investment thesis creation

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What Is an Investment Thesis?

• Understanding the Thesis

Special Considerations

• What's Included?

The Bottom Line

• Portfolio Management

Investment Thesis: An Argument in Support of Investing Decisions

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

The term investment thesis refers to a reasoned argument for a particular investment strategy, backed up by research and analysis. Investment theses are commonly prepared by (and for) individual investors and businesses. These formal written documents may be prepared by analysts or other financial professionals for presentation to their clients.

Key Takeaways

• An investment thesis is a written document that recommends a new investment, based on research and analysis of its potential for profit.
• Individual investors can use this technique to investigate and select investments that meet their goals.
• Financial professionals use the investment thesis to pitch their ideas.

Understanding the Investment Thesis

As noted above, an investment thesis is a written document that provides information about a potential investment. It is a research- and analysis-based proposal that is usually drafted by an investment or financial professional to provide insight into investments and to pitch investment ideas. In some cases, the investor will draft their own investment thesis, as is the case with venture capitalists and private equity firms.

This thesis can be used as a strategic decision-making tool. Investors and companies can use a thesis to decide whether or not to pursue a particular investment, such as a stock or acquiring another company. Or it can be used as a way to look back and analyze why a particular decision was made in the first place—and whether it was the right one. Putting things in writing can have a huge impact on the direction of a potential investment.

Let's say an investor purchases a stock based on the investment thesis that the stock is undervalued . The thesis states that the investor plans to hold the stock for three years, during which its price will rise to reflect its true worth. At that point, the stock will be sold at a profit. A year later, the stock market crashes, and the investor's pick crashes with it. The investor recalls the investment thesis, relies on the integrity of its conclusions, and continues to hold the stock.

That is a sound strategy unless some event that is totally unexpected and entirely absent from the investment thesis occurs. Examples of these might include the 2007-2008 financial crisis or the Brexit vote that forced the United Kingdom out of the European Union (EU) in 2016. These were highly unexpected events, and they might affect someone's investment thesis.

If you think your investment thesis holds up, stick with it through thick and thin.

An investment thesis is generally formally documented, but there are no universal standards for the contents. Some require fast action and are not elaborate compositions. When a thesis concerns a big trend, such as a global macro perspective, the investment thesis may be well documented and might even include a fair amount of promotional materials for presentation to potential investing partners.

Portfolio management is now a science-based discipline, not unlike engineering or medicine. As in those fields, breakthroughs in basic theory, technology, and market structures continuously translate into improvements in products and in professional practices. The investment thesis has been strengthened with qualitative and quantitative methods that are now widely accepted.

As with any thesis, an idea may surface but it is methodical research that takes it from an abstract concept to a recommendation for action. In the world of investments, the thesis serves as a game plan.

What's Included in an Investment Thesis?

Although there's no industry standard, there are usually some common components to this document. Remember, an investment thesis is generally a proposal that is based on research and analysis. As such, it is meant to be a guide about the viability of a particular investment.

Most investment theses include (but aren't limited to) the following information:

• The investment in question
• The investment goal(s)
• Viability of the investment, including any trends that support the investment
• Potential downsides and risks that may be associated with the investment
• Costs and potential returns as well as any losses that may result

Some theses also try to answer some key questions, including:

• Does the investment align with the intended goal(s)?
• What could go wrong?
• What do the financial statements say?
• What is the growth potential of this investment?

Putting everything in writing can help investors make more informed decisions. For instance, a company's management team can use a thesis to decide whether or not to pursue the acquisition of a rival. The thesis may highlight whether the target's vision aligns with the acquirer or it may identify opportunities for growth in the market.

Keep in mind that the complexity of an investment thesis depends on the type of investor involved and the nature of the investment. So the investment thesis for a corporation looking to acquire a rival may be more in-depth and complicated compared to that of an individual investor who wants to develop an investment portfolio.

Examples of an Investment Thesis

Portfolio managers and investment companies often post information about their investment theses on their websites. The following are just two examples.

Morgan Stanley

Morgan Stanley ( MS ) is one of the world's leading financial services firms. It offers investment management services, investment banking, securities, and wealth management services. According to the company, it has five steps that make up its investment process, including idea generation, quality assessment, valuation, risk management , and portfolio construction.

When it comes to developing its investment thesis, the company tries to answer three questions as part of its quality assessment step:

• "Is the company a disruptor or is it insulated from disruptive change? 
• Does the company demonstrate financial strength with high returns on invested capital, high margins, strong cash conversion, low capital intensity and low leverage? 
• Are there environmental or social externalities not borne by the company, or governance and accounting risks that may alter the investment thesis?"

Connetic Ventures

Connetic Adventures is a venture capital firm that invests in early-stage companies. The company uses data to develop its investment thesis, which is made up of three pillars. According to its blog, there were three pillars or principles that contributed to Connetic's venture capital investment strategy. These included diversification, value, and follow-on—each of which comes with a pro and con.

Why Is an Investment Thesis Important?

An investment thesis is a written proposal or research-based analysis of why investors or companies should pursue an investment. In some cases, it may also serve as a historical guide as to whether the investment was a good move or not. Whatever the reason, an investment thesis allows investors to make better, more informed decisions about whether to put their money into a specific investment. This written document provides insight into what the investment is, the goals of the investment, any associated costs, the potential for returns, as well as any possible risks and losses that may result.

Who Should Have an Investment Thesis?

An investment thesis is important for anyone who wants to invest their money. Individual investors can use a thesis to decide whether to purchase stock in a particular company and what strategy they should use, whether it's a buy-and-hold strategy or one where they only have the stock for a short period of time. A company can craft its own investment thesis to help weigh out whether an acquisition or growth strategy is worthwhile.

How Do You Create an Investment Thesis?

It's important to put your investment thesis in writing. Seeing your proposal in print can help you make a better decision. When you're writing your investment thesis, be sure to be clear and concise. Make sure you do your research and include any facts and figures that can help you make your decision. Be sure to include your goals, the potential for upside, and any risks that you may come across. Try to ask and answer some key questions, including whether the investment meets your investment goals and what could go wrong if you go ahead with the deal.

It's always important to have a plan, especially when it comes to investing. After all, you are putting your money at risk. Having an investment thesis can help you make more informed decisions about whether a potential investment is worth your while. Make sure you put your thesis in writing and answer some key questions about your goals, costs, and potential outcomes. Having a concrete proposal in place can spell the difference between earning returns and losing all your money. And that's if your thesis supports the investment in the first place.

Harvard Business School. " Writing a Credible Investment Thesis ."

Lanturn. " What is an Investment Thesis and 3 Tips to Make One ."

Morgan Stanley. " Global Opportunity ."

Medium. " The Data That Built Our Fund's Investment Thesis ."

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The Impact Investor | ESG Investing Blog

Investing for financial return is only part of the equation.

How to Create an Investment Thesis [Step-By-Step Guide]

Updated on June 13, 2023

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One of the worst mistakes an investor can make is to sink their money into an investment without knowing why. While this may seem like the world’s most obvious mistake to avoid, it happens every day. Look no further than the stock market for plenty of examples of misguided optimism gone terribly wrong.

That’s where the idea of an investment thesis comes in. An investment thesis is a common tool used by venture capital investors and hedge funds as part of their investment strategy.

Most funds also use it on a regular basis to size up potential candidates during buy-side job interviews. But you don’t have to work at a venture capital fund or private equity firm to reap the benefits of creating an investment thesis of your own.

Table of Contents

What Is an Investment Thesis?

Materials needed to create a thesis for your investment strategy, a step-by-step guide to creating a solid investment thesis, step 1: start with the essentials, step 2: analyze the current market, step 3: analyze the company’s sector, step 4: analyze the company’s position within its sector, step 5: identify the catalyst, step 6: solidify your thesis with analysis, free tools to help strengthen your investment strategy.

An investment thesis is simply an argument for why you should make a specific investment. Whether it be a stock market investment or private equity, investment theses are all about creating a solid argument for why a certain acquisition is a good idea based on strategic planning and research.

While it takes a little more work upfront, a clear investment thesis can be a valuable tool for any investor. Not only does it ensure that you fully understand why you’re choosing to put your hard-earned money into certain stocks or other assets, but it can also help you develop a long-term plan.

Should an investment idea not go as planned, you can always go back to your investment thesis to see if it still holds the potential to work out. By considering all the information your thesis contains, you’ll have a much better idea of whether it’s best to cut your losses and sell, continue holding, or even add to your position.

An investment thesis includes everything you need to create a solid game plan, making it a foundational part of any stock pitch.

See Related : Best Socially Responsible Stocks To Invest In Today

One of the benefits of an investment thesis is that it can be as complex or as simple as you like. If you actually work at a venture capital firm , then you may want to develop a full-on venture capital investment thesis. But if you’re a retail investor just looking to solidify your investment strategy, then your thesis may be much more straightforward.

If you’re an individual investor, then all you really need to create an investment thesis is somewhere to write it out. Whether it be in a Google or Word doc or on a piece of paper, just make sure you have a place to record your thesis so that you can consult it down the line.

If you’re developing a venture capital investment thesis that you plan to present to an investment committee or potential employers, then there are plenty of great tools online that can help. Slideteam has thousands of templates that can help you create a killer investment thesis , as well as full-on stock pitch templates.

As mentioned earlier, an investment thesis holds the potential to help you plot out a strategy for pretty much any acquisition. But for the sake of simplicity, we’ll assume throughout the examples in the following steps that you’re an investor interested in going long on a stock that you plan to hold for at least a few months or years.

Venture capitalists looking to invest in companies or startups can also apply the same principles to other investment goals. Investors who are looking to short a certain stock should also be able to use these techniques to locate potential investments. The main difference, of course, is that you’ll be looking for bad news instead of good.

First things first. Before you get into doing the research that goes into an investment thesis or stock pitch, make sure you take the time to write out the basics. At the top of the page, include things like:

• The name of the company and its ticker symbol
• Today’s date
• How many shares of the company you already own, if any
• The current cost average for any shares you may already hold
• Whether the stock pays dividends and, if so, how often. You may also want to include the current ex-dividend and dividend payment dates.
• A brief summary of the company and what it does

See Related : How to Start Investing With Purpose

Now it’s time to take a look at the entire market and the direction it’s headed. Why? As Investors Business Daily points out,

“History shows 3 out of 4 stocks move in the same direction as the overall market, either up or down. So if you buy stocks when the market is trending higher, you have a 75% chance of being right. But if you buy when the market is trending lower, you have a 75% chance of being wrong.”

While the overall market direction is definitely an important factor to keep in mind, what you choose to do with this information will largely come down to your individual investing style. Investors Business Daily founder William O’Neil advised investors only to jump into the market when it was trending up.

Another approach, however, is known as contrarian investing, which revolves around going against market trends. Warren Buffett summed up the idea behind this strategy with his famous quote, “Be fearful when others are greedy, and greedy when others are fearful.” Or as Baron Rothschild more graphically put it, “Buy when there is blood in the streets, even if the blood is your own.”

Most investors who are looking for a faster return will likely be better off waiting to strike until the iron is hot. If you align more with the long-term contrarian philosophy, however, bleak macroeconomic outlooks may actually strike you as an ideal investment opportunity .

See Related: How to Invest in Private Equity: A Step-by-Step

Now that you’ve got a look at the overall market, it’s time to take a look at the sector your company fits into. The Global Industry Classification Standard (GICS) breaks down the entire market into 11 sectors. If you want to get even more specific, you can further break down companies into the GICS’s 24 industry groups, 69 industries, and 158 sub-industries.

Once you identify which group your company belongs to, you’ll then want to take a look at that sector’s performance. Fidelity provides a handy breakdown of the performance of various sectors over different time periods.

But why does it matter? Two reasons.

• Identifying which sectors various companies belong to can help you ensure that your portfolio is properly diversified
• The reason that sector ETFs tend to be so popular is that when a sector is trending, many of the stocks within that sector tend to move in unison. The reverse is also true. When a certain industry is lagging, the individual stock prices of the companies in that industry may be affected negatively. While this is not always the case, it’s a general rule of thumb to keep in mind.

