How to structure a VC-style investment thesis

Using an investment thesis to follow up with investors after the first interaction

Now you’re getting deep into the venture recruiting process…v exciting stuff! You’ve gotten coffee or spoken on the phone with tons of interesting people and feel like you’ve learned so much. So, what do you do to keep the conversations going so that the relationships don’t go stale? Like what do you even say that is interesting and goes beyond the surface level stuff that you touched on in the first conversation? This is why the second date is always the hardest! You can’t just recycle the same questions about their favorite food or type of music.

There are definitely different ways to do it, but my preference is to build a thesis that you can share with the people you’ve met. It shows how you think about a market opportunity, which they’ll want to know about you, because that is a key element of any associate role. I also find thesis building to be a fun exercise in trying to predict the future and in thinking about the startups you recommend as your own personal portfolio (assuming that you would have been able to source and win those deals).

So, the intention of this guide is to help you think about how to structure a thesis, meaning an actual deck that you can send.

What a thesis is attempting to answer

Before we start, I want to make it abundantly clear: I’m an aspiring VC with some helpful perspective, not a seasoned investor with all the answers. If someone from Bessemer, Benchmark, or any other of the thesis-driven funds is willing to teach you how to do this, please listen to them. But for now, this is meant to be a useful starting point.

When thinking about a deal, I start by asking myself three main questions, which I then dig deeper into:

1. Is this an exciting opportunity?
2. Is this the company to capture that opportunity?
3. If the company captures the opportunity, will we generate desirable returns?

A thesis is about primarily answering the first question and then suggesting some companies that you feel might answer “yes” to the second question.

What the structure of a thesis looks like

So, what makes an opportunity exciting? The first thing I look for are exciting tailwinds that catalyze growth and reshuffle consumer or business preferences.

What are some macro level tailwinds that you’d like to explore?

1. What are the new or upcoming enabling technologies? — e.g. proliferation of 5G broadband
2. What are the new or upcoming regulations being put in place? — e.g. legalization of THC products to be distributed across state borders
3. What new or upcoming scientific advancements that have been approved / or are now being accepted? — e.g. development of therapies that might treat Covid-19
4. What are the relevant cultural truths? — e.g. Gen Z consumers valuing skills over experiences
5. What is happening with the macro economy? — e.g. Growing unemployment

Here’s an example of a slide that talks about global improvements to broadband as a type of enabling technology tailwind.

Once you’ve identified some macro tailwinds that you think will influence one or more industries or cross-industry categories of businesses, you’ll need to decide on which of these impacted industry or category markets to focus on. I start by trying to think about which ones will see the highest growth, meaning I ask myself the following:

What is an industry or category that will see an unlock of value from latent demand (via either existing or new customers)?

Here’s an example of the thought process:

1. In many parts of the world, consumers can’t afford to purchase expensive gaming consoles or PCs and the constant new releases of games
2. The proliferation of quality broadband in these parts of the world will make cloud gaming feasible there
3. These historically priced out consumers will enter the gaming market now that, for a low monthly subscription, they can access console or PC computing power from their phones and a full catalog of gaming titles

In the above slide, you’ll notice that my hypothesis states that the global proliferation of quality broadband will enable cloud-gaming applications to work.

And in the below slide, you’ll notice that my hypothesis states that cloud-gaming applications will unlock latent demand in the gaming industry. Consequently, this unlocked demand (i.e. expected growth) in the gaming industry is why I chose to focus on gaming versus looking into how the proliferation of quality broadband would affect some other industry.

And lastly, before you decide on which market to explore, you need to make sure that the existing size of the market is large enough. In other words, it doesn’t matter if the global market for cat leashes is going to grow by 100% if the starting market size is $10 million. So ask yourself:

Is the current market size and anticipated growth large enough to be worth winning in?

1. What is the current total addressable market (TAM)?
2. What is the expected TAM that includes the growth due to the new “unlocks/tailwinds”?

Below is an example of a slide that shows all of the above. It talks about the tailwinds I’m focusing on (technological and cultural), how those tailwinds will catalyze growth, and what that growth actually looks like by showing the historical TAM for gaming in 2019 and what that will grow to by 2022.

By this point, you’ve identified a broad market (industry or category) that you think is benefiting from certain macro drivers. You’ve also confirmed that it’s a large and growing market, so that future investments that win in this space will reach enough scale to be valuable.

