Investment Thesis 101 - Part 1: “Thesis driven vs. Thematic driven investing”
This article serves as a starting ground for upcoming stories concerning us, Air Ventures. Briefly about us, we are an early-stage fund focusing on Late-seed, Pre-Series A and Series A investments. Our area of interest falls to B2B startups in every imaginable industry. We have recently changed our look and website to be more up to date with even more things to come in the future. We were established in 2017 with a certain view on startups and we did not focus on investment thesis that much. Instead, our point of view on startups was purely thematic driven with some caveats to it. For example, one of our co-founders and partners is Michal Nydrle so we are more than confident to assess MarTech startups, thanks to him and/or his network. But other than that we struggled with the absence of a clear view or clear path to assess inbound and outbound startups on our own.
Now we are feeling a certain shift in our behavior, we have seen a lot of startups (when I say a lot I mean a few thousands a year). Simply put, we have matured. We have a huge refuse of startups in our process due to many reasons which we need to think of and coop every time we analyze startup deeply. This takes time and brings a lot of unnecessary contrarianism to the table. Me as a control and process freak struggle a lot with it. So after we agreed that we have seen a critical mass of startups I come up with a “narrow” investment thesis that aims to spare a lot of time.
This series of articles aims to introduce these concepts to funds, startups, young individuals and everyone who has spare time and/or is willing to learn. Investment thesis is a cornerstone or a code of conduct for every venture capital fund because it gathers and represents the beliefs of all parties concerned from limited partners and partners to analysts to help with marketing of the fund and mainly with the decision making process.
As I have mentioned previously we were thematic driven. Thematic driven investing involves identifying big themes and going after them. Examples from the world of enterprise software would be “enterprise 2.0”, “accounting”, “support”, “ad management”, “data handling”, “customer success” or “artificial intelligence”. Many VCs go after startup “picking” and value validation this way. They set out the themes and then go berserk filling out their portfolio with companies that fit those themes. They are looking for the next paradigm shift which is a risky bet and inherently suffers from a power law.
Thesis driven investing gives a direction where a particular area of focus is going. I like to take at least a five-year view. And once you have mapped out that picture, it becomes your thesis. And you evaluate every investment you make in the context of that thesis.
A crucial part of every investment thesis is the adoption. Everyone in the firm needs to buy the concept or it will not work. Thematic investing is undoubtedly beneficial for bigger firms. It helps partners to select a couple of “next big things” and go for them. On the other hand, our region is full of smaller VCs where cooperation and tight team is a cornerstone of every success = singular vision.
I would like to express the disadvantages of thematic driven investing. Thematic driven investing forces VCs to “bucket filling” which results in investing into the next paradigm shift without much thought. Thematic driven investing brings a lot of bias to the industry which inevitably leads to “me too” investing which is generally value-destroying. Thematic driven investing has one huge caveat to it. It allows the players in the industry to free-ride and benefit from the thoughts expressed by others. This can lead to picking the winners thanks to “random walk”.
Nevertheless, the formation of either thematic or thesis driven investing is beneficial for funds. Both substitute the most basic generalist approach which is “random walk” by the definition. Nevertheless, both thematic investing and thesis driven investing are better than a generalist approach because they both promote domain expertise which is critical to building a sustainable innovation ecosystem.
The next blog post will cover our very own investment thesis along with examples of other investment theses from throughout the Europe. I will break down every aspect of it and I give all the readers the rationale behind every step. Stay tuned.