The idea behind working sectors into your investment criteria is to give you an overview of what type of investment you’re about to make. If you’re a momentum trader, then you may want to shoot for companies within the strongest-performing sectors this year or even over the past few months.

If you’re a value investor, however, you may be more open to sectors that have historically experienced high growth, even if they are currently suffering due to the overall state of the economy. Some speculative investors may even be interested in an innovative industry with strong potential growth possibilities, even if its time has not yet come.

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If you want to up your odds of success even more, then you’ll want to compare the company you’re interested in against the performance of similar companies in the same industry.

These are the companies that tend to get the most attention from large, institutional investors who are in a position to significantly increase their market value. Institutional investors tend to have a huge amount of money in play and are far less likely to invest in a company without a proven track record.

When choosing an investment, they’ll almost always go with a global leader over a new business, regardless of its promise. However, they also consider intrinsic value, which considers how much a company’s stock is selling for now, as opposed to how much revenue the company stands to earn in the future. In other words, institutional investors are looking for companies that are stable enough to avoid surprises but that also stand to generate considerable capital in the future.

Why work this into your game plan? Because even if you don’t have millions of dollars to invest in a company, there may be hedge funds or venture capital firms out there that do. When these guys make an investment, it tends to be a big one that can actually move a company’s share price upward. Why not ride their coattails and enjoy a solid growth rate as they invest more money over time into proven winners?

That’s why it’s important to make sure that you see how a company stacks up against its closest competitors. If it’s an industry-leading business with a large market share, it’s likely to be a strong contender with solid fundamentals. If not, you may end up discovering competing companies that make sense to consider instead.

See Related : What is a Triple Bottom Line? Definition & Examples

At this point, hopefully, you’ve identified the best stock in the best sector based on your ideal investing style. Now it’s time to find out exactly why it deserves to become a part of your portfolio and for how long.

If a company has been experiencing impressive growth, then there’s bound to be a reason why.

• Is the company experiencing a major influx of business because it’s currently a leader in the hottest sector of the moment? Or is it a “good house in a bad neighborhood” that’s moving independently of the other stocks in its industry?
• How long has it been demonstrating growth?
• What appears to be the catalyst behind its movement? Does the stock owe its growth to strong management, recent world events, the approval of a new drug, the introduction of a hot new product, etc?

One mistake that far too many beginning investors make is assuming that short-term growth alone always indicates the potential for long-term profit. Unfortunately, this is not always the case. By figuring out exactly why a stock is moving, you’ll be far better positioned to decide how long to hold it before you sell.

A strong catalyst can cause the price of a stock to skyrocket overnight, even if it’s laid dormant for years. Even things like social media hype and rumors can cause a stock’s price to shoot up over the course of a given day. But woe to the investor that assumes these profits will last. Many are often left holding the bag when the price increase turns out to be part of a “ pump and dump .”

While many day traders can make a nice profit by capitalizing on these situations, such trades are best avoided altogether if you plan to hold a stock long-term. That’s why it’s so important to understand whether a stock is “in play” for the day or whether its growth can be attributed to more permanent factors that support the potential for a high return over time.

See Related : How to Become an Impact Investor [Step-By-Step Guide]

If you’re planning on investing a significant amount of capital in any stock, then a little research may be able to save you from a lot of heartache. Keep in mind that the focus of an investment thesis is to formulate a reasoned argument about why adding an asset to your portfolio is a good idea.

While all investments come with some level of risk, research can be an excellent risk mitigation strategy. There’s nothing worse than watching an investment fail due to an obvious factor you could have spotted with closer analysis. Don’t let it happen to you!

Fundamental analysis can help you ensure that your potential investments have the underlying traits that winning stocks are made of. While there’s a bit of a learning curve involved when you’re first starting out, here are some of the things you’ll want to focus on:

EPS stands for “earnings per share.” It’s a common financial indicator that basically tells you how much a company makes each time it sells a share of its stock. In this regard, a higher EPS is a good thing, but it’s important to look for solid EPS growth over time. Ideally, you’ll want to see consistent growth in a company’s EPS over the past three or more quarters.

Sales and Margins

Investing is all about putting your cash into successful companies, which is why sales and margins are key components to finding worthy investments. Sales indicate how much a business has made from (you guessed it) sales. Sales margin, also known as gross profit margin, is the amount of revenue a company actually gets to keep after you factor in overhead and other production costs. Ideally, a good investment will exhibit strong, consistent sales growth in recent years.

Return On Equity (ROE)

ROE is one of the more commonly used valuation metrics and is calculated by dividing the company’s net income/shareholders’ equity. ROE is basically a measure of how efficiently a company is using the capital it generates from equity fundraising to increase its own value. The higher the ROE, the more likely it is that a company operates with a focus on using its cash flow to increase its profits.

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While these are just a few examples of various analysis methods to work into your investment thesis, they can go a long way toward locating solid companies worth investing in. Interested in learning more about technical and fundamental analysis? There are now plenty of great sites that can help you master the secrets of the training world.

In our opinion, Tradimo is one of the most underrated, as it provides tons of free classes for investors of all levels. Udemy also has some great classes that can help you learn how to beef up your investment thesis with as much quality information as possible.

But keep in mind that these are only suggestions. The most important part of any personal investment thesis is that it makes sense to you and can serve as a valuable tool to help you along your investing journey.

Related Resources

• Best Impact Investing Online Courses
• Best Green Apps for a More Sustainable Life
• Sustainable Investing vs Impact Investing: What’s the Difference?

Kyle Kroeger, esteemed Purdue University alum and accomplished finance professional, brings a decade of invaluable experience from diverse finance roles in both small and large firms. An astute investor himself, Kyle adeptly navigates the spheres of corporate and client-side finance, always guiding with a principal investor’s sharp acumen.

Hailing from a lineage of industrious Midwestern entrepreneurs and creatives, his business instincts are deeply ingrained. This background fuels his entrepreneurial spirit and underpins his commitment to responsible investment. As the Founder and Owner of The Impact Investor, Kyle fervently advocates for increased awareness of ethically invested funds, empowering individuals to make judicious investment decisions.

Striving to marry financial prudence with positive societal impact, Kyle imparts practical strategies for saving and investing, underlined by a robust ethos of conscientious capitalism. His ambition transcends personal gain, aiming instead to spark transformative global change through the power of responsible investment.

When not immersed in the world of finance, he’s continually captivated by the cultural richness of new cities, relishing the opportunity to learn from diverse societies. This passion for travel is eloquently documented on his site, ViaTravelers.com, where you can delve into his unique experiences via his author profile.

How To Make An Investment Thesis: Ultimate Guide To Best Investment Decision

An Introduction to Investment Thesis

An investment thesis forms the basis of an investor's strategy and serves as a framework to direct investment choices as well as articulate the reasoning behind targeting assets or markets. A robust investment thesis clearly outlines the factors that will drive returns while minimizing risks. Developing a thought-out investment thesis is crucial for achieving success in investments.

This guide will take you through the components of creating a compelling investment thesis from beginning to end. We will discuss how to identify promising investment opportunities, analyze target companies, perform valuation modeling, build a portfolio, present the fund's thesis to potential investors, implement the thesis in investment activities, and adapt it as market conditions evolve. By adhering to a disciplined investment thesis, investors can consistently make informed decisions and make choices to outperform the market.

Identifying Investment Opportunities

The initial step in developing an investment thesis involves pinpointing areas of focus that will shape your investment decisions. This entails determining sectors, asset classes, geographical regions, or other frameworks on which you wish to concentrate your research and analysis.

When determining the area you want to focus on, there are four key questions and factors to consider;

• Your expertise and knowledge - It is best to concentrate on areas where you have experience or can gain expertise without stretching yourself
• Macroeconomic trends - Look out for trends that can have an impact. These trends could include shifts, advancements, policy changes, and more. Identify sectors, regions, or asset classes that are likely to benefit from these long-term shifts
• Market inefficiencies - Keep an eye out for market inefficiencies. Opportunities often arise in markets that are fragmented, complex, or experiencing changes
• Investment horizons - Consider the investment horizon required for investment theses. Some ideas may require a time frame to materialize their potential returns while others may offer shorter-term gains

Once you have determined your area of focus, it is crucial to conduct in-depth research on the macro trends shaping that market. Look for trends that will drive growth over the years rather than focusing solely on quarterly fluctuations mentioned in market reports. The objective is to identify factors that can positively impact revenues, margins, and valuations of well-positioned companies.

With an understanding of the landscape established through research, you can then search for companies positioned to take advantage of the identified trends. Look for firms, with products/services/customers/geographical reach or innovative strategies that give them an edge when it comes to capitalizing on these opportunities.

Analyzing the Company

For an investment thesis, it is crucial to assess the company you are considering for investment. This assessment should include an evaluation of the company's drivers of growth, its management team and strategy as well as potential risks and challenges.

Growth Drivers

When analyzing the market value of a company, you'll want to closely examine the products, customers, and competitive positioning that are fueling its growth.

• Products: Look at the company's current product portfolio and pipeline. Do they have innovative products that are gaining market share? How large is their total addressable market and how much of it have they penetrated so far?
• Customers: Evaluate who their key customers are and how loyal they are. Look at metrics like net dollar retention rate to understand how loyal their customers are
• Competition: Analyze the competitive landscape and the company's positioning. Do they have a durable competitive advantage? How do they compare to rivals on factors like pricing, product features, and customer experience?
• Scalability: Do margins get larger or smaller as a customer increases its size? In some cases, unprofitable companies become highly profitable with growth - in other cases, costs increase in line with revenues. 

Management and Strategy

The strategy and execution capabilities of management are critical to a company's success.

• Management Team: Research the background and track record of key executives. Do they have relevant industry experience and a history of generating returns?
• Strategy: Assess management's strategic priorities and plans to drive growth. Do they have a coherent plan to expand their market opportunity?
• Culture & Incentives: Assess how they attract and retain talent. Are employees actively involved and motivated to excel?

Assessing the management will help ascertain whether the company has the leadership to seize the upcoming opportunity.

Risks and Challenges

When conducting an analysis it's important to consider factors;

• Technology Shifts: Take into account innovations that could affect the company's market.
• Regulation: Consider possible changes in regulations that may impact the business model and financial aspects.
• Macro Trends: Look at shifts in the wider economic environment that could influence customer demand.

Thoroughly examining the company across these dimensions provides the information and perspective to build confidence in your investment thesis. It helps you understand the business model, growth trajectory, management capabilities, risks involved, and valuation potential.

Conducting Valuation

Whilst a company's valuation is largely based purely on how much an investor or acquirer is willing to pay, there are a number of methodologies that help to guide valuations:

Choosing the Appropriate Valuation Method

DCF valuation is typically preferred when assessing situations where reliable projections can be made. However, for early-stage or volatile companies, it may be more appropriate to consider comparable multiples based on similar industry peers.

Making Projections and Assumptions

When making projections and assumptions it is essential to conduct research to establish credible forecasts.

Projections should encompass metrics such as revenue growth, margins, capital expenditure requirements, and working capital needs. Additionally, explicit assumptions should be made regarding elements like market size, market share, pricing strategies, and costs among others. Conducting sensitivity analysis can help stress test these assumptions.

Ensuring Upside to Current Valuation

Once you have determined the value of a company you can compare this value against its market capitalization. Look for the ultimate goal of valuation is to support your thesis that the company is undervalued. If the current market price exceeds your estimate of value it may be prudent to reassess your assumptions and analysis. The greater the upside potential identified within your analysis the stronger your conviction becomes in considering an investment opportunity.

Constructing Your Portfolio

When constructing your portfolio based on your investment thesis, you should diversify your holdings and size your positions appropriately based on conviction and risk tolerance.

