators (KPIs) for Your Investment Thesis

Key Performance Indicators are quantifiable metrics that provide critical insights into the performance and achievements of a business. By tracking relevant KPIs, venture capitalists can assess the overall health and direction of a startup, enabling them to support portfolio companies effectively. Moreover, KPIs offer a basis for comparison, allowing you to benchmark a startup's progress against its peers and industry standards.

Tailoring KPIs to Startup Stages and Industries

While KPIs share a common goal of tracking performance, their significance can vary significantly based on the stage and industry of a startup. For example, early-stage companies might prioritize metrics related to customer acquisition, retention, and product-market fit. In contrast, late-stage startups might focus on revenue growth, customer lifetime value, and profitability. Tailoring KPIs to suit the unique needs and challenges of each startup stage and industry is vital for meaningful performance assessment.

Selecting Actionable and Measurable Metrics

When identifying KPIs, seek metrics that are both actionable and measurable. Actionable KPIs provide clear guidance on how to improve performance, helping startups identify areas that need attention and enhancement. Measurable KPIs, on the other hand, are quantifiable, allowing you to track progress and changes over time. The ability to take action based on KPIs and measure their impact ensures a proactive approach to enhancing a startup's performance.

Common KPIs in Venture Capital

While KPIs can be highly specific to individual startups and industries, certain metrics have proven valuable across the venture capital landscape. Some common KPIs include:

Customer Acquisition Cost (CAC): The cost to acquire a new customer, helping evaluate marketing efficiency.

Monthly Recurring Revenue (MRR): Provides insight into the company's predictable revenue stream.

Customer Churn Rate: Measures customer retention and the ability to maintain long-term 

relationships.

Burn Rate: Tracks how quickly a startup is spending its capital, indicating runway and sustainability.

Gross and Net Profit Margins: Assessing revenue generation and cost efficiency.

Customer Lifetime Value (CLV): Estimates the value of a customer over their entire engagement with the startup.

The Power of Data-Driven Decision Making

KPIs are not merely numbers on a dashboard; they fuel data-driven decision-making. By continuously monitoring KPIs, you can identify strengths, weaknesses, and potential roadblocks. Data-driven insights enable you to provide tailored guidance and support to your portfolio companies, helping them navigate challenges and seize growth opportunities.

Building a Well-defined Due Diligence Process

A well-structured due diligence process empowers you to make informed decisions, mitigates risks, and will help you identify the startups that align best with your investment thesis!

Let's delve deeper into the key steps involved in building an effective due diligence process so you can include it on your Investment Thesis:

1. Defining Your Due Diligence Objectives

Start by clarifying your objectives for the due diligence process. What key aspects do you want to evaluate in potential startups? Identify the critical areas of focus, such as market opportunity, team capabilities, competitive landscape, financials, and scalability. Setting clear objectives ensures that you leave no stone unturned while assessing potential investments.

2. Gathering Essential Information

Begin the process by collecting comprehensive data and information about the startup under consideration. Request financial statements, market research, business plans, and any other relevant documentation. Engage in one-on-one discussions with the startup's founders and management team to gain insights into their vision, strategy, and execution plans. Gathering essential information lays the groundwork for a detailed evaluation.

3. Market Analysis

Conduct a thorough market analysis to assess the startup's positioning within its industry. Analyze market trends, potential for growth, competitive landscape, and potential threats. Understanding the market dynamics helps you gauge the startup's competitive advantage and potential for success.

4. Team Evaluation

Evaluate the startup's team to understand their expertise, experience, and alignment with the company's vision. Assess the cohesiveness and complementarity of the team, as a strong and capable team is a significant factor in a startup's success.

5. Financial Due Diligence

Perform rigorous financial due diligence to examine the startup's financial health and viability. Analyze revenue streams, cost structures, cash flow, and projections. Scrutinize financial ratios and indicators to assess the startup's financial sustainability and growth potential.

6. Product and Technology Assessment

Evaluate the startup's product or technology to gauge its uniqueness and potential market fit. Understand the value proposition it offers to customers and how it addresses market needs. Assess the scalability and defensibility of the product or technology to ensure long-term competitiveness.

7. Legal and Regulatory Review

Conduct a legal and regulatory review to identify any potential legal risks or compliance issues. Scrutinize contracts, licenses, intellectual property rights, and any pending legal disputes. Ensuring the startup operates within legal bounds safeguards your investment from unnecessary risks.

8. Customer and Partner Feedback

Gather feedback from customers, partners, and industry experts to gain external perspectives on the startup's product or service. Their insights can validate the startup's market fit, customer satisfaction, and potential for growth.

9. Risk Analysis

Identify and assess potential risks associated with the investment. Consider market risks, operational risks, technological risks, and competitive risks. A thorough risk analysis helps you make informed decisions about risk-reward trade-offs.

10. Decision-Making and Post-Investment Monitoring

Based on the findings from the due diligence process, make data-driven decisions on whether to invest in the startup. If you decide to proceed, establish a monitoring plan to track the startup's progress and performance after the investment. Continuously monitor the startup's performance against the initially defined objectives and pivot if needed.

Refining Your Thesis and Iterating

It’s also important to keep in mind that an investment thesis should not be static; it should evolve with your experiences and the changing market dynamics. Embrace flexibility and adaptability, and be open to learning from both successful and unsuccessful investments. As you gain insights from your portfolio companies and the market, update and refine your investment thesis to enhance its effectiveness continually!

Developing your own investment thesis is a critical step for aspiring venture capitalists. It provides you with a structured approach to identify and seize opportunities in the dynamic startup ecosystem. 

Through comprehensive market research, clear investment criteria, risk assessment, and an adaptable approach, your investment thesis will act as a guiding force throughout your venture capital journey. Embrace the continuous learning process, and don't hesitate to iterate and refine your thesis as you gain experience in the thrilling world of venture capital.

Interested in the full research paper?

You might also like, unlocking opportunities: venture capital in the sportstech boom, mastering startup valuations: a comprehensive guide, venture capital mythbusters: dispelling 15 common misconceptions, the skills you need to be successful as an early-stage, late-stage, and growth equity investor, decoding pre-seed and seed funding: a comprehensive guide for entrepreneurs, space, the final frontier of vc: investing in the new space race, about goingvc.

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How to Create an Investment Thesis

What it is, why you want one, and how to create it.

One of the essential elements in a venture capital firm is the investment thesis. The thesis can come in many varieties, from broad and loosely defined focuses to a specific vertical and company stage. On the other hand, some investors choose to allocate capital without a core thesis driving their decisions and see success in this strategy. This post will define an investment thesis, why investors decide to develop one, and some tips on creating one.

What is an investment thesis?

