We work with a lot of cool founders who have great solutions, businesses, and pitch decks—yet they may still get rejected by investors. In many cases, it doesn’t matter how cool a company is. What really matters is whether this company matches with the investor’s investment thesis.
Both investors and founders may get confused about what an investment thesis is and why it’s so important.
Investors may question whether there is any standard template they may use when preparing to ask for money from limited partners (LPs). Founders, on the other hand, may wonder why they need to think about it at all, as it’s not even a document they typically create.
We’ve crafted this article to help both investors and founders understand the nature of an investment thesis. It sheds light on what this document is, why it’s important, and what it includes with examples.
What is an investment thesis?
An investment thesis is the argument investors use to explain why and where they’re going to invest to make returns. This framework helps investors see if an investment they plan to take on fits their goals and risk tolerance or not.
It isn’t always a formal document (though, in many cases, it is). As a formal document, it might be written for a fund’s internal use and isn’t usually publicly shared. This may be a summary of key points from the fund’s investment strategy presented on their website, blogs, or pitch decks. Sometimes it may even be as informal as “we will recognize it as soon as we see it.” Yet, the common thing is that an investment thesis is a set of rules investors have, which is presented to a VC or PE fund’s limited partners (LPs) to show how their money will be managed and invested.
In most cases, investors don’t go outside their investment thesis, allocating capital only to the companies that match their criteria. However, sometimes exceptions happen, especially if a deal is too good to pass by.
Be it an investment thesis in private equity or in venture capital, the purpose is the same—to guide investment decisions. But, what differs is the focus, stage, and strategy given the diverse nature of each asset class.
An investment thesis in venture capital will speak about investments in early-stage companies, higher risks but higher returns, and longer time horizons. An investment thesis in private equity, in turn, will be more focused on established companies with lower risks and more stable returns.
So, only investors create investment thesis?
The short answer is yes. But, to elaborate, it all depends on who to consider an investor. For example, if you decide to buy another company, will you need an investment thesis? Probably, yes. You need to understand why you invest and which companies to consider. That’s why businesses or acquirers may also need this document. But, in general, we speak about an investment thesis in terms of venture capitalists, private equity investors, and angel investors.
Investment thesis from an investor’s perspective
An investment thesis matters for both investors and founders; that’s why it’s better to discuss it from two perspectives.
If you’re an investor who wants to learn how to write an investment thesis, why it’s important, and what is included in it, this section will guide you step by step. For founders, this part will help understand the logic behind creating this document.
How to write an investment thesis?
Rule number one is that your investment thesis should explain how you invest and stand out from competitors. Rule number two is that there are no strict rules on how to write it.
An investment thesis typically includes:
The size of your fund;
Your portfolio;
The stages, industries, and geographies of the companies you prefer to invest in;
The average check size;
How you differentiate from other funds;
Your return profile
Note that although the structure of an investment thesis is fairly standard, the way it’s written may vary depending on your investment style—be it value investing, growth investing, income investing, etc. To be more precise, there are different ways you can communicate your fund’s goals to LPs and founders.
Here are some general tips on how to write it:
STEP 1: Determine the minimum size of your fund
It’s one of the most important steps as almost every component of your investment strategy depends on the fund’s size: how many companies you’ll have in your portfolio, which checks you’ll write out, which LPs you’ll attract, how much capital you’ll operate, and which return profile you’ll have. To understand the ideal fund size, you may research similar funds—the ones with benchmarks and goals similar to yours. Also, have a look at the most successful funds across different verticals to check what works well and what doesn’t work.
STEP 2: Set up your investment focus
Before giving money, LPs need to understand where you plan to invest it. In your investment thesis, show the stage, industry, and location of the companies you’ll target. Information about your investment criteria helps not only get LPs on board but also attract founders whose companies are a good fit for your firm.
STEP 3: Construct your portfolio
Finally, it’s time to plan how you’ll allocate the capital. You need to decide how many companies you’ll invest in, the average check size and ownership stake, and how much you’ll reserve for follow-on injections.
When to write an investment thesis?
There are several reasons why investors may need to write (or update) their investment thesis:
When launching an investment fund;
When raising money from LPs;
When changing your investment strategy;
Before making major investments or acquisitions (to make sure they match your fund’s strategy);
During fund reporting or strategy reviews (to make sure that the existing strategy corresponds to market trends, fund’s goals, and performance).
