What Is an ‘Investment Thesis’, and Why Should My Startup Care?
You have a beautiful pitch deck. A great narrative. But you keep getting turned away. You may be barking up the wrong tree — here’s what you should be looking out for.
One of the most commonly recurring frustrations I hear from the startups I work with is that rejections from venture capitalists are often extremely vague. There are a number of reasons why you may get a wishy-washy rejection — but sometimes, it’s simply because you’re talking to the wrong investors.
What makes a ‘wrong’ investor?
Every investment fund has a ‘thesis,’ or a set of guidelines that inform how they deploy their investments. If your startup doesn’t fit this thesis, chances are it doesn’t matter how promising your company is — the investors may hear you out, but they are not going to deploy cash.
For some funds, this thesis might be really broad (“All early-stage companies in California”), and some can get pretty narrow (“$1m checks into crypto startups founded by Ramapo College graduates with blue hair”).
If you fall outside of the ‘thesis,’ some investors might still invest — if an extremely promising opportunity comes along, they will at least consider it — but remember that the ‘thesis’ is what the investment partners used to raise money from their Limited Partners (LPs). If a fund starts deploying a bunch of cash into startups that are out of scope compared to the thesis, the LPs will start getting twitchy and lose faith pretty quickly.
What goes into a thesis?
Investment theses will include some combination of the below. Some funds care a lot about some of these things, and some are less sensitive. To some, these things may be a deal-breaker — and others take a more flexible approach.
- Investment amount — most funds have a minimum and maximum check size, and a min/max round size.
- Target Audience — some funds focus on Business-to-business (B2B) companies, where the core sales dynamic tends to be a small number of large sales. Others focus on Business-to-Consumer (B2C) companies (typically making a large number of smaller sales). Others again invest in B2B2C — companies that supply businesses that supply consumers.
- Verticals — Some funds only invest in verticals, while others may explicitly say they avoid certain verticals. Example verticals might be medical tech, education tech, ‘deep tech,’ space, crypto companies, surveillance companies, advertising technology, etc.
- Ownership targets — Some funds will only invest if they can own a certain percentage of the company they invest in at the end of the investment round.
- Education — Some funds are set up specifically to support graduates from a particular school or alumni network. These tend to raise money from the alumni network, too.
- Demographic — Some firms focus on investing along demographic boundaries — young founders, older founders, Latinx founders, female founders, founders who have been in prison, etc.
- Geographic location — Almost all investment firms have geographic boundaries for where they source deals. They may invest only within — or without — certain areas, states, countries, or regions.
- Opportunity size — Most investors invest in companies that have at least the possibility of an outsize return. In venture capital, most funds try to make investments where there is at least a possibility that every investment ‘returns the fund’. In other words: If they have a $100m fund, and they make $5m investments, they can make 20 investments in total. Each of these investments should have at least the outsize possibility of a 20x return — turning the $5m investment into a $100m return on investment. If your investment is looking interesting, but the investors believe that you would be a 3x return at best, you probably wouldn’t raise money.
So, is that all? Well… Not quite. All of the points above are specifically tied to the thesis of the investor. If you tick all of those boxes, that isn’t the end of your journey — that’s the beginning. You still have to have a good team, solving a meaningful problem with a good solution in a huge market, with some traction and believability for the market you’re about to enter — and be able to wrap a great narrative around all of that as part of your pitch.
How do you know if your company is a good fit with the thesis?
Ask them. Most investors are happy to tell you what their thesis is.
Ask the question “What do you typically like to invest in?” and “Do you think my company is a good fit with your thesis?”. If you get a ‘no,’ it’s okay to ask what aspect of your company isn’t a good fit. It’s possible that they may have misunderstood something, and that it’s possible to correct the misunderstanding at this point. You wouldn’t be the first startup to have been turned down over a misunderstanding.
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Haje is a pitch coach based in Silicon Valley, working with founders from all over the world to create the right starting point for productive conversations with investors — from a compelling narrative to a perfect pitch. You can find out more at Haje.me. You can also find Haje on Twitter and LinkedIn.