An investment thesis articulates the logic and reasoning behind a company’s long-term investment decisions and portfolio strategy. It serves as a guiding framework that underpins all capital allocation and business development initiatives. A compelling investment thesis should clearly lay out the investable trends, target markets, competitive advantages and value creation models. There are typically two main components of an investment thesis – the macro view of market landscapes and secular trends, as well as the micro focus on specific verticals and business models. Successful investors like venture capital firms often develop and constantly refine their investment theses over time. An insightful investment thesis helps convey the investment philosophy and edge of an investor or firm. It also attracts entrepreneurs and startups that resonate with such a worldview. This article will illustrate the meaning and components of an investment thesis through some real-world examples from renowned venture capital firms.
an investment thesis explains the overall market outlook and secular trends
The investment thesis of a venture capital firm like USV encapsulates their high-level perspective on the internet sector – how this world operates and the overarching trends taking shape. Their original 2012 investment thesis centered on the rise of massive online networks enabled by unique user experiences, network effects and sticky users. A few examples of such investments included Twitter, Tumblr, Foursquare and Kickstarter. However, USV also realized that as the internet matured, it became increasingly hard for newcomers to compete for user time against entrenched giants like Facebook. Hence, over the years, they expanded their investment thesis to include picks-and-shovels companies like Twilio, MongoDB and Cloudflare that provided infrastructure services to facilitate the next generation of startups. More recently, USV has also taken an interest in blockchain technologies and decentralized networks like Bitcoin that could potentially disrupt established centralized data models underpinning mainstream platforms.
an investment thesis zones in on specific verticals and business models
In addition to the macro perspective, an investment thesis also puts forth actionable frameworks on specific verticals and business models. For example, USV’s thesis now targets three primary areas – essential internet infrastructure picks-and-shovels, subtle network effects in specialized verticals, and decentralized protocols. Under the second bucket of specialized verticals, USV has made investments in sectors like education (Duolingo), finance (LendingClub), healthcare (Oscar) and others where the network effects tend to be narrower but the problem space is better defined. Benchmark VC’s investment thesis also spotlights models like marketplaces and two-sided networks. Overall, the micro angle in an investment thesis identifies tangible segments and models where the investor sees the most potential.
an investment thesis explains the value creation logic behind investments
A compelling investment thesis framework doesn’t just state where to invest but also elaborates on why those bets make sense. It lays out the unique value creation and growth models powering those investment targets. For example, Social Capital’s thesis for investing in Opendoor centers on how this real estate platform can tap into the extremely fragmented housing market and build a virtuous cycle. By providing an Amazon-like seamless experience to buy/sell homes instantly online, Opendoor can accumulate more housing inventory and transaction data over time. This results in greater efficiency and lower costs at scale due to refugees like cheaper access to credit. Social Capital believes these feedback loops can help Opendoor become the dominant transaction platform and disrupt an archaic industry. As such, spelling out the clear value creation logic is an integral part of any well-constructed investment thesis.
An investment thesis articulates the underlying logic, philosophy and framework behind an investor’s strategic moves. It lays out the investor’s worldview on broader macro trends as well as targeted business models. A compelling investment thesis also clearly explains the value creation models powering an investor’s bets. Leading venture capital firms use their investment theses to guide decisions, attract relevant startups and convey their edge.