An investment thesis simply put is your personal angel investor playbook. It guides you through investments, ensuring a central theme in your decision making as opposed to a random shotgun approach. The thesis is set upfront in an objective manner but can be revisited as you learn about the market and your strengths as an angel investor.
Angel investing can be both scary and exhilarating, much like going shopping for a sports car. You therefore need to have an investment strategy that is disciplined and clearly thought through. Investments would otherwise be a series of unconnected businesses without any synergies or fundamental reasoning. The risks in angel investing are already high, having a good investment thesis is a great way of derisking.
Fred Wilson, a seasoned venture capitalist, notes that having an investment thesis results in superior returns when compared to opportunistic investing. This is only true if the thesis is functional, applicable and appropriate.
What is an investment thesis
It is a functional investment strategy that is supported by your point of view. This may include an introspective assessment of your strengths and weaknesses, a fundamental view of the economy or an observed trend in society - where is the world going to. This is why each thesis is personal.
Initially they may be an instinctive set of rails we bounce around in much like a beginner at ten pin bowling. Over time the rails get taken down and they become gutters formed by years of experience, having learnt from our own gains and losses.
Drafting your thesis
Marianne Hudson, executive director of the Angels Capital Association, says that angel investing starts with educating yourself. Understand the terms entrepreneurs throw around, listen to futurists about where society is going and technologists on what’s possible. We see this is as a continuous process, you never stop learning as an angel.
Your thesis should include a personal SWOT analysis. Understand your strengths, this could be your professional network or your knowledge relating to a particular industry. Opening doors for a startup or providing guidance often adds more value than the capital you provide. Also understand your weaknesses and what to stay away from. A bad experience, particularly early on, can take the wind out of your sails.
Part of this exercise also involves understanding the opportunities and threats. This requires learning about the startup space as suggested by Marianne Hudson. We operate in a global environment where Google could introduce a new service for free, in turn killing the potential of a Cape Town based startup.
Your investment thesis should include some direction of where the startup economy is going to be in 5 years (this is long term in the technology space). Forecasting trends in technology, changes in the socio-economic landscape, needs of the next generation, legal and political shifts are all opportunities and should shape how we invest. Furthermore, the thesis is a reflection of one's own risk tolerance.
The thesis should also include a investment mandate, one which is not too rigid at the outset and firms up over time as you learn about your sweet spots. This should include a description of the types of businesses an investor is willing to invest in as well as a description of those to steer clear of. Location, target market, industry and ticket size (investment amount) range are all key guides when it comes to a mandate. The ticket size range is determined by how much of your net worth you are willing to set aside for angel investing - most investors allocate between 2 and 10%.
Also give consideration to how often you intend to pull the trigger, the degree of diversification you want in your portfolio and your inclination for syndicated opportunities. Experienced angels suggest an initial plan to invest in 10 startups over a period of 5 to 10 years, with further diversification thereafter. Set funds aside for doubling down on your winners, these can then be your bigger bets.
Stress test your thesis with your angel mentor or ask an experienced angel for advice. This is one of the most important steps, you'll learn a vast amount of useful information from experienced angels and its helpful in developing your network.
Well known angel investor Bill Payne, encourages new angels to learn from their mistakes as well as the mistakes of experienced angels, who first wrote cheques and only later asked "what is my strategy?". So to avoid learning the hard way, it is important to have an investment thesis before writing that cheque.