How to find the information you need for a VC-style investment thesis

Approaches to research for a thesis

So, if you read my last guide you hopefully have a decent understanding of how a thesis should be structured. However, knowing what the finished product should look like doesn’t mean you know how to get there. In the beginning, I definitely didn’t. I still don’t, but I also didn’t in the beginning. But I have learned some things, so this next guide is to help you think about the different ways to actually find the information you need.

In my experience, I’ve come across two different approaches to doing the research for a thesis:

1. Top down: Researching macro tailwinds, then figuring out which category to target, then finishing with interesting startups (this is the approach I’m used to and that follows the steps of my last post)
2. Bottoms up: Researching interesting startups based on recent investment activity, figuring out common categories, then seeing if there are macro tailwinds that support investment in this category

Pros and cons of each approach

Before we get started on ways to go about researching, it helps to understand the pros and cons of each approach.

Top down

The main benefit of the top down approach is that ultimately the research is your own and will potentially lead to an investigation of space in the market that isn’t already being saturated by top funds. So, especially in the case when you’re talking to an investor at a newer fund that may not be able to win allocations in the competitive deals against brand name funds, this type of research will lead to less competitive opportunities.

The main con of this approach is that you might end up spending significant time conducting research and arriving at what you thought was an interesting category, only to find that there are no exciting startups in the space yet (possibly because you overlooked something important in your thesis).

Bottoms up

Conversely, the main benefit of the bottoms up approach is that you know you’ll be looking at a space with interesting startups, because it was those interesting startups that led you there in the first place.

However, the main con of this approach is that you’re going to find that a lot of brand name funds are already exploring the space. It was their recent deal activity that tipped you off about this market. And the challenge is that in the world of venture, if you’re looking in the same place as Sequoia, you’re going to have a bad time.

Ways to conduct top down research

Alright, so what are the actual tools you can use to do top down research? Obviously there are tons of useful links that you’ll come across just by Google searching. But here are some additional sources of information that maybe you hadn’t already considered:

CB Insights — This is a great resource that offers a lot of free reports on trends in certain industries. They are also probably most famous for their extensive market maps where they break industries into smaller categories and show promising startups within each category.

Google Consumer Insights (thinkwithgoogle.com) — This is an amazing resource that is completely free. It’s a series of published reports that talk about trends in various markets based on Google Trend data.

Gartner — Gartner is a great resource but is not free. So this resource is probably only useful to you if you’re a student with pre-existing access to it. While Gartner is probably most famous for its “Magic Quadrants” analyses, they publish all sorts of amazing reports with market trends, expert opinions, and case studies.

Newsletters — This is where it starts getting tricky, because before you know it you’ll be signed up for 10 newsletters and not know where to look. My only advice here is to find the ones that work best for you. Regarding macro level trends, I think Trendwatching and Glimpse are great ones for understanding cultural tailwinds.

Conversations — This seems obvious, but not everyone thinks to do it. If you recall, when we discussed first conversations with investors, I mentioned that you should ask them what categories they’re currently excited about. In those instances, it’s also helpful to talk about why they’re excited and they should be able to talk a bit about the tailwinds.

Ways to conduct bottoms up research

Using this approach, the first step is finding a list of all the recent deals out there. The first thing you’ll notice is how many there are. It makes you wonder sometimes whether it really is that hard to start a business and raise capital (the answer is yes, it really is).

The next step is the important one. You’ll need to figure out how to narrow down the universe of startups you’re looking at to a more digestible set. That way, you can start to recognize patterns in what markets investment is taking place.

So, what filter do you use to narrow down the list of deals? Do you look at all of the startups that raised in the last year? Do you only look at startups that raised from top funds? Do you only look at startups that raised at or above a certain valuation?

These are all things to consider. My preference is to look at seed and early stage startups that raised capital from what I roughly consider to be top tier funds over the last 2ish years. Once you’ve done that, you can start to recognize categories that have a place in most of their portfolios.

Here’s an example of a bottoms up approach I used to identify startups and subsequently identify a category to focus on within the impact investing domain:

1. I started by looking at investments of reputable impact investment firms. Acumen, Impact Engine, Kapor Capital, and Next Wave Capital were a few of the ones I considered.
2. In reality, I used Pitchbook to compile a list of their portfolio companies and organize them by category. For purposes of visualization, however, I’ll show you what it would have looked like if I went to each fund’s portfolio site individually.
3. As you can see, I started to notice a pattern. Each portfolio included a startup targeting the population of people that suffer from and/or don’t have access to mental health solutions. This is a category that I think might be worth looking into.

My final point on researching for purposes of thesis building is that what you’ll most likely put into practice is some combination of the above approaches. Find what works best for you.