Diversification

Your investment thesis should guide how you diversify your portfolio. For example, if your thesis focuses on emerging market consumer stocks, you would want exposure across multiple countries and consumer product categories. Diversifying appropriately helps manage overall portfolio risk. You want to avoid overexposure to any single company, sector, or country.

Position Sizing

When determining position sizes within your portfolio, larger positions should be allocated to your highest conviction ideas based on your investment thesis. However, position size should also be constrained based on your risk tolerance. Larger positions will drive portfolio performance but also increase volatility. 

Rebalancing

As market conditions change, rebalancing your portfolio involves  realigning holdings in line with your investment thesis. If certain positions have increased significantly in size, trimming them down and reallocating to underweight areas can improve diversification and risk-adjusted returns. Revisiting your thesis and rebalancing at regular intervals instills discipline in sticking to your core investment tenets.

Presenting to Investors

When presenting your investment thesis to investors it's crucial to communicate and address important information right from the start. Your objective is to explain your insights and build confidence in your ability to generate returns.

To begin - guide investors through your thesis, research process, and valuation methodology. Elaborate on the trends you've identified and analyze the company's growth drivers and competitive position. Share how you arrived at your valuation.

Next, emphasize your "edge”. The expertise, relationships, or analytical skills that give you an advantage in assessing this opportunity. Provide examples of investments you've made in the past by leveraging an edge to establish credibility

Lastly, demonstrate your risk management abilities by addressing challenges and risks. Outline the assumptions underlying your thesis and discuss scenarios where they may not hold true. Describe how you plan to monitor and mitigate risks related to regulations, supply chains, customer demand, or management execution. 

Implementing the Thesis

Once you have developed an investment thesis the next step is executing trades to construct a portfolio that aligns with your thesis. It is crucial to approach this process with strategic planning in order to achieve results.

When making investments it is important to allocate positions based on your level of confidence in each holding while also ensuring diversification. Generally speculative or higher risk assets should be given allocations that don’t jeopardize the portfolio as a whole.

Ongoing portfolio management necessitates actively monitoring performance against the expectations outlined in your investment thesis. By keeping track of metrics, business drivers, and macroeconomic factors you can gauge whether your thesis remains valid.

As new data emerges over time adjustments and rebalancing of your portfolio will likely be required. This involves reducing exposure to holdings where the original thesis has weakened or deteriorated while increasing exposure to emerging opportunities. 

Continuously refining your portfolio ensures that it remains closely aligned with your investment thesis as market conditions evolve. Successful investors remain adaptable. Adjust their allocations while keeping their long-term perspectives intact.

Updating the Investment Thesis

As time progresses it is crucial to revisit and update your investment thesis accordingly.

Markets are constantly changing and it is crucial to stay updated with information that emerges. Your initial assumptions may not always hold true which can lead to poor investment decisions if you stick to an investment thesis.

To ensure the relevance of your investment thesis periodically reassess all your assumptions and projections. Take a look at your growth estimates, address any emerging threats, and analyze how market sentiment has shifted. If there have been changes in the investment narrative it's essential to update your thesis

Incorporate insights from sources such as earnings reports, industry conferences, macroeconomic data, and more. I. Objectively evaluate if adjustments need to be made based on the information at hand.

The key here is flexibility; being able to adapt to information sets good investors apart from the average ones. 

Common Mistakes to Avoid When Developing an Investment Thesis

To ensure the success of your investment thesis it's important to steer clear of pitfalls. Here are a few common ones;

Lack of Diversification

Having an overconcentration in a sector, geography, or asset type can leave a portfolio vulnerable. For example, an investment thesis focused solely on fast-growing US tech companies could miss opportunities in emerging markets. 

Biased Assumptions

It's easy to fall into the trap of making projections that confirm your existing bias about a company's growth potential. Avoid exaggerated assumptions that are not grounded in facts, and remember that “hope” has historically been a bad investment strategy 

Ignoring New Information

Markets and companies are dynamic, so no investment thesis holds true forever. Do not blindly stick to your original assumptions if new data suggests your thesis is no longer valid. Be ready to change course if your investment case deteriorates. Failing to adapt can turn gains into losses.

To summarize this guide - here are the most important factors in an investment thesis ;

• Identifying economic trends and sector-specific opportunities to focus on when making investments.
• Conducting a thorough analysis of potential companies, for your portfolio including their products, customers, competitors, and management.
• Using valuation models such as discounted cash flow (DCF) analysis to determine a target value based on your projections.
• Creating a diverse portfolio by considering your confidence level and risk tolerance for each position.
• Clearly presenting your investment strategy and unique advantage to inspire confidence in investors.
• Consistently implementing your investment strategy when making buy or sell decisions.
• Monitoring your portfolio and assumptions, updating the thesis as needed based on new data.

Creating a thoughtful investment thesis takes rigorous research and ongoing discipline. However, it also establishes a framework to capitalize on the upside potential of emerging trends. Investors who take the time to develop a compelling thesis are more apt to outperform the market. With the right blend of macro perspective and individual security analysis, your investment thesis can unlock substantial value creation.

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Writing a Credible Investment Thesis

by David Harding and Sam Rovit

Every deal your company proposes to do—big or small, strategic or tactical—should start with a clear statement how that particular deal would create value for your company. We call this the investment thesis . The investment thesis is no more or less than a definitive statement, based on a clear understanding of how money is made in your business, that outlines how adding this particular business to your portfolio will make your company more valuable. Many of the best acquirers write out their investment theses in black and white. Joe Trustey, managing partner of private equity and venture capital firm Summit Partners, describes the tool in one short sentence: "It tells me why I would want to own this business." 10

Perhaps you're rolling your eyes and saying to yourself, "Well, of course our company uses an investment thesis!" But unless you're in the private equity business—which in our experience is more disciplined in crafting investment theses than are corporate buyers—the odds aren't with you. For example, our survey of 250 senior executives across all industries revealed that only 29 percent of acquiring executives started out with an investment thesis (defined in that survey as a "sound reason for buying a company") that stood the test of time. More than 40 percent had no investment thesis whatsoever (!). Of those who did, fully half discovered within three years of closing the deal that their thesis was wrong.

Studies conducted by other firms support the conclusion that most companies are terrifyingly unclear about why they spend their shareholders' capital on acquisitions. A 2002 Accenture study, for example, found that 83 percent of executives surveyed admitted they were unable to distinguish between the value levers of M&A deals. 11 In Booz Allen Hamilton's 1999 review of thirty-four frequent acquirers, which focused chiefly on integration, unsuccessful acquirers admitted that they fished in uncharted waters. 12 They ranked "learning about new (and potentially related) business areas" as a top reason for making an acquisition. (Surely companies should know whether a business area is related to their core before they decide to buy into it!) Successful acquirers, by contrast, were more likely to cite "leading or responding to industry restructuring" as a reason for making an acquisition, suggesting that these companies had at least thought through the strategic implications of their moves.

Not that tipping one's hat to strategy is a cure-all. In our work with companies that are thinking about doing a deal, we often hear that the acquisition is intended for "strategic" reasons. That's simply not good enough. A credible investment thesis should describe a concrete benefit, rather than a vaguely stated strategic value.

This point needs underscoring. Justifying a deal as being "strategic" ex post facto is, in most cases, an invitation to inferior returns. Given how frequently we have heard weak "strategic" justifications after a deal has closed, it's worth passing along a warning from Craig Tall, vice chair of corporate development and strategic planning at Washington Mutual. In recent years, Tall's bank has made acquisitions a key part of a stunningly successful growth record. "When I see an expensive deal," Tall told us, "and they say it was a 'strategic' deal, it's a code for me that somebody paid too much." 13

And although sometimes the best offense is a good defense, this axiom does not really stand in for a valid investment thesis. On more than a few occasions, we have been witness to deals that were initiated because an investment banker uttered the Eight Magic Words: If you don't buy it, your competitors will.

Well, so be it. If a potential acquisition is not compelling to you on its own merits, let it go. Let your competitors put their good money down, and prove that their investment theses are strong.

Let's look at a case in point: [Clear Channel Communications' leaders Lowry, Mark, and Randall] Mayses' decision to move from radios into outdoor advertising (billboards, to most of us). Based on our conversations with Randall Mays, we summarize their investment thesis for buying into the billboard business as follows:

Clear Channel's expansion into outdoor advertising leverages the company's core competencies in two ways: First, the local market sales force that is already in place to sell radio ads can now sell outdoor ads to many of the same buyers, and Clear Channel is uniquely positioned to sell both local and national advertisements. Second, similar to the radio industry twenty years ago, the outdoor advertising industry is fragmented and undercapitalized. Clear Channel has the capital needed to "roll up" a significant fraction of this industry, as well as the cash flow and management systems needed to reduce operating expenses across a consolidated business.

Note that in Clear Channel's investment thesis (at least as we've stated it), the benefits would be derived from three sources:

• Leveraging an existing sales force more extensively
• Using the balance sheet to roll up and fund an undercapitalized business
• Applying operating skills learned in the radio trade

Note also the emphasis on tangible and quantifiable results, which can be easily communicated and tested. All stakeholders, including investors, employees, debtors, and vendors, should understand why a deal will make their company stronger. Does the investment thesis make sense only to those who know the company best? If so, that's probably a bad sign. Is senior management arguing that a deal's inherent genius is too complex to be understood by all stakeholders, or simply asserting that the deal is "strategic"? These, too, are probably bad signs.

Most of the best acquirers we've studied try to get the thesis down on paper as soon as possible. Getting it down in black and white—wrapping specific words around the ideas—allows them to circulate the thesis internally and to generate reactions early and often.

The perils of the "transformational" deal . Some readers may be wondering whether there isn't a less tangible, but equally credible, rationale for an investment thesis: the transformational deal. Such transactions, which became popular in the exuberant '90s, aim to turn companies (and sometimes even whole industries) on their head and "transform" them. In effect, they change a company's basis of competition through a dramatic redeployment of assets.

The roster of companies that have favored transformational deals includes Vivendi Universal, AOL Time Warner (which changed its name back to Time Warner in October 2003), Enron, Williams, and others. Perhaps that list alone is enough to turn our readers off the concept of the transformational deal. (We admit it: We keep wanting to put that word transformational in quotes.) But let's dig a little deeper.

Sometimes what looks like a successful transformational deal is really a case of mistaken identity. In search of effective transformations, people sometimes cite the examples of DuPont—which after World War I used M&A to transform itself from a maker of explosives into a broad-based leader in the chemicals industry—and General Motors, which, through the consolidation of several car companies, transformed the auto industry. But when you actually dissect the moves of such industry winners, you find that they worked their way down the same learning curve as the best-practice companies in our global study. GM never attempted the transformational deal; instead, it rolled up smaller car companies until it had the scale to take on a Ford—and win. DuPont was similarly patient; it broadened its product scope into a range of chemistry-based industries, acquisition by acquisition.

In a more recent example, Rexam PLC has transformed itself from a broad-based conglomerate into a global leader in packaging by actively managing its portfolio and growing its core business. Beginning in the late '90s, Rexam shed diverse businesses in cyclical industries and grew scale in cans. First it acquired Europe's largest beverage-can manufacturer, Sweden's PLM, in 1999. Then it bought U.S.–based packager American National Can in 2000, making itself the largest beverage-can maker in the world. In other words, Rexam acquired with a clear investment thesis in mind: to grow scale in can making or broaden geographic scope. The collective impact of these many small steps was transformation. 14

But what of the literal transformational deal? You saw the preceding list of companies. Our advice is unequivocal: Stay out of this high-stakes game. Recent efforts to transform companies via the megadeal have failed or faltered. The glamour is blinding, which only makes the route more treacherous and the destination less clear. If you go this route, you are very likely to destroy value for your shareholders.

By definition, the transformational deal can't have a clear investment thesis, and evidence from the movement of stock prices immediately following deal announcements suggests that the market prefers deals that have a clear investment thesis. In "Deals That Create Value," for example, McKinsey scrutinized stock price movements before and after 231 corporate transactions over a five-year period. 15 The study concluded that the market prefers "expansionist" deals, in which a company "seeks to boost its market share by consolidating, by moving into new geographic regions, or by adding new distribution channels for existing products and services."