Simply put, the investment thesis is an assumption made about a market, vertical, or trend that will drive the strategy for a particular firm or fund. Just as a startup will assume a problem or market need and build a product around solving that problem, an investor will consider various markets and trends and develop an investment strategy focused on that assumption.

Why develop an investment thesis?

The thesis is the driving force behind what a firm chooses to focus on to generate returns. It will be a fundamental part of how VCs decide what to look for in specific markets, source deals, and where they ultimately decide to invest their capital. The thesis helps keep a firm focused, allowing investors to work within particular parameters when they go about their business.

There are a couple of advantages to having a thesis-driven approach as a venture capital firm. It will drive relationships that the firm pursues. This relationship driver applies to how firms source deals from an investment standpoint and choose their limited partners. These relationships with experts in a particular vertical will help portfolio companies with mentorship, independent board seats, and talent sourcing.

A thesis compels VCs to be experts within their particular field. If a firm bases its thesis around FinTech, it will most likely have some expertise in that field. This knowledge will help them understand the marketplace, specific problems a startup is trying to solve and judge founder talent. The firm will also be a thought leader in the space by releasing analysis and reporting trends in the industry. Lastly, the firm's partners will be a better value-add to the companies within their portfolio, paving a quicker path for a startup's growth and success.

Example of a thesis

A16Z , a prominent Silicon Valley firm, has several different areas they invest in, from FinTech to Growth to Consumer focused startups. Below is their investment thesis for their FinTech portfolio:

"Fintech companies are innovating across broad categories — in banking, lending, insurance, real estate, and investing — both on the customer-facing side and in core infrastructure. We believe the combination of mobile, digital money, machine learning, and new data sources offers startups a unique opportunity to leapfrog outdated infrastructure and compete with incumbent financial institutions to reimagine the way we manage our finances." Source

We understand that the firm focuses on startups that use mobile and machine learning to innovate on financial management through this statement. This thesis has helped drive the firm's investments in Stripe (now valued at $36B) and Carta (currently valued at $3.3B).

For an awesome hub of investment thesis examples, check out this link !

How to build an investment thesis

When developing a thesis, there are vital things to keep in mind:

Markets : Start with market sizing to make sure that a particular industry is worth pursuing. We will discuss market sizing strategies in a future post.

Trends: Understand macro trends impacting the markets and industries that you determine are big enough to pursue.

Companies : Break down each company within a market that has upside potential. Look at recent companies that have seen success within your specific industry focus.

Exits : Make sure there is an exciting exit environment for companies in that particular segment. You want your investments to see a return through going public or M&A activity.

Tips on the above:

Things to think about defining in a thesis would be company stage, geography, vertical, or market.

People tend to want a fully-formed thesis right off the bat, but it's an iterative process. The scrum process might be three months, but the full process can take a year before talking about a thesis publicly.

Have a hunch on something that isn't fully formed and then test it out:

Go out and talk to entrepreneurs.

Talk to buyers of the technology.

Form relationships with ecosystem partners.

Incrementally improve your thesis based on feedback and results.

For some more tips and strategies on creating a thesis, check out this informative Medium post .

Final thoughts

The thesis can help you stay focused and is your north star. For startups, it will help them target your firm. For LPs, it will help them judge your conviction and investment strategy. When developing a thesis, think about taking on big problems and big ideas. There are so many significant issues to be solved globally, and we have a golden opportunity to help solve them. Think big, and don't limit yourself only to ideas on making returns for investors, but how to impact the world.

This story is from Sutton Capital contributor Zeb Hastings. For more information on Zeb’s work, please visit his  website .

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Why and How to Build Your Investment Thesis

When starting out in venture capital, the diversity and breadth of opportunities can get a bit overwhelming. To cut through the chaos, it’s important to arm yourself with an investment thesis. But how do you develop one? Our resident Investor Relations expert, Josh Liggett, has created a checklist of six steps to getting started. An investment thesis applies to any form of investing, from the stock market to horse racing… as long as it involves putting your money behind a principled decision.

These decisions are not just for beginners; experts in the field like Warren Buffet, and Peter Thiel have spent years developing their own personal strategies. Buffet, for example, likes to hold stocks for a long time . Shark Tank's Kevin O’Leary wants his money to bring back prisoners of war. And Thiel thinks those two guys are wrong. One thing is certain – when wading into the venture capital market, without a well-thought-out strategy, an investor could end up with too much or too little money in specific sectors, stages, or asset classes, leading to an unbalanced portfolio. Here are six steps to developing your investment thesis for Venture Capital.

Think it Over and Get Creative!

Spend some time on a brainstorming session, and be sure to jot down some notes. A thesis can be as simple as “I think driverless cars are the future” or as complex as "AI is the future," and its predictive models will change the business-consumer relationship. Come up with a hypothesis that reflects your instincts, knowledge, and needs. Having trouble getting started? Start with your personal experiences. Do you know what it takes to take a company public? Do you have your finger on the pulse of a specific industry? Do you have insight into a sector that others would die for? Are you Mark Cuban? If yes, then you can use that information as investment criteria. You can also follow experts you respect - like only investing in companies that large VCs like Sequoia back, or follow famous investors like Thiel or Chris Sacca. Remember: A thesis is only limited to the creativity of the investor, so get as specific or vague as you want.

Dive Into Specifics

Once your thesis starts to take shape, go further. List the specifics of your strategy. How much do you want to invest? What sectors are you interested in? What regions do you want to invest in? Seed or Venture stage? First time founder or serial entrepreneur? What type of shares do you want? Do you have any deal breakers? You get the gist. The more specifics, the more honed your thesis will be.

Become an Expert: Read, Read, Read

Once you know what you are looking for, it’s time to learn. Education is rule number one when coming up with a strategy. It’s important to fully understand the ecosystem you’re interested in, from the perspectives of both the incumbent and startup side. Read respected publications ( The Wall Street Journal [WSJ], Financial Times, Bloomberg , etc) that cover incumbents. Each major publication has a technology section featuring innovation, as well as columnists covering specific areas. For example, Matt Levine from Bloomberg is a great read for insight into financial markets and fintech. For the startup perspective, the main information hub is TechCrunch, but there are other valuable resources out there. Great places to start include the blog of Silicon Valley legend Eric Reis, Startup Lesson Learned , and Mattermark Daily. There are publications and blogs dedicated to specific industries as well. For example, Coindesk and Ethereum’s blog are good sources on blockchain and cryptocurrencies, while MedGadget has the latest in medical technology.

If you’re more daring, check out social news and community platforms, like Reddit or Quora. On these platforms, you can post, view, and answer questions and read the community’s comments on nearly everything under the sun. See if anyone else supports your model, and why. It’s also important to understand the different terms in startup investing. From the Power Law to conquering the term sheet, it’s important you grasp the terms about which you are investing. During the education stage, don’t be afraid to tweak/change/burn your old thesis. This is the time to learn, and don’t be scared to change your previous beliefs. At the same time, don’t hesitate to channel your “inner Thiel” and go against the tide.

