What is a venture capital Investment Thesis; and why is it so important to a thesis-based venture capital fund?
A venture capital Investment Thesis is an overall set of beliefs a fund uses to determine whether or not to make a particular investment. A fund’s Investment Thesis provides a written guideline of when to take an action and why. Having a clear Investment Thesis helps investors establish goals for their investments and measures whether those goals are being achieved. An Investment Thesis may be presented either in written form or can be as simple as an idea.
Keeping something simple is often better than making things unduly complicated.
Some may be unfamiliar with Twitter and what the concept of a Tweet is. Essentially, a Tweet is a short post, idea, or small grouping of ideas shared with an account’s followers, and in its entirety can be no more than 140 characters in length. This length restriction means you cannot fit a whole lot of ideas into the space provided. It also means that tweets must be brief, so words must be chosen carefully.
Chris Scheetz, the founder of 1839 Ventures and the 1839 Venture Funds, which they advise, has always believed venture fund investing should not be difficult. Therefore, the concept of keeping the fund’s Investment Thesis simple and brief appealed to him.
Below, in less than 140 characters, is the 1839 Venture Funds – Live Oak Fund – Investment Thesis:
We invest in early and growth‐stage companies who may scale effectively, are apt to dominate a given market, and display an exit potential.
What does this venture capital Investment Thesis mean?
- Invest – 1839 Venture Funds, through the use of various pooled investment vehicles, or venture capital funds provide financing to chosen companies in exchange for an equity share or convertible notes in the company.
- Early-Stage – There are many different stages of a business, making up its entire life cycle. The definitions of these different stages can be rather broad and may vary widely, depending on who you ask. Early-Stage, to our fund, means the company has a fully-developed prototype of its product or service. A company at this stage is beyond startup stage and has begun operations, but may not yet be at the point of commercial manufacturing or sales. Their products or services may or may not be commercially available, or the business may have a few initial customers.
- Growth-Stage – At this stage, companies have had their first initial orders, or perhaps a few customers. These companies are showing the ability to grow, but may not be able to fulfill or support large orders and need financing to effectively scale.
- Companies – These are business enterprises, or firms, set up to conduct commercial business that maintains both the goal of longevity and the objective of future growth.
- Scale Effectively – No one wants to wait around on a team that accomplishes nothing, wastes time, or spins its wheels. In order to gain investment from one of our funds, a company needs to demonstrate the ability to grow and grow quickly. Growing rapidly is a plus, but just as important as rapid growth is scaling effectively. Being able to scale effectively can be a large part of a company’s success. The business’ potential to scale and the team’s perceived ability to do so will determine if our fund’s investment is right for your company.
- Apt to Dominate – Market dominance is typically defined as the strength of a given product, service, or brand, relative to competitive offerings. Businesses in line to receive an investment from 1839 Venture Funds must be able to clearly demonstrate these strengths. Businesses who are poised to dominate their given market usually can fall into three categories: The business may be a Market Leader, with a brand new product in a new market. They also could be a Market Challenger, which may produce a better product or an improved service, that may capture market share. Firms may even dominate by being a Market Specialist, where they completely fill a niche market.
- Given Market – Companies seeking investment should clearly understand their customers, and the competitive landscape.
- Display an Exit Potential – As with any investment, the potential to make a return on that investment is the key determining factor. The Fund does not invest in what are known as lifestyle businesses, where the aim of the business is to sustain a particular income level for the founder. A return on investment for our Fund is typically produced by having a liquidity event. The two most common types of liquidity events are direct acquisitions by other corporations or private equity firms or an initial public offering (IPOs). Your company may also merge with another to have a liquidity event. A company must be able to demonstrate the capacity to have a liquidity event in order for it to receive an investment from 1839 Venture Funds.
The 1839 Venture Funds – Live Oak Fund uses this Investment Thesis because it helps remove some of the emotion from our investing. We highly believe that a solid Investment Thesis can be the foundation for a profitable portfolio.
The fund follows Investment Thesis best practices by reexamining our thesis each time there is new information related to a potential portfolio company. We have found having a sound Investment Thesis keeps the fund focused on the underlying business. As long as the fund’s Investment Thesis remains intact, everything else can be disregarded.