On average, McKinsey reported, deals of the "expansionist" variety earned a stock market premium in the days following their announcement. By contrast, "transformative" deals—whereby companies threw themselves bodily into a new line of business—destroyed an average of 5.3 percent of market value immediately after the deal's announcement. Translating these findings into our own terminology:

• Expansionist deals are more likely to have a clear investment thesis, while "transformative" deals often have no credible rationale.
• The market is likely to reward the former and punish the latter.

The dilution/accretion debate . One more side discussion that comes to bear on the investment thesis: Deal making is often driven by what we'll call the dilution/accretion debate . We will argue that this debate must be taken into account as you develop your investment thesis, but your thesis making should not be driven by this debate.

Simply put, a deal is dilutive if it causes the acquiring company to have lower earnings per share (EPS) than it had before the transaction. As they teach in Finance 101, this happens when the asset return on the purchased business is less than the cost of the debt or equity (e.g., through the issuance of new shares) needed to pay for the deal. Dilution can also occur when an asset is sold, because the earnings power of the business being sold is greater than the return on the alternative use of the proceeds (e.g., paying down debt, redeeming shares, or buying something else). An accretive deal, of course, has the opposite outcomes.

But that's only the first of two shoes that may drop. The second shoe is, How will Wall Street respond? Will investors punish the company (or reward it) for its dilutive ways?

Aware of this two-shoes-dropping phenomenon, many CEOs and CFOs use the litmus test of earnings accretion/dilution as the first hurdle that should be put in front of every proposed deal. One of these skilled acquirers is Citigroup's [former] CFO Todd Thomson, who told us:

It's an incredibly powerful discipline to put in place a rule of thumb that deals have to be accretive within some [specific] period of time. At Citigroup, my rule of thumb is it has to be accretive within the first twelve months, in terms of EPS, and it has to reach our capital rate of return, which is over 20 percent return within three to four years. And it has to make sense both financially and strategically, which means it has to have at least as fast a growth rate as we expect from our businesses in general, which is 10 to 15 percent a year. Now, not all of our deals meet that hurdle. But if I set that up to begin with, then if [a deal is] not going to meet that hurdle, people know they better make a heck of a compelling argument about why it doesn't have to be accretive in year one, or why it may take year four or five or six to be able to hit that return level. 16

Unfortunately, dilution is a problem that has to be wrestled with on a regular basis. As Mike Bertasso, the head of H. J. Heinz's Asia-Pacific businesses, told us, "If a business is accretive, it is probably low-growth and cheap for a reason. If it is dilutive, it's probably high-growth and attractive, and we can't afford it." 17 Even if you can't afford them, steering clear of dilutive deals seems sensible enough, on the face of it. Why would a company's leaders ever knowingly take steps that would decrease their EPS?

The answer, of course, is to invest for the future. As part of the research leading up to this book, Bain looked at a hundred deals that involved EPS accretion and dilution. All the deals were large enough and public enough to have had an effect on the buyer's stock price. The result was surprising: First-year accretion and dilution did not matter to shareholders. In other words, there was no statistical correlation between future stock performance and whether the company did an accretive or dilutive deal. If anything, the dilutive deals slightly outperformed. Why? Because dilutive deals are almost always involved in buying higher-growth assets, and therefore by their nature pass Thomson's test of a "heck of a compelling argument."

Reprinted with permission of Harvard Business School Press. Mastering the Merger: Four Critical Decisions That Make or Break the Deal , by David Harding and Sam Rovit. Copyright 2004 Bain & Company; All Rights Reserved.

[ Buy this book ]

David Harding (HBS MBA '84) is a director in Bain & Company's Boston office and is an expert in corporate strategy and organizational effectiveness.

Sam Rovit (HBS MBA '89) is a director in the Chicago office and leader of Bain & Company's Global Mergers and Acquisitions Practice.

10. Joe Trustey, telephone interview by David Harding, Bain & Company. Boston: 13 May 2003. Subsequent comments by Trustey are also from this interview.

11. Accenture, "Accenture Survey Shows Executives Are Cautiously Optimistic Regarding Future Mergers and Acquisitions," Accenture Press Release, 30 May 2002.

12. John R. Harbison, Albert J. Viscio, and Amy T. Asin, "Making Acquisitions Work: Capturing Value After the Deal," Booz Allen & Hamilton Series of View-points on Alliances, 1999.

13. Craig Tall, telephone interview by Catherine Lemire, Bain & Company. Toronto: 1 October 2002.

14. Rolf Börjesson, interview by Tom Shannon, Bain & Company. London: 2001.

15. Hans Bieshaar, Jeremy Knight, and Alexander van Wassenaer, "Deals That Create Value," McKinsey Quarterly 1 (2001).

16. Todd Thomson, speaking on "Strategic M&A in an Opportunistic Environment." (Presentation at Bain & Company's Getting Back to Offense conference, New York City, 20 June 2002.)

17. Mike Bertasso, correspondence with David Harding, 15 December 2003.

interpretive economics

• Feb 27, 2023

How to Write the Perfect Investment Thesis

For investment managers, finding investment opportunities is only half the challenge. Often the harder part is raising funds. To do this they need to create the perfect investment thesis to set out a convincing argument as to why their investment strategy will generate a return on investment for their clients. In this article, we’ll explore the importance of crafting a perfect investment thesis and provide insights into how to write one.

What is an Investment Thesis?

An investment thesis outlines a fund manager’s investment strategy and rationale for investing in a particular market or niche. It’s a crucial document that investment managers use to provide investors with the information and data they need to decide whether or not to invest in a fund. It can be turned into a variety of marketing materials for the fund including white papers, one-pagers, and investment decks.

The investment thesis should be concise and articulate the investment logic and framework for why a particular market or niche presents an attractive investment. It should outline the investment strategy and how it aligns with the fund manager’s hypothesis. The thesis should also address potential risks and benefits to investors.

Successful investment theses typically include an analysis of market trends, an assessment of the competitive landscape, and an explanation of why the investment opportunity presents an attractive opportunity.

In 2013, Ron Baron, a fund manager, invested in Tesla. At the time the stock was trading at $25 per share. However, Baron believed that electric cars were the future , and he was convinced that Tesla would become the leader in the EV industry. Ten years later, Tesla’s stock is trading at over $200 per share, making it one of the most successful investments in recent years.

Step-by-Step Guide to Writing the Perfect Investment Thesis

Crafting the perfect investment thesis is not an easy task. It requires a great deal of research, analysis, and writing skills. Follow our step-by-step guide to write a perfect investment thesis.

Step 1: Define Your Investment Strategy

Determine your investment goals and objectives.

To define your investment strategy, you need to first need to understand your investment goals and objectives. Are you looking to invest in high-growth companies or established companies that generate a stable return? What is your investment horizon? What is risk profile? How much capital do you need to raise?

Identify investment opportunities

Once you have defined your investment goals and objectives, you need to identify your target market and investment opportunities in that market.

Define your investment strategy

Having determined your goals, risk tolerance and capital requirements you need to create a high-level investment strategy. This is a set of principles that will help the fund achieve its investment goals and guide investment decisions. This can be refined as you conduct market research and receive feedback from investors and industry-peers.

Step 2: Conducting Market Research

An investment thesis that is not backed by data is just opinion. To write the perfect investment thesis you need to conduct market research. This includes analyzing market trends, identifying potential risks and benefits, and conducting competitive analysis.

How to analyze market trends using data

To analyze market trends, you need to collect and analyze data. Data can come from a variety of sources including industry reports, financial statements, and news articles to identify trends in the market. You can also use tools such as Google Trends to identify search trends for specific keywords. There are also opportunities to use official data to back up claims, for example census data to prove an investment thesis based on demographic trends.

A variety of alternative data sources are available. these include:

Web scraping : Scraping data from online sources including social media sites, e-commerce or news stories. This data can be analyzed using natural language processing techniques (categorization, sentiment analysis).

Open data : There is a growing trend of organizations making data freely available. Good examples include traffic patterns on metro networks such as TFL in London .

Sensors and satellites : A growing industry of data providers is providing access to alternative data sources. From satellite data showing agricultural production to IoT sensor devices.

Polls and Surveys : Surveys provide insights into the collective consciousness. From tangible economic behaviors such as buying and shopping habits, customers expectations, information on personal finances, to social and political views.

Identifying market opportunities and potential risks

Having analyzed market trends, you need to identify market opportunities and potential risks. Investors need to be aware of different types of investment risks, such as market risk, credit risk, and liquidity risk associated with your investment thesis. A thorough analysis of potential risks helps investors make informed decisions and ensure that the investment is aligned to their risk appetite. The analysis should cover both systematic and unsystematic risks, There are a variety of statistical methods than can be used to measure risk and volatility including standard deviation, Sharpe ratio, beta, value at risk (VaR), conditional value at risk (CVaR), and R-squared.

Conducting competitive analysis

You may also want to include a competitive analysis. This looks at the competition in your target market. Who are the main players in the industry, their strengths, weaknesses, and competitive advantage.

Step 3: Developing Your Investment Hypothesis

The best investment theses include a well structured investment hypothesis. An investment hypothesis summarises why an investment opportunity exists in a given market. It should be based on your research and analysis and articulated in a clear and concise manner.

What is an investment hypothesis?

An investment hypothesis is a proposed explanation for a specific investment opportunity. It’s a statement that describes the investment opportunity and how it aligns with the investment manager’s investment goals and objectives.

Formulating an investment hypothesis based on your research and analysis

To develop a strong investment hypothesis, you need to review the data and information collected during your market research. Using this you need to identify key trends, opportunities, and risks and determine an investment strategy that allows you to achieve investment goals and objectives. This is the time to revisit and critique your initial investment strategy.

H4: Articulating the investment thesis in a clear and concise manner

Once you have developed your investment hypothesis, you need to articulate it in a clear and concise manner. This includes a clear investment logic and analytical framework for why a particular market or niche presents an attractive investment. You should also outline the investment strategy and how it aligns with your hypothesis.

Step 4: Writing the Investment Thesis

Having created the perfect investment thesis you need to structure the thesis and include key elements to make it persuasive.

The structure and format of a successful investment thesis

A successful investment thesis typically follows a structure that includes an executive summary, market analysis, investment hypothesis, investment strategy, and potential risks and benefits. The thesis should also include data and visual aids, such as graphs and charts.

Key elements to include in your investment thesis

To make your investment thesis persuasive, you need to include key elements such as a clear articulation of the investment opportunity, a detailed explanation of the investment hypothesis, an overview of the investment strategy, and describe the risks and benefits for potential investors.

Writing with clarity and brevity

To make your investment thesis easy to read and understand, you need to write with clarity and brevity. Use simple language and avoid jargon. Keep the thesis concise and to the point.

What type of resources and marketing materials do you need to create

Having defined your investment thesis you know need to create a variety of marketing materials in order to present to potential investors. These will vary depending on the type of investors and the regulatory framework you operate under. Some common investor marketing materials include:

Investor decks

An investor deck is a summary of your investment thesis. It should include a summary of your investment hypothesis, market opportunity with data, investment strategy, expected outcomes, risks, and benefits to investors. The investor deck should be concise and easy to understand. Avoid lengthy text and present the opportunity using relevant data points. Employing a professional designer will maximize the impact of your investment thesis.

The structure of an investment deck forces you to focus only on the key points, consequently a clear analytical framework or investment logic is essential.

White papers

A white paper is a more detailed description of your investment thesis. It should include an in-depth analysis of the market trends, competitive landscape, and investment opportunity. The white paper should also include an overview of your investment strategy and potential risks and benefits.

Investment one-pager

An investment one-pager is a brief summary of your investment hypothesis, market opportunity, and risks and benefits. It should be a one-page document that investors can quickly review to understand your investment opportunity.