Bounce It Off your Colleagues and Peers

Get a group of friends together and practice selling your thesis to them. Bill Gates and Warren Buffett employ the same strategy., as the friends regularly bounce ideas off each other.

If you can’t convey to a friend why you think you’re right and defend your position, then you should probably go back to the drawing board.

Put it into Action: Invest

If you have gotten this far, congratulations! The hard part is over, now it’s time to put your money where your mouth is. Pick the companies and funds to invest in, keeping your hard-earned thesis front and center. Don’t be blinded by cool looking companies, follow your educated hypothesis.

Continue to Evaluate your Thesis

Finally, don’t be afraid to stick to your thesis if you’re doing badly or change it even if you’re doing great. It’s a dynamic thing, especially as you continue to educate yourself. Who knows, you could be too early to a new trend or catching the tail end of an old one.

Reid Hoffman put it best: “It’s useful to be able to recognize whether you’re on track or not. To have the belief, but also paranoia about am [sic] I tracking against my investment thesis.”Check out ourcrowd.com and start following your hypothesis today.

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S T R E E T OF W A L L S

Building an investment thesis.

Now that you understand what characteristics make up attractive long and short ideas, it is time to explain how to formulate an investment thesis. Being able to construct a real and actionable investment idea is in the heart and soul of an analyst’s work in the hedge fund industry. Building a successful thesis begins with (1) rigorous due diligence at the Micro level, (2) aligning that view with the Macro environment, and (3) understanding the overall trade setup.

Good Company Qualities

• High return on capital
• Barriers to entry
• Growing industry
• High margins relative to competition

Good Management

• High insider ownership
• Well respected
• Clean accounting
• Infrequent restating of earnings
• Not overly promotional
• Good allocators of capital

All of these qualities are obvious and won’t differentiate your pitch, but they are qualities you will have to talk about, so make sure you understand them well.

Target Price = Your Earnings Estimate × Multiple

Company Earnings

• Will the company beat earnings expectiations in the next quarter or in the next year?
• If so, what are the catalysts that will cause the Company to beat earnings (e.g., higher revenue, higher margins, lower interest expense, share buybacks, etc.)? Paint the picture of how, when, and why there will be a catalyst that supports your view. Providing an opinion without fully understanding and explaining the relevant value drivers will be a recipe for failure.
• What’s your confidence the company will beat earnings? What’s the probability?
• What’s your margin of safety? What can go wrong?
• Does your pitch rely on multiple expansion? Why? Where is the company trading relative to its historical multiple? Should the multiple trade at a premium or discount given how the company has changed over the years, and where we are now in the business cycle?
• Where is the company trading relative to its peer group? If the entire market has seen multiple expansion, then is it fair that this company should too? In other words, is it expensive or cheap relative to itself historically and/or its peers, and can you explain why this might be wrong?
• What catalyst is going to cause this multiple to start expanding? Again, paint the picture of how, when, and why there will be a catalyst that supports your view.
• What is your confidence in multiple expansion? What’s the probability?

Target Price:

Your target price is the product of a forecasted earnings metric multiplied by the expected multiple. This multiple can be P/E, EV/EBITDA, EV/Sales, FCF/Market Cap, or any other reasonable metric. Some metrics are industry-specific and more valuable for those industries than the aforementioned general ones.

Regardless, if you provide a target price, you need to explain how you arrived at this target, and the stages of your thought process to get there. for example, if you claim that a stock is going to have +50% upside, but feel they won’t beat consensus earnings, then you are calling for +50% multiple expansion, pure and simple.

Although not ideal, stocks in industries with bleak macroeconomic outlooks can still be good investments. It is important to understand what is taking place at the company level, sub-sector level, industry level, and national level. This approach will help you determine whether you are investing in a “good house in a bad neighborhood.”

• How has the stock performed heading into the catalyst, i.e, before you put the trade on? If it has already gone up 10% recently, for instance, it will be much harder to outperform on the catalyst.
• How crowded is the trade? Are a lot of hedge funds already invested in the name? One easy way to determine this is to speak to a sell-side research analyst and ask whether they are getting a lot of calls from other funds regarding the company.
• Is the general public bullish or bearish? If you are researching a short pitch, it is key to check for existing short interest (SI function on Bloomberg). If it is a long, you should review the list of major holders of the stock (HDS function on Bloomberg). If the top holders are several hedge funds, then the stock pitch is likely overcrowded and may not be actionable. One of the biggest mistakes in a hedge fund interview is to pitch a stock that every hedge fund has already heard of and evaluated.

Crowded names can still work, but investors must tread lightly. When the market sells off or there is a change in sentiment, crowded names typically perform the worst. To check this, there is an index on Bloomberg of high hedge fund ownership stocks; you can use it to see whether your idea is on that list to make sure it isn’t already an overcrowded trade idea.

Other technical tools that can help evaluate the setup for a stock include RSI (relative strength index) and moving averages. The RSI is a momentum indicator—below 30 is considered oversold and above 70 is considered overbought.

Ideally, you want a stock that has recently underperformed its peers, is lightly owned by hedge funds, and is heading into a catalyst that you think will have a positive surprise . By contrast, a crowded name that has already outperformed based on the expectation of a positive catalyst will likely get a limited reaction if and when the catalyst does occur. For example, it is very common for companies to beat earnings expectations but not to experience an increase in their stock prices, because the general public or hedge funds are already expecting the earnings surprise. In today’s hyper-competitive market, one needs a truly different variant perception in order to outperform the market.

Other Investing Thoughts

• What constitutes a good investment idea? What does that phrase even mean? The answer is that it means something different to every person–that is what provides opportunities in a market. That is why some investors own a stock and others short it. If everyone agreed on what makes a good investment then everyone would own the same stocks.
• How much should you make per idea? Investors do not even agree on this principle. Developing frameworks for investing will help you follow a set of guidelines that you can refine over the years through experience, and as part of that, you will learn to determine what the expected profit and acceptable risk for a particular investment are.

Value Investing Framework

• Benjamin Graham defined the first basic tenant of value investing as follows: when the price of a security diverges from its intrinsic value (its corresponding cash flows), a value investor should work to exploit that divergence.
• The second basic tenant of value investing is the margin of safety: a security should preferably be purchased at a deep discount to its intrinsic value, to help limit the amount of downside risk the investment has.

Street of Walls Investing Framework

• It is very easy to get ideas from other investment professionals, but it will be very obvious in your pitch whether you have done the analytic work yourself or not.
• This is typically discovered when you are questioned on your assumptions in the model. If you built the model yourself, you can likely defend the assumptions much more intelligently.

Industry Analysis

Market size and growth.

