What is an Investment Thesis?
Breaking down theses, the way investors think, and an exciting update
Something that is always top of mind for private (and public) investors is an investment thesis. Many famous investors (e.g. USV - an early investor in Coinbase, Twitter, Justworks, Dapper Labs, Stripe, Carta, and many more) share their theses online. It’s an incredible way to see how a lot of brilliant people want to approach evaluating investments.
Theses are flexible. That’s obvious any way you slice it. Whether it’s a hedge fund that focuses on a certain sector or a VC firm that focuses on Africa or crypto, everyone will have some sort of area they prefer to play in. As Andy Weissman points out in the USV thesis above, some also just have a “macro-level view about the world”. Rather than specific focuses on sectors, Africa, or crypto, many investors look for broad themes and traits of the companies they invest in. It helps to weed out thousands of cold inbounds they receive every month or companies flashing on their Bloomberg terminals, but also provides a template of what they’ve seen works.
Theses aren’t rules of law, however. They’re more like a framework for thinking or guardrails for a profile. That’s why many you’ll see are intentionally vague (e.g. “tech” usually means exclusively SaaS, Fintech, or Consumer) or platitudes (e.g. “large markets with revolutionary products”). A thesis usually also describes an ideal, which is why they can almost be broken down into rubrics, sub rubrics, and so forth. Many are often called “playbooks”.
Theses are helpful in building a framework for what to look for, but it doesn’t solve the largest issues at hand. The challenge in public vs. private investing is at times straightforward to understand and at times not at all. Some key datapoints such as publicly available information (e.g. financials, more news, Twitter etc.) are easily digestible and therefore can contribute to more in depth financial models and pitches. I actually get a lot of my investment ideas from Twitter to be honest. People who are full or part time analysts share so much wisdom and deep insights that I might not have time or eyes to uncover. Huge caveat - you have to do your diligence on who’s trustworthy or not. I also wouldn’t recommend doing exactly as they do, put in some work. Public companies have a lot of people who cover them because the information is available. That said, anything can happen and even a solid forecast is just a best guess. Similar to leveraging Twitter, you have to do as much work as you can when investing your money.
Private companies don’t have that same coverage available. It’s not available to the public, so the best information available comes from news articles and assessing what you think an opportunity might look like. A thesis becomes more relevant here because investors need to focus on companies that check all their boxes. Or at least most of them.
While theses are important, there are also questions that need to be asked when investing in a company anyway. Especially in the earlier stages when less is known about them and traction doesn’t exist yet. Questions like “why now?” or “who cares?” are vital to understanding changing markets and what the context is of that market. While these are still vitally important, they’re not necessarily questions that would be included as part of a thesis (but can be abstracted into a specific company or investment’s thesis). They are complementary, and should be asked anyway. Thesis are meant to be more specific.
All of the above said, Fred Wilson makes a salient point when describing some of his best investments. Sometimes all it takes is an “aha” moment. Wilson describes bumping into a friend by chance, who encouraged him to read the Bitcoin white paper. Wilson didn’t know of Bitcoin beforehand or understand all of the whitepaper, but understood that Bitcoin and permissionless money would be massively important. Wanting to invest in the space, he not only bought a chunk of Bitcoin, but also invested in Coinbase. That was in 2011.
In an ideal world, an investor has both “aha” moments and finds investments that hit points in their thesis. That should help construct a portfolio that meets all the desired criteria. It won’t be perfect, they never are, but it means that each investment registered as the right idea at the time. Whether it fails from execution, leadership, or competitors becomes almost entirely out of an investor’s hands. All investors can do is narrow their focus and eliminate the noise when picking and choosing. Of course, in private investments, there has to be mutual desire for investment as well.
All of this has been top of mind for me recently. Over the next post or two I’m going to publicly construct and share my second investment thesis. I had written one up in 2020 in my spare time when between jobs, so now that everything is so top of mind and I feel more plugged in, it feels like a good opportunity to try again. It will also be helpful for me to get constructive criticism from anyone and everyone reading this to help crystallize thoughts or add additional considerations I overlook. This is a new and exciting route for me, expanding past investment memos, so I’m looking forward to it!