Step 5: Refining and Perfecting Your Investment Thesis

The final step in writing a perfect investment thesis is to refine and perfect it. You need to continuously refine and improve your thesis to ensure it’s persuasive and effective.

Revising and editing your investment thesis

Once you have written your investment thesis, you need to revise and edit it. Review the thesis for grammar, punctuation, and spelling errors. Ensure that the thesis is clear, concise, and persuasive. Nothing will damage your credibility more than easily fixed errors or incorrect data.

Seek feedback from peers and industry experts

You should seek feedback from peers and industry experts to ensure that your investment thesis is persuasive and effective. Aim to get feedback from colleagues, mentors, or industry experts all of whom can offer a unique outside perspective.

Continuously refining and improving your investment thesis

Investment managers should continuously refine and improve their investment thesis. They should review the thesis periodically and update it as needed to reflect changes in the market or investment strategy.

Crafting a perfect investment thesis is a crucial task for investment and fund managers. The investment thesis is a document that outlines the investment strategy and rationale for investing in a particular market or niche. A good investment thesis provides investors with a clear understanding of the investment opportunity, the risks and benefits, and the potential return on investment.

To write a perfect investment thesis, investment managers need to define their investment strategy, conduct market research, develop an investment hypothesis, craft the thesis, and refine and perfect it. They should also create marketing materials such as an investor deck, white paper, and investment one-pager to summarize their investment opportunity. Investment managers should continuously refine and improve their investment thesis to ensure it’s persuasive and effective.

How Interpretive Economics can help you write the perfect investment thesis

At Interpretive Economics, we help investment managers, asset managers, venture capital, family offices and other investment professionals create a variety of investment marketing materials including investment white papers, investor decks and investment one-pagers. We are experts at economic analysis, sourcing and analyzing data and crafting investment hypotheses. Get in touch to see how we can help you create the perfect investment thesis.

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Investment Thesis: An Argument in Support of Investing Decisions

October 29, 2023 by Abi Tyas Tunggal

An investment thesis is a well-reasoned argument that supports a specific investment decision, playing a vital role in the strategic planning process for individual investors and businesses alike. It comprises detailed research and analysis to evaluate an investment's potential profitability. A good investment thesis serves multiple purposes, including helping in the decision-making process, providing a comprehensive framework for monitoring and assessment, and offering a structured approach to identifying potential opportunities.

There are different types of investment strategies, such as venture capital , private equity, and long-term value investments. The core of an investment thesis involves identifying key parameters for evaluating an investment, understanding the unique market dynamics and competitive landscape, and realizing how to create value through strategic planning. To ensure a comprehensive and detailed investment thesis, it is crucial to involve thorough research, considering emerging trends and opportunities, and incorporating industry case studies for better understanding. Ultimately, financial statements and valuation metrics play a significant role in determining a well-suited investment decision.

Key Takeaways

• An investment thesis is a well-reasoned, research-based argument supporting a specific investment decision
• There are several types of investment strategies, and a well-structured investment thesis addresses market dynamics and competition to create value
• Research, valuation metrics, and understanding emerging trends are crucial in crafting a compelling investment ideas

Defining an Investment Thesis

An investment thesis is a well-structured, logical argument that justifies a particular investment decision, based on thorough research and analysis. It is essential for investors, as well as financial professionals in the domains of investment banking, private equity, hedge funds, and venture capital funds . A confident and knowledgeable investor will build out clear investment criteria to successfully navigate the investment landscape.

The primary purpose of an investment thesis is to outline the reasons and expected outcomes of a proposed investment, often focusing on the potential for growth and profit. This document offers a roadmap for investors, guiding them through their decision-making process, and helping to ensure that they arrive at rational and informed conclusions. A comprehensive investment thesis should consider various aspects, such as market conditions, competitive landscape, and financial performance of the targeted asset or company.

A strong investment thesis is built on rigorous market research and analysis. This involves evaluating historical and current financial information, as well as scrutinizing industry trends and the overall economic environment. Skilled investors will also incorporate their expertise in the industry to better assess the merits of an investment opportunity. This level of thoroughness creates a confidently expressed thesis, allowing investors to remain steadfast in their investment decisions, even amid market volatility.

In summary, an investment thesis plays a pivotal role in the investing process. It presents a well-reasoned argument, grounded in extensive research and clear analysis, that supports an investment decision. Crafting a robust investment thesis is crucial for both individual and institutional investors as it provides a solid foundation for investment choices and ensures the alignment of investment strategies with long-term objectives.

Importance of Research in Crafting an Investment Thesis

Thorough research is a crucial aspect of creating a solid investment thesis. It allows investors to gather vital information and insights that will help guide their investment decisions. There are several elements to consider while conducting this research, with data analysis, understanding risks, and returns being essential components.

Data Analysis

Data analysis forms the backbone of any research conducted for crafting an investment thesis. It involves collecting, organizing, and interpreting various types of data, such as financial statements, market trends, and industry forecasts, to identify patterns and make informed predictions about a potential investment opportunity. A comprehensive data analysis can help investors make confident choices based on reliable information, which is essential for a successful investment strategy.

Some key data analysis techniques used in crafting an investment thesis include:

• Comparative analysis: Comparing the performance of different companies within the same industry to identify investment opportunities.
• Trend analysis: Monitoring historical data to determine patterns and potential future developments.
• Financial statement analysis: Examining the financial health of a company through its balance sheets, income statements, and cash flow statements.

Understanding Risks and Returns

One of the primary goals of research in developing an investment thesis is to assess the risk/reward profile of a potential investment. This involves evaluating the potential risks associated with the investment and weighing them against the expected returns. A sound investment thesis should demonstrate a clear understanding of these risks and offer a rationale for why the investment’s potential returns make it a worthwhile addition to a portfolio.

Some common risks to consider when crafting an investment thesis include:

• Market risk: The risk of an investment losing value due to fluctuations in the market.
• Credit risk: The risk that a company or issuer of a financial instrument may default on its obligations.
• Operational risk: The risk of losses arising from failed internal processes, systems, or personnel within a business.

Evaluating these risks requires investors to develop a deep understanding of the investment opportunity, its industry, and the factors that may impact its performance. A diligent and systematic approach to research can help investors identify potential risks and gains, leading to informed and confident decision-making in crafting a strong investment thesis.

Types of Investment Strategy

When it comes to crafting an investment thesis, selecting an appropriate investment strategy is crucial. In this section, we will discuss two popular strategies: Value Investing and Growth Investing.

Value Investing

Value investing is a strategy that focuses on identifying undervalued stocks or assets in the market. These investments typically have lower valuations, which are reflected in their price-to-earnings ratios or book values. The central idea behind value investing is that the market may sometimes undervalue a company or asset, presenting an opportunity for investors willing to do thorough research and analysis.

The process of value investing involves:

• Fundamental analysis : Evaluating a company's financial health, management, and competitive advantages
• Value metrics : Identifying various valuation metrics, such as price-to-earnings, price-to-book, and dividend yield
• Margin of safety : Discovering investment opportunities with a built-in cushion to reduce the risk of loss

Famous investors, such as Warren Buffett and Benjamin Graham, have implemented value investing strategies to achieve long-term success.

Growth Investing

On the other hand, growth investing centers on companies that are expected to grow at an above-average rate compared to their industry. Growth investors seek opportunities in businesses they believe will offer substantial capital appreciation through rapid expansion or market-share gains. They prioritize the potential for future profit over the stock's valuation.

Features of growth investing include:

• High expectations : Companies targeted by growth investors typically have a history of robust revenue and profit growth
• Momentum : Investors seek stocks with upward price momentum, as increasing demand for these stocks may drive prices even higher
• Risk tolerance : Growth stocks can be volatile, and investors must be prepared to weather price swings

Renowned growth investors like Peter Lynch and Phil Fisher have demonstrated the effectiveness of growth investing throughout their careers.

Both value and growth investing strategies have their unique advantages and require different levels of risk tolerance. Investors should carefully consider their investment thesis and select a strategy that aligns with their objectives and risk appetite.

Venture Capital and Private Equity Investment Theses

When considering investments in private companies, venture capital (VC) and private equity (PE) firms each have their own unique strategies encapsulated within their respective investment theses. These theses provide guidance on the focus of investments, the sectors or geographies of interest, and the stage of the target companies.

Learn more about the differences between private equity and venture capital .

Venture Capital Investment Thesis

A venture capital investment thesis outlines how a VC fund aims to make money for its investors, typically referred to as Limited Partners (LPs). This strategy identifies crucial factors such as the stage of companies the fund will invest in, commonly early-stage companies, the targeted geography, and specific sectors of focus.

The thesis may vary depending on a venture capitalist's unique specialization, with some firms concentrating on a specific vertical and stage, while others invest more broadly without a core thesis driving their decisions. The underlying objective of a VC investment thesis is to outline how the firm will achieve high returns on investment by supporting and nurturing the growth of portfolio companies.

Private Equity Investment Thesis

In contrast, a private equity investment thesis is an evidence-based case in support of a particular investment opportunity. It usually begins with a concise argument illustrating how the potential deal supports the fund's general investment strategy. The thesis then provides details that substantiate this preliminary conclusion.

Private equity firms often target more established companies compared to venture capital firms, focusing on businesses with a proven track record. The PE investment thesis may identify areas where operational improvements, strategic mergers, or better capital structures could enhance value, ultimately generating a good return for the firm and its investors.

Overall, both venture capital and private equity investment theses serve as critical frameworks guiding investment decisions. They not only help align these decisions with a firm's specialized strategy but also provide a basis for evaluating potential deals to ensure they contribute to the firm's goals and long-term value creation.

Key Parameters for Evaluating an Investment

When assessing the viability of an investment, it is essential to examine various key parameters to make informed decisions. By analyzing these factors, investors can gain a deeper understanding of a company's financial health and its potential for growth.

One vital metric to consider is earnings per share (EPS) , which represents the portion of a company's profit attributed to each outstanding share of its common stock. A higher EPS indicates higher earnings and suggests that the company may be a lucrative investment opportunity.

Another fundamental metric is the return on assets (ROA) , which measures the effectiveness of a company in using its assets to generate profit. The higher the ROA, the better the company is at utilizing its assets to generate earnings. Similarly, return on equity (ROE) is a measure of financial performance that calculates the proportion of net income generated by a company's equity. A higher ROE demonstrates the efficient usage of shareholders' investments.

Conducting a thorough analysis of the company's financial statements is crucial. This includes reviewing income statements, balance sheets, and cash flow statements. By doing so, investors can gain insights into the company's profitability, liquidity, and solvency.

Another important factor to consider is a company's cash position. Adequate cash reserves enable a company to meet its short-term obligations and invest in growth opportunities. On the other hand, a lack of cash can leave a company vulnerable to market fluctuations and financial stress.

It is also essential to evaluate a company's capital structure, which refers to the proportion of debt and equity financing it uses to fund its operations. A balanced capital structure ensures financial stability, while excessive debt may lead to financial distress.

Examining a company's debt level is crucial, as it can directly impact the company's financial flexibility and risk profile. A high level of debt can hinder a company's ability to grow and adapt to changes in the market, making it a less attractive investment option.

Assessing a company's assets and how they're managed plays a significant role in evaluating an investment opportunity. This includes tangible assets, such as property and equipment, and intangible assets, such as patents and trademarks. Effective asset management contributes to a company's ability to generate profit.

Finally, it is important to scrutinize a company's costs associated with its operations, such as production costs and overhead expenses. A company that efficiently manages its costs will likely generate higher profitability and provide better returns for investors.

Creating Value through Strategic Planning

Strategic planning plays a crucial role in creating value for investors and businesses. It serves as the foundation for effective decision-making and guides companies towards achieving their goals. Through strategic planning, management teams can identify and focus on core competencies that contribute to a company's competitive advantage.

One way to create value is to prioritize revenue growth. By identifying key growth drivers, such as product innovation or market expansion, companies can allocate resources accordingly to boost earnings. Such targeted investments in growth engines allow firms to capture a larger market share and drive long-term profitability.