Study the market size and growth of the company’s core industry. Even though you may be studying the beverage industry, the manufacturing companies and distribution companies have very different dynamics. The beverage manufacturers may not be growing much faster than CPI, but the distributors may be going through a massive consolidation period and therefore have earnings that are growing at a much faster pace.

Historical Industry Returns

A security may be cheap and look attractive, but that may be because the returns of the company and the industry are not attractive. For example, the stock Owens Corning (OC) traded at 8x earnings for a long time. This sounds inexpensive, but it was ultimately justified because operating margins were in the single digits. Eventually, however, industry did consolidate and operating margins expanded to 20%. Thereafter, the company’s earnings multiple expanded into the low teens.

Unit Economics

Most bottom-up, fundamental analysis is used to study the unit economics of a company. For example, what does it cost to make and sell one unit of output, and what is the profit on that unit? What are the pricing and volume trends? It is important to understand the value drivers clearly in order to build a detailed operating model for your pitch.

Competitive Positioning

• Do certain companies control industry pricing?
• How sustainable is the company’s competitive advantage?
• Are there high or low switching costs?
• Does branding matter
• Are there regulatory protections, such as tariffs?
• What important considerations are there with respect to the company’s customers and suppliers?

Cyclical / Seasonal

An industry may be in a strong growth period and look very attractive, but it may also be at the peak of a cycle that is possibly about to turn substantially negative. For example, the housing industry looked extremely attractive in the early 2000s, but crashed and was extremely unattractive into the late 2000s and beyond. This is due to both an economic downturn and a systematic overbuilding of homes that collapsed in the middle of the decade. In addition to the economic/business cycle, certain industries have drivers of cyclicality that are very specific. One example of this is the Oil & Gas industry—the price of oil alone can have a huge impact on a Oil & Gas company’s earnings potential.

It is also important to understand the seasonality of the business. Retailers tend to sell more product during the fourth quarter of the year, because of the holiday shopping season. Therefore, it may be wrong to extrapolate a trend in March and April if the majority of the company’s sales take place in the later months.

Investment Considerations

When you start working for a hedge fund you will quickly learn that each fund has their own unique investment style. Some hedge funds simply will not invest in companies that have weak management teams. It does not matter how attractive the opportunity or valuation is—the fund simply won’t invest. This principle often results from an investor getting burned from a bad management decision, such as a bad acquisition, or a focus on short-term earnings at the expense of long-term objectives. After gaining experience analyzing companies, you will eventually develop your own philosophy. Still, bear in mind that other investors may have an opinion on this topic that differs from yours, and you need to consider the philosophies of your teammates when evaluating an investment idea.

In studying management teams, you should look at the management team’s track record and understand both the buy-side and sell-side opinion on the management team. Study the company’s internal philosophy: how do they allocate capital? Is the current management team following what the company has always done? Another key to understanding how a management team will probably act is to study how the members are compensated. Is their compensation tied to revenue or earnings, return on capital, or some other metric? How much stock does the management team currently own? How much risk are they taking? Are they buying or selling stock? How many options do they have outstanding?

Study both relative and absolute valuation. A stock may appear cheap when compared to a stock in another sector, but very expensive against its peers. Thus, different investment situations call for different valuation metrics to be used.

One example of this principle is that it is completely unhelpful to use P/E if the company has no earnings (or negative earnings). You should also study the rate of growth of the earnings metric you chose. A company may look expensive at 30x earnings, but if it is doubling revenue every year and tripling earnings, it may not be so expensive after all. In fact, if you believe that this trend can continue, it may be an excellent long investment idea.

• Is there a difference between your earnings estimates and those of the street?
• If not, is your thesis really interesting, or is it just a “consensus trade”?
• What are the key events that the street will care about? Is it an earnings release, a new product release, or something more unusual?
• Does the street care about what happens next quarter or are they more focused on the potential signing of a big contract that could take place at any time?

Donald Rumsfeld once said there are “Known unknowns and unknown unknowns.” Some risks are riskier than others. How does the company control for this? How do you as the investor assess the downside risk from this?

• What has to happen for the downside case to play out?
• What has to happen in order to lose some benchmark amount, say 20% or more?
• If that event plays out, what will happen to the multiple? Will it go down or actually expand?
• All in all, what is the probability of a downside event and what is the maximum potential loss you might face in such a scenario?

Catalysts are extremely important in identifying when you are going to “get paid.” This is a crucial factor in sizing positions. If a catalyst is expected to take place in the near future, you probably want to have your position fully sized immediately. If not, it may make sense to taper into a position.

Framework for Investing: Large Market Movements

Rising Markets: The typical reaction to a rising stock price is to “chase” the returns. That means when a stock continuously goes up, day after day, the investor feels like he or she is missing an opportunity, and will be inclined to buy the stock. This pile-on mentality causes more investors to become a part of the action. This is a classic, human reaction to a strongly outperforming stock, and it can often lead to poor returns due to an undisciplined approach and the fickle nature of the market.

The same thing can happen when a stock continues to drop in price. Investors tend to panic and sell at exactly the worst time. During the heat of the battle, people tend to get emotional and sell their best stocks out of fear.

• Tell yourself it is normal to react this way when you are losing a lot of money. Fear is normal: both the fear of missing an opportunity and the fear of continuing to lose more money.
• Ask yourself, “Has my investment thesis changed?” If it has, then sell, but if it has not, then ignore your fears and hold the position.
• Have strict target prices in place. This will help you exit a position once your target has been achieved, and thereby avoid the trap of trying to “ride a winner.”

Here is a related excerpt written by Benjamin Graham, from The Intelligent Investor:

• “Imagine that in some private business you own a small share that costs you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects, as you know them. Often, on the other hand, the value he proposes seems to you a little short of silly.
• If you are a prudent investor or a sensible businessman, will you let Mr. Market’s daily communication determine your view of the value of $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.”

Trading Considerations

The liquidity of a single stock is not a reason for a fundamental investor to buy a stock, but it can definitely be a reason for an investor not to buy a stock. The less liquid a stock is, the riskier the position becomes, as it is difficult to exit an illiquid position—especially during turbulent market conditions, when liquidity is often demanded.

In order to determine how liquid a stock is, you need to see how many shares trade on a regular basis. For example, if the average daily volume of a $10 stock is 1 million shares, then the stock trades $10 million per day. If you have a $1 million hedge fund, and you want to take a 10% position, you will need to buy $100,000 worth of stock, or 10,000 shares. If you wanted to buy all of that stock in 1 day you could, as you would only account for 1% of the daily volume ($100,000 in stock to be purchased ÷ $10,000,000 daily volume = 1%). A reasonable rule of thumb is that you do not want to account for more than 10-15% of a stock’s daily trading volume if you do not want to influence its price. So in this example, you could buy up to $1,500,000 worth of stock per day without moving the share price. If you were to buy $2,000,000 of stock in 1 day, or 20% of the daily volume, you would likely cause the stock price to increase (at least temporarily). If your desired position is much larger, then it could take many days to accumulate the desired position – and similarly, it could take a long time to unwind the position when you want to exit. This makes the investment much more risky.

