Investment Thesis Creation: Honing your Focus

Trevor Loy, Managing Partner and Founder of Flywheel Ventures joined the 500 Global Education team to discuss the elements of crafting an investment thesis. Trevor is an instructor at VC Unlocked: Silicon Valley. VC Unlocked: Silicon Valley, offered in collaboration with the Stanford Center for Professional Development, is an invite-only, educational program for emerging leaders who want to shape the future of the venture capital industry. Learn more about VC Unlocked: Silicon Valley. 

Below is a short summary of Trevor’s discussion. You can also watch the full discussion on YouTube here. 

Investment Thesis Creation: Honing your Focus

Investment thesis can be thought of as a foundation that is part of a larger set of tools and activities. It is the strategy and execution plan upon which your portfolio construction can rely.

There is a 3 part framework that focuses on these 3 aspects: 

1. Focus-  determining the focus of your fund
2. Process – what process will you use to run the fund 
3. Execution – the steps you’re going to do to implement your investment thesis 

Hone your Focus

In the Focus section of your investment thesis creation, there are 4 key elements to consider. 

Market Opportunity 

The important factor here is that no matter which market or markets you intend to target, you must establish a solid foundation and effectively explain, especially during fundraising, why these markets can support a large number of new startup entrants.  You should also consider if these markets can accommodate one or two massive billion dollar unicorn winners- despite whatever incumbents are already in that market. 

Trends

The big question when it comes to trends is – why now? Be able to determine what factors make the current year – or the next 5 years- the right time. Some factors may be obvious. For example, we are all paying attention to AI, so it would be easy to tell a story about why AI is a good trend to follow, at least in theory. However, one may argue that there are too many investors already focused in that sector and maybe the trend is against you. Someone might argue that now is the right time to start a crypto fund because it is out of favor with so many people. 

You need to have an argument on ‘why now’, which something many new emerging managers  do not focus enough on. Think about – Why you, what’s changed, and why does this strategy work now, vs 5. years ago. 

Landscape 

Mapping the ecosystem is a  familiar aspect for most fund managers. You’ll often see logo-mapped visuals laying out the landscape. The key here is to recognize that part of understanding trends is being able to articulate what is going on in the ecosystem. This gives you an opportunity to recognize gaps, predict where startups will emerge and put yourself in a position to get the deal flow of those new startups as they emerge. 

Segments 

Focusing on target segments is often overlooked by emerging managers. For example, new VCs may decide to focus on AI, Ed Tech or Healthcare Tech. These categories are so large and amorphous, it is difficult to articulate what startups and specific opportunities you are targeting. A more effective segmentmentation would involve delving deeper. For instance, within AI, it could be about AI-driven drug development or precision targeting in the biotech sector. In Ed Tech, the focus could shift to startups specializing in for-profit professional education or lifelong learning. The key is to move beyond overarching sector labels and instead honing in on more defined opportunities within them.

Once you’ve clearly defined your focus, the next step is to determine the process that you will go after the opportunity you’ve defined. 

Curious about the next two steps in Investment Thesis Creation? Watch the full discussion here.

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