Another aspect of strategic planning involves optimizing a company's holdings. By assessing the existing portfolio, management can decide whether to divest underperforming assets or make strategic acquisitions that align with their investment thesis. The right combinations and adjustments can significantly enhance a company's overall performance and shareholder value.

Risk management is also an essential aspect of strategic planning. Companies must assess potential risks and incorporate suitable mitigation measures in their plans. This ensures that organizations are prepared for unforeseen circumstances, which can safeguard profits and protect the company's assets.

Furthermore, creating value requires continuous improvement and adaptation to market trends. Companies should routinely reevaluate their strategies to identify both internal and external factors that may impact their current position. By setting clearly defined objectives and quantifiable financial targets, management teams can measure their progress effectively and adjust their strategic plans as needed.

In summary , creating value through strategic planning involves a combination of focusing on core competencies, prioritizing revenue growth, optimizing holdings, managing risk, and continuously reassessing the company's strategic direction. This holistic approach can help businesses enhance their profitability, strengthen their market position, and ultimately deliver strong value creation to investors.

Understanding the Market and Competition

Before developing an investment thesis, it is crucial to have a deep understanding of the market and its competition. The stock market is influenced by various factors such as economic supercycles, bear markets, and secular trends. Analyzing these elements will provide a solid foundation to recognize potential investment opportunities.

An economic supercycle is a long-term pattern that occurs over several decades, during which the economy undergoes periods of growth and contraction. Investors need to be aware of the current phase and how it may impact their investment decisions. For instance, during a growth period, certain industries tend to outperform, while others may underperform during a contraction phase.

In addition to analyzing these market conditions, investors must also pay heed to the competitive landscape of the sector in which they plan to invest. Examining the competitors within the industry enables one to identify companies with competitive advantages, which may lead to superior performance. These advantages can stem from factors such as lower costs, innovation, or a dominant market share.

A bear market occurs when the stock market experiences a prolonged decline, typically characterized by a decrease of 20% or more from recent highs. In such environments, it becomes even more crucial for investors to understand the competitive dynamics within an industry to identify resilient companies that can withstand market downturns.

A secular trend is a long-term movement in a particular direction that can last for several years or even decades. Identifying secular trends within industries is essential to spotting opportunities for long-term growth. For example, investors may capitalize on sectors benefiting from a shift towards clean energy usage or the increasing importance of artificial intelligence.

In summary, understanding the market and competition requires a deep analysis of the stock market, economic supercycles, bear markets, and secular trends. By researching industry trends, evaluating market opportunities, and assessing the strengths and weaknesses of competitors, investors can develop a robust investment thesis that increases the likelihood of achieving long-term returns.

Industry Case Studies

In the investment world, the importance of an investment thesis cannot be overstated. By examining various industry case studies, we can gain insight into how businesses make strategic investments to enhance their value. In this section, we'll discuss notable examples from companies such as DuPont, General Motors, Rexam PLC, and Clear Channel Communications.

DuPont is a leading science and innovation company with a focus on agriculture, advanced materials, and industrial biosciences. During its acquisition of Dow Chemical, DuPont developed a robust investment thesis to justify the merger. Their investment case relied on the belief that the combined entity would benefit from increased operational efficiencies, new market opportunities, and enhanced innovation capabilities. This approach provided a strong rationale for the deal, which has created a more competitive company in the global market.

General Motors (GM) , a multinational automobile manufacturer, crafted its investment thesis in response to evolving trends in the automotive industry, such as the increasing importance of emissions reduction, electrification, and autonomous technology. GM's investment case centered on embracing these trends, focusing on innovation, and expanding its product offerings through strategic M&A, investments, and partnerships. For example, GM has made significant investments in electric vehicles and autonomous driving technology, positioning the company for future growth in these areas.

Next, we have Rexam PLC , a former British packaging manufacturer that was a leading producer of beverage cans globally. When Ball Corporation sought to acquire Rexam, they developed an investment thesis based on the value derived from combining the two companies' strengths. This thesis outlined the strategic fit between both companies, synergies from combining production capabilities, and projected growth, particularly in developing markets. The successful acquisition helped Ball Corporation consolidate its position as a global leader in the packaging industry.

Lastly, Clear Channel Communications is a media company specializing in outdoor advertising. As the company sought to expand its presence in this sector, it created an investment thesis centered around leveraging its core competence in outdoor advertising and acquiring strategic assets. One example is Clear Channel's acquisition of crucial billboard locations to solidify its competitive edge in the outdoor advertising market. This targeted growth strategy has allowed Clear Channel to remain a dominant player in the industry.

In conclusion, these industry case studies demonstrate the value of a well-crafted investment thesis. Effective investment theses provide a roadmap for companies to pursue strategic acquisitions and investments that create long-term value, while also helping investors evaluate the viability of proposed deals. By understanding how companies like DuPont, General Motors, Rexam PLC, and Clear Channel Communications have strategically invested in the market, we can better appreciate the importance of a well-structured investment thesis.

Long-Term Investment Strategies

A long-term investment strategy refers to an approach where investors hold onto their investments for an extended period, typically more than one year. This type of strategy aims to achieve the investment goal by allowing assets to grow through market fluctuations and capitalizing on the power of compounding interest. Diversification and patience play pivotal roles in ensuring the success of a long-term investment strategy.

Portfolio managers often use various techniques and methods to craft long-term investment portfolios. Some of these techniques include targeting undervalued sectors or stocks, dividend reinvestment plans, dollar-cost averaging, and asset allocation. By employing these strategies, portfolio managers increase chances of achieving their clients' investment goals over time.

In order to develop long-term investment strategies, investors should first define their investment goal . This could include objectives such as saving for retirement, funding a child's college education, or purchasing a home. Clear investment goals help in designing an appropriate investment strategy, taking into account factors like the investor's risk tolerance, time horizon, and available capital.

One key aspect of a successful long-term strategy is diversification . Diversifying across asset classes and industries allows investors to spread risks and potentially achieve higher risk-adjusted returns. A well-diversified portfolio will typically consist of a mix of stocks, bonds, and other asset types, with variations in investment size, industry sector, and geographical location. This diversified approach minimizes the impact of underperforming investments on the overall portfolio.

Another crucial element in long-term investing is patience . Market fluctuations can be tempting for investors to react to their emotions and make impulsive decisions, which could derail a well-thought-out investment strategy. Maintaining a disciplined approach and sticking to one's investment plan, even during periods of market volatility, is paramount to achieving long-term success.

In conclusion, long-term investment strategies require investors to define clear goals, diversify their portfolio, and exercise patience in the face of market fluctuations. By adhering to these principles, investors and portfolio managers can steer a course towards achieving their investment objectives.

Emerging Trends and Opportunities

In recent years, various emerging trends have presented attractive opportunities for investors. Among these trends, renewable energy, megatrends, and the coffee shop market stand out as sectors with significant potential for growth.

Renewable energy has gained considerable attention and investment as a response to the global push for addressing climate change and reducing emissions. Solar, wind, and hydroelectric power are some of the most prominent technologies in this sector. With an increased interest in clean energy from both governments and consumers, companies in this space are poised to experience substantial growth.

Megatrends such as urbanization, aging populations, and technological advancements are also influencing investment opportunities. These large-scale shifts provide a backdrop for businesses to tap into new markets and adjust their strategies to capitalize on these changes. For instance, companies working in healthcare and biotechnology may benefit from catering to the needs of an aging population, while businesses focused on artificial intelligence (AI) and automation may find increased demand due to technological advancements.

The coffee shop market, too, presents investment opportunities. This industry has experienced robust growth in recent years as consumers increasingly seek out unique, high-quality coffee experiences. Independent and specialty coffee shops are at the forefront of this trend. Niche coffee shops that offer novel and authentic experiences have seen success by catering to the specialized preferences of today's consumers. As the demand for artisanal and premium beverages continues to rise, businesses operating in this space can expect to have ample opportunities for growth.

In conclusion, current emerging trends such as renewable energy, megatrends, and the coffee shop market offer a wealth of investment opportunities. As these sectors continue to develop and evolve, investors with well-informed investment theses stand to benefit from the potential rewards in these growing industries.

Role of Financial Statements and Valuation Metrics

Financial statements play a vital role in the investment thesis by providing crucial information about a company's financial health and performance. They consist of the balance sheet, income statement, and cash flow statement, which offer insights into the company's assets, liabilities, revenues, expenses, and cash flows. Investors use these statements to assess the company's past performance, current financial condition, and potential for future growth.

Valuation metrics, on the other hand, are vital yardsticks that investors use to compare different investment opportunities and make informed decisions. These metrics include price-to-earnings (P/E) ratio, price-to-sales (P/S) ratio, price-to-book (P/B) ratio, dividend yield, and return on equity (ROE), among others. By analyzing these ratios, investors can gauge a company's value relative to its peers and make better investment choices.

Analysts and investors scrutinize financial statements to identify growth trends, profitability, and financial stability. For instance, they may calculate the gross margin, operating margin, and net profit margin to determine the company's profitability across different stages of its operations. Additionally, they examine liquidity ratios, such as the current ratio and quick ratio, to assess the company's ability to meet its short-term obligations.

Valuation metrics provide a quantitative basis for comparing investment opportunities within the same industry or across different sectors. For example, a lower P/E ratio may indicate that a stock is undervalued, while a high P/E ratio might suggest overvaluation. Moreover, the P/B ratio can help investors determine if a stock is undervalued by comparing its market price to its book value.

Another key valuation metric is the dividend yield, which measures the annual dividend income per share relative to the stock's price. A higher dividend yield may attract income-oriented investors, while a lower yield might be more appealing to growth-focused investors. Furthermore, the ROE ratio, which measures a company's profitability in relation to its equity base, is an essential metric for evaluating the efficiency of management in creating shareholder value.

In conclusion, financial statements and valuation metrics are indispensable tools for investors to evaluate a company's financial health and investment attractiveness. By analyzing these data points, investors can make well-informed investment decisions that align with their risk tolerance and investment objectives.

Concluding Thoughts on Crafting a Compelling Investment Thesis

Crafting a compelling investment thesis is crucial for informed investing decisions, as it helps investors thoroughly analyze a potential opportunity. A well-researched investment thesis demonstrates the investor's conviction level and reinforces their confidence in the investment choice. This process involves a deep understanding of the business, its value drivers, and its potential growth trajectories.

A strong investment thesis should be definitive, clearly articulating the reasoning behind the opportunity and the expected returns. This allows investors to stay focused on their goals and maintain their conviction, even when the stock's price movement does not align with their expectations.

By adopting a confident, knowledgeable, and neutral tone, investors can effectively communicate their investment thesis to others. Clarity in presenting the investment case is essential for persuading potential partners or stakeholders to support the opportunity. Utilizing formatting tools such as tables and bullet points can aid in conveying essential information efficiently and ensuring the investment thesis is easy to understand.

In summary, crafting a compelling investment thesis enables investors to make well-informed decisions that align with their financial goals. By developing a thorough understanding of the investment opportunity and maintaining a strong conviction level, investors can better navigate the market and achieve long-term success.

Frequently Asked Questions

How do you develop a strong investment thesis.

A strong investment thesis begins with thorough research on the company or asset in question. This may include looking at the financials, competitive position, management team, industry trends, and future prospects. It's essential to critically analyze the available information, identify potential risks and rewards, and establish a clear rationale for the investment based on this analysis. Staying focused on the long-term outlook and maintaining a disciplined approach to the investment process can also contribute to developing a robust investment thesis.

What are the key elements to include in an investment thesis?

An investment thesis should include the following key elements:

• Overview of the company or asset: Provide a brief background of the company or asset, including its market, size, and competitive positioning.
• Investment rationale: Detail the reasons for investing, such as attractive valuation, strong revenue growth, or a unique business model.
• Risk assessment: Identify potential risks and how they could impact the investment returns.
• Expected return: Estimate the potential financial return based on the identified growth drivers or catalysts.
• Time horizon: Indicate the investment period, typically long-term, during which the thesis is expected to play out.
• Fund size: Specify the amount of invested capital that will be allocated to this particular investment, considering its impact on portfolio construction, liquidity, and potential returns within the overall portfolio strategy

How can one evaluate the success of an investment thesis?