Therefore, a stock may have fantastic management, excellent earnings growth, and an attractive price, but if there is no liquidity you probably simply cannot buy it.

Shareholder Base

You may think that you have found a gem: a rare and precious investment opportunity that no other hedge fund is talking about. Fortunately, that notion is relatively easy to confirm or disprove. To check and see whether other sophisticated investors are involved in the company you’re researching, you can pull up the company’s quarterly holdings report on Bloomberg and see who the largest shareholders are.

For example, suppose that W.R. Grace (GRA) offers an exciting investment opportunity, according to your analysis. However, looking at the holders list, you determine that other hedge funds are well aware of this opportunity, as the top shareholders include large hedge funds such as Lone Pine, York Capital, TPG Axon, and Hound Partners.

It may not be a bad thing that other hedge funds are involved. You will probably be invested in a good company in this case, as large hedge funds rarely get involved in unsound investment ideas. That being said, crowded trades can, again, be very risky. First, if the market is already anticipating good news, it may be that the good news is already baked into the stock price. Second, if bad news comes out, then everyone will likely be forced to run for the exits at the same time. This will lead to adverse price movement that could destroy your holding.

Hedge funds in general tend to be short-term focused, so it could turn into a situation where one investor exits swiftly and triggers a domino-effect panic, crushing other investors in the wake.

Looking at charts can be very deceiving and can create misleading signals. For example, the stock chart below shows a quickly rising stock price, but that does not mean it is expensive. It may be cheap relative to its own history, the rest of the sector, or the market as a whole. The entire stock market might have been going up rapidly, or the sector as a whole might have had a big rally, and relative to the sector the stock underperformed, so it may actually be cheap on a relative basis.

You may also want to compare several valuation metrics simultaneously. For example, a company may look expensive on a Price/Earnings basis but cheap on an EV/EBITDA basis.

In the graph below, you can see that Factset Research Systems (FDS) is trading at 20x P/E. Relative to the market that is high, but relative to its own history, that is a normal trading ratio.

Business Model Questions

It is just as important to understand the industry in which a company operates as it is to understand the company itself. For example, if you are studying a homebuilder, it is important to understand the companies the homebuilders buy supplies from. If the building products companies are raising their prices and the homebuilder cannot raise prices, the builders are going to see their margins compress. Therefore, it is important to scan what is happening with related companies across the industry and sector to get a sense of the overall dynamic affecting the company’s earnings potential.

Homebuilding Industry: Related Participants

• Building Materials – USG, EXP, VMC, SHW
• Home Builders – LEN, DHI, KBH
• Building Products – WHR, MAS
• Furniture – TPX, LZB, ETH
• Extensions – Lawn care – SMG
• Mortgage Originator – BAC, C
• Insurance Provider – PRU, MET

A change by the mortgage originator will likely have an impact on the entire industry. If Bank of America (BAC) tightens its origination standards, then people will buy fewer homes; homebuilders will buy less carpet to go inside the homes; fewer beds will be sold; etc. Therefore, before considering an investment in a homebuilder or related entity, it would behoove you to perform checks to see what else is occurring in related industries and sectors across the value chain.

Business Model Advantages

Barriers to entry.

Companies with barriers to entry have a huge advantage relative to companies that do not. These barriers can occur for a variety of reasons, but some of the most common include economies of scale, substantial investment requirements, technological innovation, favorable government regulation, and networking effects. eBay, for example, is an extremely difficult company to compete against, because the company has established a formidable position as the largest Internet-based auction site available. Both buyers and sellers are unlikely to go to other sites, because both realize that eBay offers more individuals on the other side of the aisle to transact with. This makes it hard for new auction companies to compete with eBay effectively.

Companies in most industries will claim that they have high barriers to entry, but time will often show that a company earning significantly higher than its cost of capital will attract competitors. Put simply, if the company is earning outsized returns on the capital it invests, then it will attract competitor investment seeking to earn comparable returns. This competitive investment will result in increased production and sales competition, and diminished profit-earning potential will surely follow in the future.

Cost Advantages

The low-cost producer can have a huge advantage over its competition. In industries with large legacy assets, such as cement or coal production, the players with the newest assets are typically the lowest cost providers, and that allows for lower pricing often results in greater market share.

Alternatively, there is also a learning curve that can create the reverse effect, wherein the older industry participants have lower costs as the newer players are still “figuring it out.”

Customer Habits

Repeat purchase items, such as paper or office supplies, can create a strong advantage for the producer. The more entrenched companies become within their customer bases, the higher the switching costs for those customers. For example, a large technology roll-out may effectively lock a customer in to the provider’s products, as it costs too much to execute a complete technology overhaul to switch to a different vendor.

Economies of Scale

Companies with large fixed costs need scale in order to make a profit. The larger the fixed costs, the larger the scale needs to be. Incremental margins can be very high once a company crosses a certain threshold and is able to sufficiently leverage its cost base. This can make a company highly attractive and cause a company to trade at a high multiple, once the threshold production level has been achieved. This phenomenon is sometimes referred to as “operating leverage.”

Oligopolies, or Monopolistic Competition

Functioning oligopolies can act similar to monopolies, in terms of locking in outsized profit margins from its business. These situations should not take place for long according to basic economic theory, but they can and quite often do. For example, the roofing industry has greatly consolidated in recent years, so that four players currently control 80% of the roofing shingle manufacturing market. When one of the four manufacturers raises its prices, the other three can easily follow. For the past five years, none of the players has broken from the pack and tried to steal market share from the other three by offering a lower price. As a result, the industry has seen its operating margins grow from 8% to 20% in recent years. Whether this increase in margin is sustainable over the long term remains to be seen.

Expected Return

What is a “good” return for a portfolio? How do you know? What is a good return for an individual investment?

The Academic Approach

Expected Rate of Return = Risk-free return + Beta × (Expected Market Return – Risk-free return)

This is the equation from the Capital Asset Pricing Model (CAPM), which you will learn in school—but try pitching this to a portfolio manager at a hedge fund. He or she will likely tell you to get lost!

Theoretically this makes perfect sense, but most hedge funds don’t use this as a hurdle rate. Most funds target a 20% return—though very few are capable of actually achieving that return consistently.

The Practical Hedge Fund Approach

A more practical approach is to study what percentage of the time you will make money and lose money on your investments. From there, you need to understand how much you make when you are right and how much you lose when you are wrong. Here is an example of this framework:

As you can see:

Average Return per Idea = (% Right × Avg. Return When Right) + (% Wrong × Avg. Loss When Wrong)

% Right is often referred to as your “Hit Rate,” and Average Return When Right is often referred to as your “Slugging Rate.” The magnitude of your wins relative to that of your losses is referred to as your “Win/Loss Ratio.”

