The investment thesis explained: everything you need to know

You've poured your heart and soul into your startup. Now you're ready to take the next big leap – securing venture capital (VC) funding. 

But here's the catch: VCs aren't just looking for great ideas. They're looking for great ideas that fit their specific investment strategy. 

Enter the investment thesis, which guides both how you select suitable VCs and how they decide whether you’re suitable for them.

Read on to uncover the ins and outs of investment theses, how they shape VC decisions, and how you can use this knowledge to your advantage when seeking funding for your company.

What is an investment fund thesis?

An investment thesis is a VC firm's core set of beliefs about the types of investments that will yield the best returns. It's a foundational philosophy that guides their investment decisions.

A typical investment thesis includes:

• Target sectors or technologies
• Preferred company stages (e.g., seed, early-stage, growth)
• Geographical focus
• Ideal company characteristics
• Market trends they believe will be important

The investment thesis informs how a VC firm evaluates opportunities, allocates its fund, and builds its portfolio. It's primarily based around the firm's expertise, market analysis, and predictions about future trends.

For companies trying to raise VC capital, effectively analysing and understanding a VC's investment thesis is an essential skill.

It helps you determine if your startup aligns with what the VC is looking for, increasing your chances of securing funding and building a productive long-term partnership. 

Not to mention, it will save you from wasting time pursuing the wrong VCs!

Key elements of an investment thesis

When researching VCs, here are the main components of their investment thesis to look out for:

1. Fund size

As noted, a fund's size significantly influences the types of investments it can make.

Larger funds need to write bigger checks and often target later-stage companies to move the needle on returns. Smaller funds typically focus on earlier stages, where smaller investments can yield outsized returns.

For example, a $500 million fund might focus on Series B and C rounds, while a $50 million fund might concentrate on seed and Series A investments.

2. Investment stage

VCs usually specialise in certain stages of a company's lifecycle.

Some VCs target smaller companies, offering smaller sums as low as £/$100K or less for early-stage, risky businesses. Others get involved once a business has raised seed and Series A funding.

Broadly speaking, early-stage VCs might be more comfortable with product risk and market uncertainty, while later-stage investors often look for proven traction and clear paths to profitability.

Again, this is often flexible. For example:

• AI startups have been raising immensely large seed and Series A funding, like the French company H, which recently raised $220 million months after its formation.
• US startup Safe Superintelligence Inc. similarly raised an eye-watering $1 billion despite having no product.

3. Industry focus

Many VCs specialise in specific industries or sectors where they have expertise or see particular potential. This could be broad (like "enterprise software") or niche (like "AI-powered fintech for SMEs").

Industry focus is often tied to the partners' backgrounds and the fund's thesis on where future growth opportunities lie.

For instance, a VC firm might focus on health tech because it believes in the sector's growth potential and has partnered with healthcare industry experience.

4. Geographic focus

Some VCs invest globally, while others focus on specific regions or even cities (this is common in US cities like San Francisco and New York).

This often aligns with where they have the strongest networks and can provide the most value beyond capital.

A VC's geographic focus might be influenced by factors like:

• Local ecosystem strength
• Regulatory environment
• Proximity for hands-on support
• Emerging market opportunities

5. Deal size and ownership targets

VCs typically have a range for their initial investments and targets for the percentage ownership they want to acquire.

This helps them manage their portfolio and ensure they have enough stake in their winners to drive fund returns.

For instance, a VC might aim to invest £/$2-5 million for a 15-20% ownership stake in their initial investment. This allows them to have meaningful influence while leaving room for future investors.

6. Follow-on strategy

Most VCs reserve capital to participate in future funding rounds of their portfolio companies. Understanding this provides insights into how they might support you beyond the initial investment.

Some VCs might reserve 50% or more of their fund for follow-on investments, while others might have a more limited follow-on strategy. This can impact how much support you can expect in future rounds.

Using this knowledge to approach VCs

VCs often see a company’s attempt to align with their thesis as a green flag. In fact, many say that failing to consider the thesis when reaching out to VCs is precisely how not to approach VCs. 

Josefa Marzo Pons from Kalonia Venture Partners explained:

If they have researched what kind of investments we make and it is a match it's a welcomed email.

Kate Brodock from Switch Futures similarly says:

You’d be shocked how many cold outreaches I get that are so clearly outside our thesis.

Here’s how to use your understanding of the thesis to increase your odds of VC outreach success:

1. Do your homework

Before reaching out to a VC, thoroughly research their investment thesis. This information is often available on their website or in interviews with the partners. As our friends at Connectd say:

The first step is always research. You need to have a clear understanding of the ecosystem, what kinds of investors are out there, and then decide who is best suited to your business.

2. Tailor your pitch

Highlight aspects of your startup that align with the VC's thesis. Show them why you're a perfect fit for their portfolio. Our free pitch deck template should put you in good stead.

3. Be realistic

If your startup doesn't align with a VC's thesis, it's probably not worth your time to pitch them. Focus on VCs whose theses match your profile.

4. Understand their perspective

When a VC asks questions or raises concerns, try to view it through the lens of their investment thesis. Are they trying to determine if you fit their strategy?

5. Prepare for the long game

VCs think in terms of fund lifecycles (typically 10 years). Be prepared to discuss your long-term vision and how it aligns with their thesis.

6. Highlight the value you bring

VCs are looking for companies that can provide outsized returns. Emphasise how your startup fits into their thesis in a way that could drive significant value.

A mutual fit matters

Ultimately, securing VC funding isn't just about the cash. It's about entering into a long-term partnership.

The VC's investment thesis should align not just with your current state, but with your long-term vision and goals.

Don't be afraid to ask VCs about their thesis and how they see your company fitting into their portfolio.

This demonstrates your savviness as a founder and helps ensure that any partnership you enter is built on mutual understanding and aligned interests.

The long and short of it is that:

It's not about impressing every VC out there but finding the ones whose investment thesis matches your startup's potential, saving you time and energy in the process. 

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