Why does an investment thesis matter for investors?
The main task of an investment thesis is to show LPs and founders how your fund invests.
When you have a set framework of where and how you pour capital, this makes it easier:
For you to evaluate a potential investment opportunity;
For founders to know if it’ll be beneficial to pitch to your firm;
For LPs to trust your strategy and to understand how effectively their money will be managed and which returns will be generated.
That’s how important it is to have a realistic and sustainable investment thesis.
Investment thesis from a founder’s perspective
Although an investment thesis is more of an investor document, founders may also benefit from knowing about it.
How? To see if your company is a good fit for this investor.
When you start your investor outreach, you try to select VC firms or angel investors who can be potentially interested in your solution and operate at your funding stage and industry. You do some homework on investors, and checking their investment thesis is supposed to be a part of it. Of course, not all investors clearly state what they prefer. Some may broadly mention, “We invest in all early-stage companies in Australia” or “All AI-focused startups.” With such a VC investment thesis, it may be hard to check if you match. In such a case, you may need to do deeper research.
However, there are many investors who get pretty narrow and state their investment thesis clearly, “$1 million checks into fintech startups from Dubai.” In this case, you see from the start if you should pitch to this VC firm or if you’d better keep searching further.
When you understand what investors want and expect right from the start, it becomes easier to target the right investors, tailor your pitch if needed (you can highlight some aspects that investors find important, like growth potential or profitability), and build credibility (when you show that you know the preferences of investors you’re pitching to, it adds you extra points). Finally, checking VC investment theses can save you time and effort. Just imagine you’ve gone the extra mile on pitching to an investor whose focus is SaaS startups, but you have a biotech company.
At the same time, it’s not just about what investors want-founders have expectations too. In “Dear Investors, This Is All We Ask For as Founders”, entrepreneurs outline key things they wish investors would consider during the fundraising process. Understanding both perspectives can lead to more productive investor-founder relationships.
Where to find an investment thesis?
You can typically find an investment thesis on private equity and venture capital firms’ websites. Just check sections like “Our strategy,” “Investment focus,” “About us,” etc. Many investors publish articles or posts on social media to explain their investment thesis, areas of interest, and market outlook. You can find information in interviews and podcasts, attend startup events, conferences, or accelerator events, and talk to investors in person. Some funds also make their pitch decks available online, often including an investment thesis. Options vary. Just find the one that suits you best.
Here are some investment thesis examples from prominent venture capital firms’ websites:
1. Menlo Ventures
While not a formal document, on this page, you can explore the key takeaways from an investment thesis of Menlo Ventures.
The page communicates:
Investment focus: Early-stage companies across AI, SaaS, Bi & Healthcare, Cloud Infrastructure, Consumer, Cybersecurity, Fintech, and Supply Chain & Automation.
Strategy: They help startups with product-market fit, scaling, and getting ready for growth.
Differentiation: They prefer to “go all in.”
Geography and market: They are likely to invest in US startups and cater to global opportunities.
2. Andreessen Horowitz
You can check another investment thesis example here. a16z clearly states which stages and industries are at the top of the mind, along with their values and long-term vision.
To be more precise, the page shows:
Investment focus: A stage-agnostic fund that supports startups across Bio & Healthcare, AI, Consumer, Enterprise, Crypto, Fintech, Infrastructure, Games, and companies contributing to American dynamism.
Differentiation: A team of former founders and seasoned professionals and a culture built on trust, respect, and partnership.
Wrap-up: The bridge between investors and founders
The reason why many companies fail to raise funding even though they have cool solutions and solid businesses and why many investors struggle to attract LPs and make sound investment decisions is an investment thesis.
For investors, it’s like a set of beliefs they follow when channeling funds to startups and companies. That’s why it must be clear and concise. LPs must see right from the start where their money will go and which returns it will generate.
For founders, it helps to see if a company is a good match for an investor in terms of stage, industry, geography, and vision.
However, ticking all the boxes of a VC investment thesis doesn’t mean the end of a journey; it’s rather the beginning. Here, the magic of fundraising starts and founders have to be well-prepared. They must have a great team, a solution that can address a really meaningful problem, a rock-solid business plan and financial model, some traction, and be able to wrap a cool narrative around all these elements as a part of their pitch.
If you feel overwhelmed with all the details, contact our Waveup team, and we’ll gladly help you raise funding and grow your business.