The best analysts are right about 60% of the time. Most people think they will be right closer to 75%, but the sad truth is that most investors will not do much better than 50%. You can still make money being right only 50% of the time, but you have to be very disciplined about cutting your losses. That is why maintaining a 2-to-1 Win/Loss ratio is so important.

Here is what is so troubling about the example given above: a fantastic analyst who is right 60% of the time, makes a 30% return when right, and maintains a 2-to-1 Win/Loss ratio, will only earn an average return of 12% per idea. However, as we noted, most hedge funds try to earn 20%, so how can they do this?

One possible solution is to employ leverage, but from an analyst’s perspective, he/she typically does not have control over this. So how can an analyst generate a higher return per idea?

A higher Hit Rate is very difficult to achieve. Also, achieving greater than a 2-to-1 Win/Loss ratio is also not realistic, as it would require tighter stop-loss controls that may result in the premature exit of lucrative investments simply because they took an initial “hit” before panning out.

Therefore the only real area to control is the Slugging Rate. If this is the lever, then the analyst cannot afford to invest in stocks that will only earn 10%, 20%, or even 30%. It is just not a high enough annualized return. At a 40% Slugging Rate, the analyst can get closer to the elusive 20% total return hurdle.

40% thus tends to be a “sweet spot” for many hedge fund analysts, as a minimum hurdle rate of return for putting on a position. If the investment only has a 6-month duration, then the return only needs to be 20%, which is roughly 40% on an annualized basis.

Searching for 40% Returns

What needs to happen in order for a stock price to increase? Either earnings need to expand, or the multiple needs to expand, or a combination of the two. The first step is to look at where the sell-side estimates are for the current year and two years into the future. If AAPL is trading at $611 today and is expected to earn $54 in 2013 and $63 in 2014, it is trading at 11x P/E and 10x P/E in 2013 and 2014. In order for the stock to reach $855, or 40% higher, you might project earnings to be 20% higher than the street in 2013 at ~$65, and for the multiple to expand by 20% to ~13x. Or, you might predict stronger earnings growth and less multiple expansion, or vice versa.

As you can see, it pays to think through different scenarios needed to achieve your target return.

A common mistake analysts make is to say that they believe a stock will appreciate by an amount but have earnings expectations that equal or are very similar to those of sell-side earnings estimates. That means that for the investment thesis to prove correct, the stock must increase entirely due to multiple expansion. That is generally viewed as a “low-quality” thesis, as expansion in a valuation multiple is more difficult to predict and gain confidence in than is growth in earnings.

Home » Blog » Fund Management » What is an Investment Thesis and 3 Tips to Make One

What is an Investment Thesis and 3 Tips to Make One

• July 10, 2022
• Lanturn Content Team
• Fund Management

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Whether you are a start-up founder or a first-time fund manager, learning how to write an investment thesis, can greatly assist you in attracting venture capital. Venture capital is a promising route, it can provide you with access to cash and expert advisors who can assist with day-to-day operations. Furthermore, venture capitalists can help guide you on your journey towards becoming the next big thing. In this article, we will provide you with tips for crafting an investment thesis, and offer insights into fund management and investing.

As a business-friendly region for aspiring fund managers and startups, Singapore is no stranger to venture capital, as evidenced by the total number of Singapore-based startups backed by venture capital reaching  S$11.2 billion in the first nine months of 2021 , doubling the whole amount raised in 2020. Although the number is predicted to increase in the coming years, it is crucial to remember that venture capital investors are highly selective; they will not invest in a company without thorough due diligence and vetting.

What is an investment thesis?

Would you invest in a business with no vision, guiding principles, or viability? Most likely, you will pass on the idea, no matter how much return is promised. This is why an investment thesis becomes crucial.

An investment thesis is a proposal that venture capitalists and investors make regarding a particular investment or entire asset class before investing in it. The thesis states their belief about why a particular investment will give them a good return in the future. Therefore, meticulous research is required to predict potential growth and determine the current market sentiment. If the thesis remains valid, then the investment should be continued, even in a downturn. Meanwhile, if the thesis turns out to be false, the asset can be sold and the investor can move on.

If you are a startup founder seeking investment, you must check if the goal of your startup is aligned with the investment thesis of the investor even before you pitch to them, so as not to waste time. For example, if your startup is about saving the climate, you should find an investor whose investment thesis is about impact investing. Other examples of investment thesis could be about a positive outlook on crypto or about investing in real estate.

You can  get a fundraising consultant  to help you with this.

How to make an investment thesis?

An investment thesis is not something that can be done on a whim. It must be well-thought-out. Here are three steps that you should take in creating an investment thesis:

Determine the cause of the trend

In crafting an investment thesis, you should elaborate on the trends that support your view of why this new venture would be a success. For instance, if you want people to back your new fintech venture, you may want to state that in today’s digital age, people are increasingly spending their time online and becoming dependent on mobile devices, including when it comes to their finances. They want everything to be instant and within reach, just by the tap of a finger.

This presents an opportunity for fintech to fill the demand, especially as mobile and internet penetration continues to increase worldwide. This section should support your view on why investing in fintech will pay off down the line. Remember to include market size potential or appetite for the service to bolster your argument.

Moreover, you should assess whether the industry itself has a place in the foreseeable future. As the world becomes more interconnected, it can be said that the probability of digital banking and fintech adoption is relatively high. Such a view was further realised during the pandemic when lockdowns and social distancing measures meant customers needed to find a new way to fulfil their financial needs — ultimately leading to a boom in fintech usage.

Assess the existing trend

After researching the cause of a given trend and market sentiment, it is time to make the case for why investors should back companies that will fit the investment thesis.

For instance, people started to rely on their smartphones, which became all-encompassing devices that answered every need at about the same time that internet penetration seemed to increase every year. It was in this environment that Grab, a booking platform for taxis in Southeast Asia, first started. Since then, they have transformed into the Super App that it is known for today, providing car rides, food, and even grocery shopping and investing services.

Becoming the first in Southeast Asia allowed Grab to establish market share and dominance long before other competitors. While it is true that Gojek was established in 2010, they relied on traditional call centre service for the first few years of operations and just started using an app in 2015. Additionally, they did not expand their Southeast Asia operations until much later, unlike Grab, which expanded to Singapore a year into operations.

This applies to all businesses and startups, not just digital native companies. For example, if you want to open a coffee shop, you must know the potential market in your area and list down the reasons why your coffee shop has potential. Perhaps it is located in a trendy and upcoming neighbourhood surrounded by commercial and residential properties, or you have a Korean-inspired flavour, piggybacking on the buzz surrounding anything Korean nowadays.