While saying that the gaming industry is worth investing in is correct, my 11-year-old cousin with a severe Call of Duty addiction could have told you that. For this to be a venture-level thesis, you’re going to have to dig deeper. So, the next part of the exercise will be to break down the broad market into smaller slices.

You can slice a market a bunch of different ways:

• By customer segment — e.g. coffee drinkers can be bifurcated into addicts, like myself, and casual drinkers
• By vertical — e.g. health can be split into mental health, physical health, sexual health, etc.
• By layer in a complement stack — e.g. in gaming, there’s the networking infrastructure, the device, and the game that are all needed for the consumer to play

Then for each of the segments that you break your broader market into, you evaluate what consumers will look for (demand) and what competition already looks like (supply). And the simple answer, in terms of which segment to pursue, will ultimately be the category where supply doesn’t fully meet demand (many investors refer to this as “white space”).

Once you’ve sliced your market into segments, you should ask yourself these questions for each one:

Does one category benefit from a reallocation of value in the broader market (demand related question)?

Here’s an example of the thought process:

1. I anticipate that improved broadband globally will make cloud gaming applications feasible
2. Because these applications offer the requisite computing power for AAA games in the cloud, the device in the consumer’s hand is essentially rendered a simple input-output device
3. In a complement stack of infrastructure (computing, networking, etc.), device, games, and ancillary applications (e.g. streaming), the device layer is commoditized and loses value
4. Much of the money spent on devices will now go towards spending on cloud gaming subscriptions
5. However, because content is king, the money or value in the industry will shift again from the cloud gaming apps, or app layer, down to the games layer

Here’s a slide that does two things. It shows how I’m segmenting the gaming industry — by layers in a complement stack. And it describes how I believe the launch of cloud-gaming applications will drive a reallocation of value between these layers.

Now that you understand on the demand side if there’s a shift in value within the categories, you also want to understand what the shift is in customer preferences (consumer or businesses). Ask yourself:

How do the macro drivers affect customer preferences within each category (demand related question)?

When: How does the when consumers or businesses decide to purchase change?

How: How do consumers or businesses now want to purchase; or put differently, what do they want their new purchasing journey to look like?

• Awareness — how are they now learning about offerings?
• Consideration — how are they further researching and narrowing the searching space?
• Intent — what distribution channels do they want to buy at?
• Payment — how do they want to pay?

What: What are they now looking for in a product that doesn’t yet exist in the market?

Now that you have a good sense of what’s going on with the market demand, you need to figure out what the supply looks like, so you ask:

What does the competitive landscape look like (supply related question)?

Who are the competitors and what is each of their positioning strategies (which tells us how they’ll react to a new entrant that goes after a similar position)?

• Incumbents in industry
• Incumbents in adjacent industries that will potentially enter
• Other new players
• Substitutes

How fragmented is the market versus consolidated with resource-rich incumbents?

What are their competitive advantages that they have that new entrants will either need to position around or overcome?

How will the industry unlocks potentially affect the business models and competitive advantage of the incumbents?

• E.g. U.S. government considering reducing subsidies for big animal meat manufacturers, which will wipe out low cost production competitive advantage against plant-based meat

Here’s a slide that captures the above points on what consumers are looking for (i.e. bases for competition), who the competitors are that are also targeting those consumers, and what competitive advantages exist in the market that new entrants will need to foster. Sometimes I capture everything in a single slide, other times it happens across multiple slides. In this example, I show the customer preferences part of demand and supply on the same slide for the sake of simplicity.

Now that you’ve identified white space in the market and the types of competitive advantages startups will need to hold off incumbents as they win in that white space, the next step is to figure out which startups are following that playbook. Basically, you ask yourself the following:

What are some startups that are positioned to win in this future market?

1. Are they positioned correctly, meaning are they differentiating on aspects of the product or experience that we’ve established the customers care about?
2. Do they have sustainable competitive advantages that serve as a moat against competitors?
3. What do you know about the team, do you believe in them?
4. Is their traction to date interesting (assuming post-launch)?

Here’s a basic example:

This is one of the first theses I put together. I’m sure many experts could pick it apart fifty different ways, but that isn’t necessarily a bad thing! The purpose of this thesis is to open up a conversation with said experts, so that you can learn from them…and continue to ask them for an interview or more intros!