Investment thesis for Angels: Not just for VCs
🖖 Welcome to Closing The Gap by JVH Ventures. After founding multiple companies and investing into more than 50 startups and 9 funds, we realized that a common understanding between founders, angels, and VCs is often missing.
We want to close this gap and combine perspectives from all sides.
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Investing in startups can be both exciting and frustrating. To opt for a positive outcome in the long-run, it's crucial to have a clear roadmap to guide your investment decisions as an angel investor. Many might argue that building an investment thesis is more of a VC concern, but this couldn't be further from the truth. In this article, we'll explore the reasons why thesis building is just as important for angels, and how it can help you become a more strategic and successful investor.
Set your guiding north star
An investment thesis acts as your guiding star in the vast galaxy of startup opportunities. Seeing dozens if not hundreds of opportunities every month, it gets increasingly difficult to quickly make decisions.
Having a thesis introduces clarity to your investment strategy and sets clear objectives. It will also serve as a benchmark to evaluate potential opportunities and ensure they align with your long-term goals.
This is especially helpful, once you enter the space of emotions, and an “incredibly hot deal” enters the stage. Your thesis and strategy helps you to stay cool, focussed and prevents rushed, impulsive investments.
Next to helping you focus, it also serves as a baseline to re-assess your strategy within a given structure. Therewith, setting rules enables you to change this rules with learning over time - but in a structured and analytical manner.
Make quicker decisions
Time is of the essence in the startup world. Startups move fast, and opportunities can disappear in the blink of an eye. In addition, as a business angel, your time is scarce and efficiency should be the main goal here. That being said, it’s often about speeding up the “time to say no”. Especially, if new innovative concepts excite you, they often develop to be rabbit holes, sucking in your valuable attention.
With a solid investment thesis, you can make quicker decisions, because you set your “default no” and automate your decision-making processes with it. On the contrary, you'll know exactly what you're looking for and be able to recognize it when you see it.
This clarity enables you to save time and show strong conviction (or even branding) early on, to get better deals done.
Develop your brand
Having a well-crafted investment thesis can also set you apart from other angel investors. In fact, it’s an important part of your personal brand as an investor. When startups know that you have a clear focus and a well-defined strategy, they are more likely to approach you with relevant opportunities. This boost in reputation as an investor is incredibly helpful because it increases the quality of your deal flow. That’s the goal with the highest priority, because it both saves time and increases chances of great returns.
How to build an investment thesis for your strategy
Hopefully, we have you sold on the importance of having an investment thesis. But how do you develop a set of theses and strategy? Let’s see how you can build your own tailored strategy.
1. Start with the macro & market development
This might be a no-brainer while reading it, but we seldomly see this within the angel world. It’s important to remember that you are looking for the game changers of the next 10 years. So it’s important to adopt a broader mindset and try looking into the future.
Start by analyzing macroeconomic trends and how our world develops. Dive into global developments on all kind of layers. This can be way beyond the classical startup world. For example, we look into categories like these:
Macroeconomic development (Recessions, stock markets, interest rate development, etc.)
Geographical and political conflicts (war, instability, immigration, etc.)
Climate and weather changes
Societal developments (growing elderly population, health problems, mental health, etc.)
Regional developments (urbanization, water & food shortage, extreme weather)
…
It always helps to start with a bigger picture. Ask yourself: In what areas would I found a startup myself? What will happen in 10 years from now? Remember, this is not your daily task, but a more yearly summary of what happens in the world around you and set the stage for everything else.
2. Work and tech trends
This is what everyone thinks about, when it comes to thesis building. Of course, it’s about staying updated on technology trends and the future of work and business. Technology is often a key driver of startup success. By keeping an eye on emerging technologies and their potential applications, you can identify startups that are positioned to disrupt industries and create value.
More precisely, understand the industries and sectors that are poised for growth. Identify areas where innovation is or will thriving and where there are unmet needs. Your thesis should be aligned with these broader dynamics. Try to dive in deeper and not just settle with “AI will disrupt the world”. For example, you could look into the following categories:
Skilled blue-collar workers shortage
Highest risk of cybersecurity
(Theft of) digital identity
…
3. Funding climate
Of course, as an angel, you are free to invest into anything you like. But facing reality, you also have to take a look into the VC scene. Ultimately, most startups raise multiple rounds of funding and heavily rely on VC money to be successfully.
That’s why you need to consider the current funding climate. Talk to VCs openly about it and align with their investment theses. Not all funds just go for AI and green tech right now. Openly talk to VC investors and see what they think. Are investors pouring money into a particular sector? Are there any shifts in investment preferences?
In any way, your thesis should take into account the availability of funding.
4. Own strength and weaknesses
Last, but not least, it’s about you. Ultimately, you have your own set of strength, weaknesses, experiences and know how, which helps you to set yourself apart from YOUR competition (other investors). It will also enable a good fit with the founders, which is essential for your ability to help them (and also the fun involved).
Next to understanding your strength, it also helps to reflect weaknesses and failures of the past. Overestimating once abilities is definitely a common weakness among angels. Especially, pointing out areas of low expertise that might lead to consequential sub-par decisions could be one easy to cross-off fallacy. For example, we decided not to do any more hardware based investments, because we are just not experienced enough in this field to understand development cycles deep enough.
After all, communicating your experience and strengths is obviously one of your main marketing tools. Placing your expertise and your network publicly at the forefront will attract founders that specifically search for you.
Developing clear investment profiles
By mapping both your external and internal environment, it will become much clearer what areas your sweet spot lies in. In general, we would advise adjusting both ends of the spectrum:
Define your focus fields: Your thesis will clearly define the fields or sectors you want to invest in, allowing you to concentrate your efforts on opportunities that matter most to you. In turn, communicating your focus fields, helps to generate higher quality deal flow.
Set boundaries (hard vs. soft): Your thesis can include both hard boundaries (e.g., no hardware at all) and soft boundaries (e.g., hardware only within specific industries). Clarifying your boundaries will help you to make way faster decisions when deal flow is pouring in.
There is not a set blueprint to formulating your strategic theses. Your thesis might be very broad, covering an entire industry, or can actually be very precise, diving into a specific vertical in a specific region at a specific growth stage.
Whatever it may be, we think it’s an extremely helpful tool for angels to reflect and formulate your thoughts in order to make better and faster decisions.
Thank you for reading! If you liked, feel free to share it with someone else who could profit from it - angels, founders, VCs, anyone :)
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PS: We are always happy to answer your questions or take on topics you want to hear about to close the gap! Just let us know.