By highlighting these differentiating factors in your investment thesis, you effectively showcase why your venture has a competitive edge and the potential to succeed amidst the existing trend. This will attract investor interest and support for your startup.

Consider the risks involved

While starting a business may offer you a fantastic upside, it is still a risky endeavour. Even if you have the experience, starting something new does not always go according to plan. Therefore, it is often said that becoming an entrepreneur is not for the faint of heart. Not everyone has the stomach to ride the ups and downs of establishing a new venture.

You may have grand plans in your head, but executing them into reality is a different ball game. That is why you need to list the possible worst-case scenarios that might occur in your startup and how you will address them to minimise their risk. This will give your investors confidence in your business, meaning that your business is not a flash-in-the-pan startup idea but a well-thought-out one with viability in the future.

Harking back to the fintech example, the risks could be cyber-attacks on the platform or hesitancy to adopt digital platforms, particularly among older generations, which may impact market reach and investment return. Your investment thesis should include ways to deal with such incidents, including hiring and training security experts and regularly holding workshops for seniors in urban and rural areas.

An investment thesis is a written document that explains why you believe investing in a specific asset will yield a good return in the long run. The belief should be backed by comprehensive research and analysis, not driven by a fear of missing out on the current investment trends or following the tips of an influencer. The document will function as a guide or reference to keep your emotions in check on the roller coaster ride of investing.

Lanturn’s Corporate and Fund Administration Services

As one of the leading technology firms that provide end-to-end financial services and solutions for businesses, Lanturn has a proven track record in fulfilling every client’s needs. This includes helping clients navigate their accounting and financing needs. Lanturn has administered over S$200M in fundraising rounds for our clients, from initial seed rounds to Series C.

Lanturn puts technology at the centre of everything we do, embracing the digital world with ease. It is ideal for digitally native companies or those planning to do a comprehensive digital transformation.

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For instance, the know-your-customer (KYC) and onboarding process used to rely on emails, PDFs and wet signatures, which took weeks to complete.  Lanturn can make fundraising run smoothly  because it has built a platform that allows investors to upload key documents with just a few clicks. It features real-time guidance from a Lanturn onboarding specialist who will guide them every step of the way, ensuring a hassle-free and speedy process —ultimately increasing customer satisfaction and experience.

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4 Ways to Create Your Startup Investment Thesis

Investing in startups without an investment thesis is like going on a trip without a GPS; you can do it, but you’ll have no direction.

An investment thesis is a framework that outlines your investment strategy and objectives. It helps you think more clearly by giving you the ability to narrow down what makes a company interesting.

In this blog post, we will discuss how to create an investment thesis so you can start investing with direction.

Table of Contents

Conducting Market Analysis and Identifying Investment Themes

To create a successful investment thesis, you need to conduct market analysis and identify investment themes. This involves the following steps:

Analyze the Market

You should analyze the market to identify trends and opportunities. This may involve conducting interviews with industry experts, attending industry conferences, and analyzing market reports.

Identify Investment Themes

Based on your market analysis, you should identify investment themes. Investment themes are broad areas of focus that guide your investment decisions. For example, you may choose to focus on startups that are developing innovative technology solutions for the healthcare industry.

Establishing Criteria for Investment Selection and Portfolio Construction

Once you have identified investment themes, you need to establish criteria for investment selection and portfolio construction. This involves the following steps:

Investment Selection Criteria

Your investment selection criteria should be based on your investment goals and criteria. This may include factors such as the startup’s market potential, management team, and financial performance.

Portfolio Construction

Your portfolio should be diversified to minimize risk. You should consider factors such as the stage of development, industry, and revenue potential of each startup in your portfolio.

Read more: USV Investment Thesis , Notation Investment Thesis , NewView Investment Thesis

Creating an investment thesis is step one before investing in startups.

Your investment thesis should define your investment goals and criteria, assess your personal investment philosophy and objectives, and identify investment themes. Your thesis should improve your clarity and make it easier to narrow down your investment decisions.

If you’re looking for more examples of investment theses from some of the top funds in the world, check out the Ultimate VC Resource Library to get access to that plus 350+ other venture resources.

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How To Build A Real Estate Investment Thesis

“If you had $100 million to invest in real estate, where would you invest it?”

If you’re sitting across the table from a hiring manager in an interview for a real estate firm, this is one of the most intimidating open-ended questions that you can be asked.

There are so many things to think about, and with so many product types and markets to consider, how do you answer this question?

Fortunately, you don’t have to know everything about every market in order to respond in a way that makes you look good on interview day, or helps you make better investment decisions if you’re doing deals on your own.

And in this article, we’ll break down three of the biggest things to consider when building a real estate investment thesis, and how to build a framework for where you want to invest, and what you want to invest in. You can also watch the video version right here :

So let’s get back to the original question:

If you had $100 million to invest in real estate, where would you invest it?

Your answer to this question can depend on a lot of different factors, but in order to develop a well thought-out investment thesis, you really only need to break this down into three main parts.

Decide On Your Target Geographic Market(s)

The first thing that you need to decide on when building an investment thesis is the market (or markets) that you’ll be targeting.

Real estate values are very closely correlated with their location, and how attractive a location is from a real estate investment perspective essentially boils down to two things:

• Where demand is currently outpacing supply, and
• Where demand is projected to outpace supply in the future.

Demand drivers in a real estate market can be summed up as the things that make residents and businesses want to move to a given area .

The biggest ones here usually include things like job growth, tax friendliness, lower cost of living, and better weather, all of which lead to the biggest indicator of demand in a market, net migration patterns .

Net Migration Patterns and Real Estate Investing

Net migration numbers measure the amount of people moving into an area vs. the amount of people moving out of an area, essentially showing the growth or contraction of a market.

Markets with positive net migration numbers indicate more people are moving to the area, while negative net migration numbers indicate more people are moving from the area.

And this directly impacts the demand of essentially all product types in a market.

Analyze Current (and Future) Real Estate Supply

Even if demand goes up in a market, we still need supply growth to be less than the demand in a market in order for rents and property values to ultimately increase.

So with that, the second part of choosing a market is the process of analyzing the current and future supply in a market itself.

This is primarily determined by the current development pipeline, and current governmental restrictions on new development and renovation of existing structures (AKA “Red Tape”).

To find this information, the research groups at major CRE brokerage firms will generally publish Quarterly or Annual Market Reports, which will usually provide some sort of an overview of projects either planned or under construction in a market.

And if you’re looking for more in-depth information, comprehensive paid databases like CoStar will have detailed data in most markets on what supply is going to look like over the next 1 to 3 years in a number of commercial square feet, or total number of multifamily units.

“Supply-Constrained” Real Estate Markets

As far as what might be planned in the future outside of the information you can gather, information on building restrictions in a market, and also availability of land, will help you make projections about what supply is going to look like in the next decade or two and whether a market is “supply-constrained” or not.