Evaluating the success of an investment thesis involves tracking the progress of the company or asset against its initial expectations and underlying assumptions. This may involve measuring financial performance, analyzing key developments in the industry and the company's position within it, and monitoring potential changes in overall market conditions. It is helpful to revisit the investment thesis regularly to assess its validity and make adjustments as necessary.

What's the difference between an investment thesis for startups and publicly traded companies?

An investment thesis for a startup often focuses on the growth potential of a new or emerging market, considering the innovative products or services the startup offers in that market. Here, the focus may be more on the potential for long-term value creation, the management team's ability to execute on their vision, and market fit.

For publicly traded companies, the investment thesis may include analysis of current financial performance, valuation multiples, and overall market trends. Publicly traded companies have more historical data and financial performance information available, allowing investors to make more informed decisions based on these factors.

How does an investment thesis guide decision-making in private equity?

In private equity, the investment thesis helps guide the selection of companies to invest in, as well as the structuring of deals to acquire those companies. It provides a blueprint for how the private equity firm aims to create value, including plans for operational improvements, financial engineering, or growth strategies. This thesis serves as a basis for monitoring the progress of an investment and helps make decisions on the timing of potential exits.

How can real estate investment theses differ from other sectors?

Real estate investment theses may focus on factors such as location, property type, market dynamics, and demographic trends to identify attractive investment opportunities. The analysis may also take into account macroeconomic factors, such as interest rates and economic growth, which can influence real estate markets. Additionally, real estate investments may be structured as either direct property investments or through financial instruments like Real Estate Investment Trusts (REITs), affecting the underlying investment thesis.

What considerations should a first-time fund manager have when developing a fund's investment thesis?

For a first-time fund manager, crafting a compelling and robust fund's investment thesis is paramount for attracting investors. Given their lack of a track record, these managers need to lean heavily on the research, clarity, and vision articulated in their investment thesis. The thesis should detail how the fund aims to identify ideal investments, especially those in industries with high margins. It should also benchmark the strategies against industry standards to highlight the manager's acumen and awareness of market norms.

How is a stock pitch related to an investment thesis and what role does a target price play in it?

A stock pitch is essentially a condensed, persuasive form of an investment thesis, often presented to stakeholders to advocate for investing in a particular publicly-traded company. A key element of any stock pitch is the target price, which is an estimation of what the stock is worth based on projections and valuation models. This target price serves as a quantitative anchor for the investment thesis, giving stakeholders a specific metric against which to measure potential returns and risks.

How To Create A Compelling Stock Investment Thesis

About the author:.

Andy Reimann

Andy Reimann is a passionate and knowledgeable writer in personal finance and investment with multiple years of experience. Beyond the world of finance, he’s an accomplished game developer, merging creativity with technical expertise. With a commitment to empowering individuals, Andy believes in early financial education and seeks to equip individuals with the tools to make better financial decisions for the long term.

Ever paused to dissect the motivation behind every single stock or asset you’ve decided to own? If your answer is no , then this conversation is the appetizer you didn’t know you needed. We’re about to navigate the riveting world of constructing a robust investment thesis.

Consider your investment thesis as your personal shield in the throes of the financial gladiator ring. When the market behaves like an erratic roller-coaster, dipping your investments into the lows, it’s your thesis that provides that comforting pat on the back. It’s your well-crafted defense against the hailstorm of discouraging news that barely scratches the surface of your investment’s core business.

Do you know the Company’s Manifesto?

Imagine every company as an explorer embarking on a quest; each one has its unique compass guiding its journey. Your job? To uncover it! A straightforward internet search “Company Name + mission statement” should get you started.

A well-crafted mission statement is the place I always start my research at. It should be straightforward, crystal clear, and resonate with you. When reading it, you should feel a jolt of inspiration and the fires of motivation kindling within you.

To give you a taste, let’s delve into the mission statements of some iconic companies:

Nike paints a vivid picture with their mission, aiming to “Bring inspiration and innovation to every athlete in the world.”

LinkedIn focuses on creating professional bridges with their mission, which is “To connect the world’s professionals to make them more productive and successful.”

Patagonia , with a distinct environmental conscience, commits to “Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis.”

Of course, your research does not stop there. Every company is different and to make sure it is worth your money, you need to dig a little deeper. I’ve created my own little framework around this research. It is available to you for free :

My Framework: 20 Questions You Should Ask Before Investing In Stock

As you embark on this thrilling expedition of thesis creation, beware of a few potential pitfalls. Firstly, don’t be enticed by flashy sales numbers or rapid growth alone. These are akin to glittery sirens that may lure you towards rocky shores. Secondly, avoid being swayed by market hearsay or hot tips without proper due diligence. The stock market isn’t a racetrack for betting on the fastest horse but a platform for investing in businesses you genuinely believe in. Lastly, don’t allow your emotions to steer your investment decisions. Investment thesis creation is an art where rationality and strategic foresight must prevail over emotional impulses. Navigating these pitfalls is essential to curating a robust, growth-oriented portfolio.

So strap in, delve into the world of your investments, and start building those captivating investment theses. Your portfolio will thank you for it!

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How to Create an Investment Thesis

by Admin | Feb 5, 2021 | Angel Investing , Finance , Venture Capital | 0 comments

One of the essential elements in a venture capital firm is the investment thesis. The thesis can come in many varieties, from broad and loosely defined focuses to a specific vertical and company stage. On the other hand, some investors choose to allocate capital without a core thesis driving their decisions and see success in this strategy. This post will define an investment thesis, why investors decide to develop one, and some tips on creating one.

What is an investment thesis?

Simply put, the investment thesis is an assumption made about a market, vertical, or trend that will drive the strategy for a particular firm or fund. Just as a startup will assume a problem or market need and build a product around solving that problem, an investor will consider various markets and trends and develop an investment strategy focused on that assumption.

Why develop an investment thesis?

The thesis is the driving force behind what a firm chooses to focus on to generate returns. It will be a fundamental part of how VCs decide what to look for in specific markets, source deals, and where they ultimately decide to invest their capital. The thesis helps keep a firm focused, allowing investors to work within particular parameters when they go about their business.

There are a couple of advantages to having a thesis-driven approach as a venture capital firm. It will drive relationships that the firm pursues. This relationship driver applies to how firms source deals from an investment standpoint and choose their limited partners. These relationships with experts in a particular vertical will help portfolio companies with mentorship, independent board seats, and talent sourcing.

A thesis compels VCs to be experts within their particular field. If a firm bases its thesis around FinTech, it will most likely have some expertise in that field. This knowledge will help them understand the marketplace, specific problems a startup is trying to solve and judge founder talent. The firm will also be a thought leader in the space by releasing analysis and reporting trends in the industry. Lastly, the firm’s partners will be a better value-add to the companies within their portfolio, paving a quicker path for a startup’s growth and success.

Example of a thesis

A16Z , a prominent Silicon Valley firm, has several different areas they invest in, from FinTech to Growth to Consumer focused startups. Below is their investment thesis for their FinTech portfolio:

“Fintech companies are innovating across broad categories — in banking, lending, insurance, real estate, and investing — both on the customer-facing side and in core infrastructure. We believe the combination of mobile, digital money, machine learning, and new data sources offers startups a unique opportunity to leapfrog outdated infrastructure and compete with incumbent financial institutions to reimagine the way we manage our finances.”   Source

We understand that the firm focuses on startups that use mobile and machine learning to innovate on financial management through this statement. This thesis has helped drive the firm’s investments in   Stripe   (now valued at $36B) and   Carta   (currently valued at $3.3B).

For an awesome hub of investment thesis examples, check out this   link !

How to build an investment thesis

When developing a thesis, there are vital things to keep in mind:

Markets : Start with market sizing to make sure that a particular industry is worth pursuing. We will discuss market sizing strategies in a future post.

Trends:   Understand macro trends impacting the markets and industries that you determine are big enough to pursue.

Companies : Break down each company within a market that has upside potential. Look at recent companies that have seen success within your specific industry focus.

Exits : Make sure there is an exciting exit environment for companies in that particular segment. You want your investments to see a return through going public or M&A activity.

Tips on the above:

Things to think about defining in a thesis would be company stage, geography, vertical, or market.

People tend to want a fully-formed thesis right off the bat, but it’s an iterative process. The scrum process might be three months, but the full process can take a year before talking about a thesis publicly.

Have a hunch on something that isn’t fully formed and then test it out:

Go out and talk to entrepreneurs.

Talk to buyers of the technology.

Form relationships with ecosystem partners.

Incrementally improve your thesis based on feedback and results.

For some more tips and strategies on creating a thesis, check out this informative   Medium post .

Final thoughts

The thesis can help you stay focused and is your north star. For startups, it will help them target your firm. For LPs, it will help them judge your conviction and investment strategy. When developing a thesis, think about taking on big problems and big ideas. There are so many significant issues to be solved globally, and we have a golden opportunity to help solve them. Think big, and don’t limit yourself only to ideas on making returns for investors, but how to impact the world.

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Corporate Financial Strategy

• First Online: 04 June 2019

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In this chapter, we will explain how management can include the investor and capital market perspective in its financial strategy. The firm’s financial strategy is the final building block of our corporate strategy framework (Chap. 1 ). It has three key elements: first, a clear and convincing investment thesis for existing and potential shareholders that explains how the company’s corporate strategy is going to create value; second, a consistent financial policy that defines the company’s target leverage ratio, debt structure, cash reserves, and dividend policy and supports its corporate strategy and the envisioned transformation pathway; and third, an overall investor strategy that defines the company’s target investor structure and its approach for managing relations with investors. We will cover the three elements in turn.

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Further Reading

Investment thesis.

BCG Value Creators Report series (on bcg.com )

Hansell G, Heuskel D (2012) The CEO as investor. BCG Perspectives

Financial Policy

Barclay M, Smith C (2005) The capital structure puzzle: the evidence revisited. J Appl Corp Financ 17(1):8–17

Shapiro AC (2013) Multinational financial management. Wiley, New York, NY

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Boyd BK, Solarino AM (2016) Ownership of corporations: a review, synthesis, and research agenda. J Manag 42(5):1282–1314

Brauer M, Wiersema M (2018) Analyzing analyst research: a review of past coverage and recommendations for future research. J Manag 44(1):218–248

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General Textbooks on Corporate Finance

Brealey RA, Myers SC (2014) Principles of corporate finance. McGraw Hill, New York, NY

Hawawini G, Viallet C (2015) Finance for executives. Cengage Learning Emea, Andover, MN

Pettit J (2007) Strategic corporate finance. Wiley, New York, NY

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Ulrich Pidun

Faculty of Economics and Management, Institute of Technology and Management, Technical University of Berlin, Berlin, Germany

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Pidun, U. (2019). Corporate Financial Strategy. In: Corporate Strategy. Springer Gabler, Wiesbaden. https://doi.org/10.1007/978-3-658-25426-1_10

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Your investor has an investment thesis. Here’s why you should care

I work with a bunch of founders who have incredible stories, great pitch decks  and solid businesses — and they get confused when investors turn them down anyway. A lot of the time, it doesn’t matter how good your company is. What matters is whether it matches up with your investor’s investment thesis.

An investment thesis is sometimes a detailed document, sometimes a deck and sometimes something as vague as “we know it when we see it.” What it has in common, though, is that this is a set of “rules” that the VC has. It presents this thesis to its own investors — the LPs — so they have a feel for what the venture firm will be investing in. Investing outside of this thesis is sometimes possible for deals that are too good to pass up, but it will often take some managing on the VC/LP side of things.

What makes a “wrong” investor?

