If you talk to experienced investors, you might hear them throw around the phrase "investment thesis".
In the VC world, this refers to guidelines the fund uses to decide where to deploy their money.
For example, at Hustle Fund we invest in early-stage tech companies with low-overhead and founders who hustle... generally in North America and Southeast Asia.
Another fund's investment thesis might be: biotech companies in emerging markets, or SaaS companies in Canada.
A few weeks ago I spoke with an investor about her investment thesis, and how she arrived there.
Meet Jess Lee
Jess Lee is a partner at Sequoia Capital - one of the most trusted and successful traditional VC funds in Silicon Valley.
This is Jess. She's amazing.
Jess has a pretty crazy story.
Around 2008, Jess discovered a company called Polyvore – a platform that enabled users to clip items from images on the web, and create virtual collages.
Jess became a power-user. After a few months of using the platform for hours at a time, she sent an email to Polyvore's founder. She had some feedback.
She also had detailed instructions on how to implement her feedback.
Polyvore's founder responded by hiring Jess.
As a product manager at Polyvore, Jess focused her attention on measuring growth and retention, launching new revenue channels, and increasing community engagement.
Within 4 years she was named CEO. The company was acquired in 2015 by Yahoo! for $230m.
Her Investment Thesis
After the Polyvore acquisition, Jess joined Sequoia Capital.
(Sidenote: the story of how she got recruited is amazing.)
Pretty immediately, she realized that the feedback loop for an investor was long. Like, really long.
It takes 7-10 years to find out if you're a good investor. And coming from a startup mentality where things move quickly and feedback often comes in real-time... that was hard for her.
Ever the product manager, Jess needed a system – a thesis she could look to when facing decisions about where to deploy capital.
She thought about her time at Polyvore. The biggest needle mover for the company was the community they powered.
That sealed the deal for her.
Jess' thesis is that companies with an engaged community have the strongest moat.
What does that mean, exactly?
Jess' investment thesis gives her flexibility... while helping her focus on companies that – she believes – have a competitive advantage though their communities.
She's invested into companies that focus on the parenthood journey, like Maven and Otter.
And future-of-work companies, like Wonolo.
And companies supporting the creator economy, like Protege.
And even enterprise companies, like Ironclad.
The one thing nearly all her investments have in common? They are all community-based.
Do you need an investment thesis?
Defining your investment thesis might be valuable once you've invested in a handful of companies and have started to identify good and bad signals.
If you decide to create your own investment thesis, here are a few places to start:
Pick an industry and/or a market
Perhaps you have deep knowledge of the fin-tech industry because of your career. Or perhaps you're passionate about climate change and want to support founders who can make a real impact.
Or maybe you want to invest in companies in emerging markets, where there is more greenfield.
There is no right answer here.
Do your research
This could include reading articles and white papers on the industry, or even just following industry experts on Twitter.
Validate your idea
Reach out to others who are already investing in the space. Learning about their experiences will help you get a more realistic sense of if your thesis is a good one.
Do you have an investment thesis already? What is it?