Coastal cities like San Francisco, Los Angeles, and New York have traditionally been very highly regulated markets, creating supply constraints and upward pressure on rents and values as a result.

At the same time, non-coastal markets like Dallas, Phoenix, and Las Vegas have historically been less regulated and have a much higher probability of being overbuilt at the end of a real estate cycle, leading to supply outpacing demand and prices weakening as a result.

The bottom line is that a strong investment thesis generally involves investments in markets where demand is increasing and supply is growing either more slowly or staying static, and things like positive net migration and supply constraints in the market will make that a much more likely scenario.

Choose Your Real Estate Product Type

Once you’ve decided on your target markets, the next step in building an investment thesis is to choose the product type you want to invest in.

Choosing a product type is going to depend primarily on your research, but also your beliefs around what the future looks like for the way people live, work, shop, and play.

Right now, some investors are making big bets on remote work becoming more permanent and widespread, while others are taking a more aggressive approach and assuming office needs will come roaring back stronger than ever.

Some investors are investing heavily in necessity-based retail after seeing some really strong performance in 2020 when the rest of the sector has been down.

Other investors won’t touch the retail space because they’re predicting even greater Amazon and e-commerce disruption in necessity-based retail purchase behaviors in grocery stores and pharmacies.

Some investors are doubling down on multifamily, assuming that affordability will continue to decrease and the amount of “renters-by-necessity” will increase as a result.

Others are backing off of multifamily rentals due to millennials beginning to get married and moving to the suburbs in larger, single family homes.

At the end of the day, there is no right or wrong answer in any of these scenarios, but whatever you believe, it’s important to back this up with research and fact, and to support where you see an arbitrage opportunity in the market.

For example, if you’re planning to make a big bet on hotels coming back, you should be able to talk through how long it’s taken in the past several recessions for occupancy numbers to get back to healthy levels at hospitality properties, and which markets have recovered first.

And if you think there are repurposing opportunities in distressed assets to convert those into higher and better uses, make sure you can back up the rent and supply statistics in that product type to support that decision.

The bottom line here is that regardless of the stance you take, backing your opinions up with data is a necessary piece of the puzzle when talking through any product type or product types that you’re planning to target.

Come Up With a Research-Backed Real Estate Investing Business Plan

Finally, once you’ve decided on the markets and product types that you’re bullish on, the last step in the process is to come up with your business plan and, again, back that up with data.

If your investment thesis involves doing “value-add” apartment deals in San Diego, are people going to be paying for renovated units during a tough time in the economic cycle?

And if your plan is to renovate units and raise rents, will things like rent control restrictions be an issue in executing on that business plan?

To perform those renovations you’re planning, what are construction costs today, where are they trending, and how will they affect what you’re trying to accomplish?

Again, similar to everything else on this list, the key here is to make sure there are data points to support your decisions, and to make sure that you can point to those data points when talking through business plans that you find attractive in the real estate space today.

Where To Invest – The Bottom Line

Overall, getting clear on the markets you like, the product types you’re interested in, and the business plan you’re looking to implement are the three main steps in building a solid investment thesis for your own investments (or to explain during a CRE interview), and backing that thesis up with data is an extremely important piece of the puzzle.

And to do your research, even if you don’t have access to a comprehensive database like CoStar, free research published by firms like CBRE, JLL, Cushman and Wakefield, Green Street, and even the Bureau of Labor Statistics are all great resources to find information on each of these topics.

What To Do Next

The next time you’re asked what you’d do with $100 million, by going through these steps, you’ll know where you’d plan to put it, and why you’d plan to invest it where you would.

And once you’re dialed in on a market and you’re ready to start modeling out individual deals, if you want help with building out your own real estate pro forma models for valuing commercial properties or to prepare for an Excel interview exam if you’re applying for new jobs, make sure to check out Break Into CRE Academy for instant access to our entire library of courses on real estate financial modeling and investment analysis, access to dozens of pre-built real estate financial models and Excel exercise files, and some additional one-on-one email-based career support to get your questions answered every step of the way.

So thanks so much for reading, and I hope this was helpful in building out your own real estate investment thesis!

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Thesis Writers: Build Your Network and Start Writing!

Posted on May 3, 2024 by Gram Johnson

Writing an undergraduate honors thesis is a daunting task. It’s a task that I took too lightly – I primarily did so because it seemed like a less painful alternative to SPEA-V 370, Research Methods and Statistical Modeling. (It definitely isn’t.) However, choosing to write a thesis is not a decision I regret making. In the end, I gained a wealth of useful knowledge about academic writing, conducting research, and the inner workings of academia. Here are a few tips for prospective thesis writers that I picked up along the way.

Write a lot! – Your honors thesis instructors will likely tell you to “write early, and write often.” That’s excellent advice, but I think it’s important to emphasize the sheer quantity of words that you need to produce. Your final thesis needs to be 7,000 to 10,000 words. As such, you have lots and lots of room to work with. If there’s something you think may be of relevance to your thesis, write about it! It’s even better to do so in great detail. It’s very unlikely that any of your writing will go to waste. Even if something you write doesn’t end up in your final paper, your time wasn’t wasted. In that case, you practiced your writing skills, organized your thoughts, and now have more knowledge about the topic of your research.

Your writing shouldn’t just take the form of prose that could fit into your final thesis – you should take extensive notes. Plan on documenting the excruciating minutiae of every single step you take in the research process. One way to think of this piece of advice is that you should be able to justify every decision you made along the way. Why did you choose to distribute your survey in the way that you did? What gave rise to your research question? Why did you choose the database with which you conducted your analysis? How did you select a sample for your survey? etc. Like my previous piece of advice, writing too much will not be an issue.

Build your network! – My thesis wouldn’t have been possible without help from several people. Don’t be afraid to reach out for help! You don’t have to figure this out on your own. In a Zoom meeting with a former professor of mine, I chose my research topic. I couldn’t have distributed my survey without the help of connections I made in a summer internship. My advisor was another former professor of mine, and he put me in contact with the professor emeritus who created the entire field of research for my project. Finally, the Honors Program put me in contact with a PhD student who helped me finalize my research question and taught me how to complete statistical analysis, from scratch. (I skipped V370. see above.) If I didn’t connect with these people and ask them for help, I couldn’t have completed my thesis.

After writing this, I realize that I may have made the task look even more daunting to prospective thesis writers than it already does. Sorry about that. However, I’d like to reiterate not just that this process is worth it , but also that it is feasible . I did it, somehow. You can do it too, and you won’t regret it.

Gram Johnson   is a senior studying Law & Public Policy at the O’Neill School of Public and Environmental Affairs. After graduation, he will pursue a J.D. at the Maurer School of Law, joining the class of 2027.

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