complicated concepts

The benefits of slowing down and writing things out

Today’s Topic: Every new investment you make requires you to have conviction in the opportunity. But how can you tell if you have conviction? Try “writing it out.”

Growing up, you were probably taught that writing improves your thinking. Well, it’s true, regardless of your age.  

Like David McCullough, two-time Pulitzer Prize winner said, “Writing is thinking. To write well is to think clearly. That’s why it’s so hard.”

Luckily for us, investors aren’t competing for a Pulitzer Prize when writing out our thoughts. But the importance of writing remains true.

Writing out your thoughts can provide clarity; and when the goal is to determine if you have a high degree of conviction in a potential investment, clarity is your north star.

Assessing deals as an investor

Whether you’re a brand-new angel investor or an experienced VC, determining which aspects of a potential investment opportunity are important to you is critical in gaining clarity in your decision to invest or pass on an opportunity.

At Hustle Fund, we have a framework that we use to decide if a company is investable based on our beliefs of what a successful company should look like. We call this our Deal Assessment Framework, and we’ve open-sourced it to the world.

It may be that it’s important to you for the founder to have previous domain experience or for the team to be highly technical.

Or perhaps, you only like to invest in companies with recurring revenue models that sell a “revenue center” product, rather than a “cost center” product.

There’s no one way to assess a startup; every investor will weigh different aspects of a company differently. That’s what makes investors unique.

Write it out

Once you’ve determined which aspects of a company are important to you as an investor, it’s time to conduct due diligence on an investment opportunity.

Writing deal memos are common for VC and angel investors. Whether you’re pitching the opportunity to your investment committee at your firm, or pitching the LPs in your syndicate to fill the deal, deal memos are an integral way to communicate the pros and cons of the opportunity at hand.

And if you’re diligencing a company for a personal angel investment, writing a deal memo as if you’re pitching the company to other people is a great way to get into the rhythm of writing your thoughts down.

Writing a deal memo gives you the opportunity to explore your thoughts further. This exercise encourages you to research, conduct competitor analysis, and understand the market opportunity on a deeper level.

Writing also allows us to face our fears and to remain balanced in times of irrational exuberance. FOMO and market “hype” prey on all of us, especially the ones who don’t have processes in place to determine whether a company is investable.    

Recognize the red flags

Putting your thoughts to paper doesn’t mean that everything has to be positive. Use this time to be authentic and truthful to yourself.

Cautious about the slow-down in growth rate? Or, worried about the company not receiving the regulatory approval it needs? This is the analysis that ultimately provides the best clarity in an investment decision.

Different companies will have aspects that vary in importance. What’s important to succeed as a company in one sector, might not be quite the same as a company in another sector. Identifying a negative signal in just one aspect of a business doesn’t mean that it’s a bad investment opportunity.

Elizabeth Yin, General Partner at Hustle Fund has scored several future portfolio companies a 2 out of a maximum score of 4 in individual areas. But this didn’t prevent Hustle Fund from investing. In fact, it gave clarity into the areas of the business that could use the most attention in an otherwise exciting investment opportunity.

The aspects of a company that we would consider a “con” may disappoint us, but as investors, we owe it to ourselves and our LPs to be thoughtful across a full 360 analysis of a company.

Pitching yourself

Oftentimes, you won’t be writing for anyone but yourself. This is particularly true if you’re a new angel investor or diligencing a company for a personal investment.

This doesn’t mean that writing is a waste of time. In fact, pitching yourself is an opportunity to sit on the other end of the table as if a deal lead is selling you on the opportunity.

Is the argument for investment compelling? Are there holes in the analysis that need to be filled in order to understand the full picture? Putting yourself in the shoes of the people you’re attempting to convince can allow you to determine if you gained clarity from the due diligence or if there’s more to uncover.

How writing refines your thoughts and leads to clarity as an investor  

The purpose of writing is to arrive at the truth.

You may come to the conclusion that an opportunity you were excited about turns out to be one you should pass on. Or you may surprise yourself with a deal that surpasses your expectations and shows to be a promising investment.

Neither one is right. It’s only the truth.

As David McCullough said, “Writing is thinking. To write well is to think clearly. That’s why it’s so hard.”

One of the most important responsibilities of an investor is to think clearly, have conviction and act on that conviction.

How do you figure out if you have a conviction? Write it out.

This article was written by Tucker McKay. Tucker is the founder of Ikaria Labs, a content marketing agency for funds, fintechs, and financial services companies.