Dear Investor,
If your investment thesis is still in your head and more of a gut feel, this article will help you put it in writing. If you have a thesis in writing already, you can skip to the middle of the article and draw inspiration from the aspects discussed.
When crafting your investment thesis, you can think of it as an advertisement for opportunities. Startups are seeking capital, and your thesis should clearly communicate if you are a match, so no one wastes each other's time. It is essential to identify your unique edge and articulate it in your investment thesis. What sets you apart from other investors? Do you have a deep understanding of a specific industry? Are you an expert in certain technologies or markets? Clearly defining your edge helps startups recognize the added value you bring beyond just financial support, and it clarifies to yourself and your partners why you are able to spot the right opportunities to invest in. As an expert in your field, you hear about opportunities, you understand changes in the market and you are able to assess the founding teams competencies. Be clear about in which industries and in what kind of business you have an edge.
What is your risk appetite? Think carefully and describe how much risk you are willing to take, to get potential rewards. Risk comes in the form of an unproven market, an unproven product or a long road to profitability. The price of the startup should reflect the risks involved, so there is no reason to take on more or less risk. The key is to take on the risk that you have experience managing. If you have expertise in early stage companies, then that is the kind of risk you can manage, and that is the stage which would give you an edge.
At the end of writing your investment thesis, you will have a framework of testable guidelines for executing deals. Your thesis can incorporate specific criteria, such as geographical location, industry, sales approach, cash flow and growth prospects,founding team composition, scalability, path to profitability, key metrics, valuation, and control. Your AI assistant will be most efficient when your investment thesis is clear and can be understood as a list of testable criteria which can be answered yes/no/maybe.
Now, let's delve into the key components you should consider when crafting your investment thesis. Each aspect plays a vital role in shaping your investment strategy and should be carefully evaluated.
Consider the operating and regulatory environment of the companies you invest in. Proximity to your location may provide better insights and easier access for hands-on involvement.
Choose industries where you possess a deep understanding of the market dynamics and regulatory landscape. Your expertise will enable you to provide valuable guidance to the startups you support.
Evaluate the revenue generation potential of a business. Analyse whether it relies on direct-to-consumer sales, business-to-business or government contracts. Assess the cash flow profile and growth prospects within the targeted industry and market. A company dies from starvation of cash flow.
Analyse the composition and dynamics of the founding team. Consider factors such as solo founders versus teams, industry experience versus outside perspective, and their unique insights and ability to confront challenges.
Evaluate the scalability potential of the business. Identify key drivers such as digitization, marketing scalability, or network effects that can propel rapid growth and expansion.
Examine the roadmap to profitability for the startup. Assess if they plan to introduce new products or enter new markets. Clarify your risk tolerance, whether it involves investing in pre-profitable companies or supporting cash flow-positive ventures.
If you target a single industry, you can also include key metrics such as customer acquisition cost (CAC), lifetime value (LTV), and net promoter score (NPS) in your investment thesis. These metrics provide valuable insights into a startup's ability to attract and retain customers, measure profitability, and gauge customer satisfaction. The metrics are different across industries, so they do not translate well into a general hypothesis.
Define your target valuation range and the maturity stage of companies you are interested in. Consider if you are willing to invest in companies with valuations lower than your preferred range and clearly outline any requirements regarding ownership size.
Decide if having control through a board seat or specific terms in a term sheet is a key requirement for you. Understand that this may influence the size of your investment in the round. It will also influence which instruments you can use to invest in a company. Many early startups use convertible debt instruments which do not give you the same level of control as a direct ownership stake.
By developing a well-crafted investment thesis, you will have a powerful tool that advertises your unique value proposition, defines your edge as an investor, aligns with your partner's vision, and provides clear guidelines for executing deals. Regularly review and refine your thesis to adapt to market dynamics and industry potential. The journey of a startup investor is an ongoing learning experience, and your investment thesis will be your guiding light.
We want to invest in companies that operate in the nordics, such as Sweden, Denmark, Norway or Finland. We prefer companies where the founders have competencies and experience within the same industry as the company they are building. We would like the investment deck to reflect insights about the industry or service/product, which are not obvious to outsiders. We invest in companies that are valued between 1-10 million euros or dollars. We prefer businesses which accumulate data from their operations, and are able to service their customers better, the more data and marketshare they get. We refer to that as the Data Flywheel effect. We do not want to invest in businesses that rely on the production of hardware components. We prefer businesses that operate digitally and have a software product or software based distribution.