Archives

How Angel Investors Navigate Deals with an Investment Thesis

How Angel Investors Navigate Deals with an Investment Thesis 
Creating a Roadmap for Success 
Mindy Barker | Barker Associates

How do you know where you’re going without a navigation tool – GPS, a smartphone, or even the “ancient” map? For angel investors, that navigation tool is an investment thesis. When done correctly, it will not only guide you along your chosen investment course, it will help you identify the roadblocks and detours to avoid.  

An investment thesis is one of the most useful tools in the angel investor industry, summarizing your reasons and conditions for investing in certain types of companies. If you do not have an investment thesis or some type of investment strategy from the beginning, you may fall in love with a charismatic founder and invest in a deal you have no business investing in. This scenario happens all the time and it shouldn’t because it leads quickly to frustration and likely, the loss of the investment down the road. There is a myth that an investment thesis is only for venture capitalists—those who have a fiduciary duty to invest money in a certain way. While it’s true it is an important component to them, it is equally, if not more, valuable to all investors, especially those who are just starting out on investment roads less traveled.  

Essentially, if you invest in start-ups, founders will inevitably pitch you for money (it’s the name of the game, after all). Without an investment thesis, you may find it difficult to concentrate only on the start-ups that match your investment objectives because simply, you may not know those objectives. On the other hand, a strong thesis will guide you into sourcing the right deals, with your criteria, conditions, and requirements clearly set in advance. 

The Benefits of an Investment Thesis 

All angels should have clear, documented investment theses due to the numerous benefits they provide. And like any good roadmap, your thesis not only benefits you, it benefits others as well. Behind the driver’s seat, it keeps you disciplined on your selections and focused on where you want to go with your investments. With a deep understanding of the types of industries and businesses you want to invest in, the risks you’re willing to take (and those you’re not), and the parameters you want to see in companies, you are much better equipped to find the right fit for your money. 

An investment thesis also benefits the start-ups and entrepreneurs looking for funding. It allows them to understand what you’re looking for and what you’re not, and if you’re the right fit for them. If not, they can move on to someone who is, saving time, energy, and money in the process. This can only happen when expectations are delineated clearly from the beginning.  

Finally, an investment thesis facilitates communication and dealings with other investors. Angel investors refer deals to each other frequently. What may not work for one in one instance may be perfect for another at that particular time. And no one wants to refer a deal that the person is not interested in. Not only does it waste everyone’s time, but it makes that person look as if they are ill-advised. 

Tips for Creating a Strong Investment Thesis  

Let me reiterate – an investment thesis is crucial for your success as an angel investor. A strong one will help develop a stong portfolio, while a weak one may indicate lower overall performance. Here are a few tips to help you create a strong investment thesis: 

  • Do not rush it. It should take thought, research, and time. 
  • Have a clear, simple purpose, conditions, and expectations. 
  • Choose an industry you either have experience in or in which you are passionate about. 
  • Determine how that industry’s impact influences your decision. 
  • Conduct market research with both primary and secondary sources. 
  • Analyze long-term trends and short-term events that could affect the industry. 
  • Set specific criteria for an investment. Be clear as to what you will invest in and what you will not. 
  • Remember diversification. While you should focus on a particular industry or sector, you can diversify other factors, such as geography, business model, technology, or customer segment to create a more balanced portfolio. This should also be calibrated with your personal net worth. 

Once your investment thesis is created, you will have a detailed roadmap of where you are going on your investment journey. It helps serve as a reminder of why you do what you do and what your own investment parameters and boundaries are. And it guides you toward finding the investments that fit those objectives. 

Remember, all early-stage investments are risky and can fail even with the best idea, product, and management. By investing only in companies that fall within your thesis, you are not only minimizing your risk and exposure, you will also have an increased ability to help more companies grow through your specific offerings. And ultimately, a better fit in the beginning will likely lead to a better return in the end. 

Barker Associates has extensive experience working with angel investors on their investment theses. If you would like to discuss angel investing, either as an investor or as a company that requires funding, or if you have other specific areas of concern, please click here to schedule a 30-minute consultation at a rate of $100.