For some funds, this thesis might be really broad — “all early-stage companies in California” — while others get pretty narrow: “$1 million checks into crypto startups founded by college graduates from New Jersey that have blue hair.”

If you fall outside of their “thesis,” some investors might still invest — if an extremely promising opportunity comes along, they will at least consider it — but remember that the “thesis” is what the investment partners used to raise money from their limited partners (LPs). If a fund starts deploying a bunch of cash into startups that are outside the scope of the thesis, the LPs will start getting twitchy and could lose faith.

What goes into a thesis?

Investment theses will usually include some combination of the below. Some funds care a lot about some of these things, and others are less sensitive. To some, these things may be a deal-breaker — and others take a more flexible approach.

• Investment amount — Most funds have a minimum and maximum check size, and a min/max round size. This is often expressed as such: “We invest $2 million to $4 million into $4 million to $8 million rounds.”
• Lead versus follow — Some funds only “follow” — i.e., invest into rounds where a lead investor has already negotiated and vetted the deal. Other funds prefer to lead; they will negotiate a term sheet with the startup for the deal. Others are more agnostic and prefer a portion of each across the portfolio. The driving factor here is often that lead investors tend to take a board seat, and there are only so many boards you can support at any given time. Not leading a round because the lead investor is a great board member is a valid choice.
• Target audience — Some funds focus on business-to-business (B2B) companies, where the core sales dynamic tends to be a small number of large sales. Others focus on business-to-consumer (B2C) companies, typically making a large number of smaller sales. Others again invest in B2B2C — companies that supply businesses that supply consumers.
• Verticals — Some funds only invest in specific verticals, while others may explicitly say they avoid certain verticals. Example verticals might be medical tech, education tech, deep tech, space, crypto companies, surveillance companies, advertising technology, etc.
• Ownership targets — Some funds will only invest if they can own a certain percentage of the company they invest in at the end of the investment round.
• Institutional ties — Some funds are set up specifically to support graduates from a particular school or alumni network. These tend to raise money from the alumni network, too. Others might invest only in founders coming out of a certain company — for example, the Slack diaspora (i.e., companies founded by ex-Slack employees).
• Demographic — Some firms focus on investing along demographic boundaries — young founders, older founders, Latinx founders, founders of color, female founders, founders who have been in prison, etc.
• Geographic location — Almost all investment firms have geographic boundaries for where they source deals. They may invest only within — or outside of — certain areas, states, countries or regions.
• Opportunity size — Most investors invest in companies that have at least the possibility of an outsize return. In venture capital, most funds try to make investments where there is at least a possibility that every investment “returns the fund.” In other words: If they have a $100 million fund, and they make $5 million investments, they can make 20 investments in total. Each of these investments should have at least the outsize possibility of a 20x return — turning the $5 million investment into a $100 million return on investment. If your investment looks interesting, but the investors believe that you would be a 3x return at best, you probably wouldn’t raise money.

So, is that all? Well, not quite.

All of the points above are specifically tied to the thesis of the investor. If you tick all of those boxes, that isn’t the end of your journey — that’s the beginning . You still have to have a good team, solve a meaningful problem with a good solution in a huge market, with some traction and believability for the market you’re about to enter — and be able to wrap a great narrative around all of that as part of your pitch.

So, how do you know if your company is a good fit for the thesis? Ask them. Most investors are happy to tell you what their thesis is, at least in broad lines. Presenting your company or pitch deck will often get you a very quick thumbs up or thumbs down regarding the thesis. Ask the question: “What do you typically like to invest in?” and “Do you think my company is a good fit with your thesis?”

If you get a no, it’s OK to ask what aspect of your company isn’t a good fit. It’s possible that they have misunderstood something, and that it’s possible to correct the confusion at this point. You wouldn’t be the first startup to have been turned down over a misunderstanding — but counteracting that all starts with having a deeper understanding of the dynamics of how and why VC firms invest.

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Related Expertise: Value Creation Strategy , Corporate Finance and Strategy

The Role of Portfolio Management in Value Creation

October 25, 2016  By  Gerry Hansell ,  Jeff Kotzen ,  Eric Olsen , and  Hady Farag

This article is an excerpt from   Creating Value Through Active Portfolio Management: The 2016 Value Creators Report   (BCG report, October 2016).

Ever since BCG introduced the growth share matrix, in the 1960s, executives have understood that portfolio management is a critical component of any strategy for superior value creation. As more and more companies must justify the value creation logic of their business portfolios in response to pressure from activist investors, portfolio management is more important than ever. 1 1 See “ Winning Moves in the Age of Shareholder Activism ,” BCG Focus, August 2015. Notes: 1 See “ Winning Moves in the Age of Shareholder Activism ,” BCG Focus, August 2015.  Partly in response to such pressure, spinoffs have become one of the most popular strategic moves in the increasingly active market for corporate transactions. 2 2 See “ Creating Superior Value Through Spin-Offs ,” BCG article, February 2016. Notes: 2 See “ Creating Superior Value Through Spin-Offs ,” BCG article, February 2016.

And yet, despite the growing importance of portfolio strategy , it is striking how many large multibusiness companies do not have a systematic one. That is, they do not have a deliberate approach for determining what businesses they should and should not own, why their portfolio of businesses is worth more under common management than the sum of the individual businesses, and how to optimize the value the businesses generate for shareholders. In our experience, many senior executive teams are comfortable with the businesses they currently own simply because they have “always” owned them. They focus on being good operators of the current portfolio—running those businesses, making them better, and meeting plan—rather than savvy investors of corporate assets.

It is an understandable mindset, but it comes with a major strategic risk. Without a strategic portfolio roadmap, executives are not as prepared as they should be to create strong and sustainable TSR for their investors or to react quickly and responsibly to shocks in the business environment. When such shocks happen—as they increasingly do in today’s dynamic economy—executives often respond in a way that is too reactive or transactional. They rush to make a deal—any deal—to address their problems without thinking enough about the real sources of the company’s competitive advantage.

Between the extremes of doing nothing and doing too much, senior executives need to take a more measured and more strategic approach. It is no coincidence that many of the companies we have profiled in recent Value Creators reports have put the continual reshaping of the corporate portfolio at the center of their value creation strategies. (See “Portfolio Reshaping: A Common Contributor to TSR Success.”) There are three steps to doing so: defining an investment thesis, determining the value creation potential of the portfolio, and developing a robust portfolio strategy.

PORTFOLIO RESHAPING: A Common Contributor to TSR Success

To get a sense of just how important active portfolio management is to value creation, one must look back at the companies we have profiled in recent Value Creators reports. In the five years since our annual report first included in-depth profiles of BCG clients that are leading value creators, we have featured six companies. In nearly every case, portfolio strategy has been a key factor in value creation performance. Consider the following examples.

Church & Dwight. A critical component of the winning value creation strategy developed by the consumer-packaged-goods company Church & Dwight (featured in the 2012 Value Creators report) was a transformation of its brand portfolio. 1 Through a systematic process of investing in organic growth in its core Arm & Hammer brand, selling off weaker brands, and acquiring new ones with greater potential for high-margin growth, the company increased gross margins from 39.1% in 2006 to 44.2% in 2011, and operating margins from 13% to 18.1%. Today, eight of Church & Dwight’s brands deliver 80% of the company’s revenue and profit.

VF Corporation. Apparel company VF Corporation (featured in 2013) went through a similar portfolio transformation, shifting the company’s focus from large but relatively low-growth legacy apparel segments to smaller but faster growing businesses in so-called lifestyle brands. 2 Before VF’s strategy could gain credibility in the capital markets, however, the company had to make itself more attractive to growth-oriented investors. The steps it took included hiring a senior M&A executive from General Electric to run its acquisitions process, providing investors with greater clarity about its M&A strategy and track record, reporting earnings separately for its lifestyle brands in order to emphasize their higher margins and growth potential, and creating an internal talent-management program to build the capabilities necessary to manage a stable of high-growth brands.

Gannett. Media company Gannett (featured in 2014) has increasingly shifted its portfolio from its traditional newspaper and publishing business into higher-growth media and digital businesses. 3 In 2015, Gannett split its publishing and media businesses into two companies. The publishing business continues to use the Gannett name, while the broadcasting and digital company is called Tegna.

Alfa. The Mexican conglomerate Alfa (also featured in 2014) has become a top multibusiness value creator by going through two waves of portfolio transformation. 4 The first, completed in the early 1990s, focused a collection of unrelated businesses on three sectors—steel, petrochemicals, and food—and a small group of diverse businesses. The second, in the early years of this century, focused on businesses with the greatest prospects for growth and profitability. For example, the company exited its legacy steel business in 2005 and in 2006 started a joint venture with Pioneer Natural Resources to explore for natural gas in Texas. By 2008, none of the businesses in Alfa’s original portfolio remained. In the process, the company greatly improved the value creation profile of its portfolio and shifted from being primarily in the Mexican domestic market to having a more international presence.

Defining an Investment Thesis

Managing a business portfolio for sustained value creation starts with an investment thesis. Senior executives should think about each business in the portfolio as a long-term investor would, asking the following questions: What are our core businesses and why are they good for us? Of the noncore businesses, which should we monetize and when? Where do we expect to take each business over the next three to five years?

An investment thesis is a clear view—grounded in the realities of a company’s competitive situation, strengths, opportunities, and risks—of how the company will allocate capital to compete and create value over time.  In contrast to the typical strategic plan, with its lengthy list of actions and targets, a good investment thesis highlights three to six critical levers to deliver strong value creation over a specific period (usually three to five years).

By developing an explicit corporate investment thesis, much as professional investors do, senior executives can more effectively assess the tradeoffs among competing priorities and evaluate the performance of their company’s investments. A clear investment thesis also provides criteria for identifying and assessing acquisition and divestiture candidates.

Determining the Value Creation Potential of the Portfolio

A robust investment thesis establishes the high-level value creation logic of a company’s portfolio. But it should be informed by a granular understanding of the potential of each business in the portfolio. To develop such an understanding, it is important to evaluate each business from three different but complementary perspectives.

Market Perspective. The first perspective is the traditional domain of business strategy: What is the fundamental strategic potential of each business in the portfolio in terms of the economic attractiveness of the served markets, their growth potential, their margin potential, and the strength of the company’s competitive advantage in the business?

It is not enough that the business in question serve an attractive market. It needs to offer advantages that will give the company a leg up against rivals. Take the example of growth. Too often, in seeking to grow, companies in an industry look in the same places, chasing the same pockets of growth with me-too strategies, assuming that they will end up with strong positions. But investing simply to participate rarely creates meaningful shareholder value. Instead, a company should have a differentiated strategy that is based on defensible competitive advantages in terms of cost position, technology, brands, or scale.

Value Perspective. Many companies stop with the market analysis. However, while that analysis is necessary, it is far from sufficient. In parallel to addressing the strategic potential of a business, companies should also develop a perspective on the business’s performance as an investment and its ability to create value in the future.

BCG’s approach, called the Value Lens, helps companies understand the value creation profiles of their portfolio businesses by answering two fundamental questions: What is the value to the company of each business today? What is the likely contribution to TSR, share price, market capitalization, and the valuation multiple in the future?

The starting point is to develop a snapshot of how investors would value a business if it were an independent company listed on the stock market. For each business, we identify a peer group of similar businesses that are publicly listed and analyze the impact of various operational and financial drivers on valuation multiples in that peer group. We then apply this valuation model to the portfolio business in question. The result is an accurate estimate of what the business’s valuation would be if it were publicly listed.

A key insight that often emerges from this analysis is that the biggest businesses in the portfolio in terms of revenue are not necessarily the biggest value creators. For example, in the client example portrayed in Exhibit 1, division 1 is responsible for a full 27% of the company’s revenue but only 16% of the current share price. Division 4 is responsible for only 13% of revenue and 17% of the current share price. And two of the six divisions (2 and 3) account for 65% of their company’s total valuation. Clearly, investors value a dollar of revenue more highly in some of the businesses in this portfolio than in others.

To estimate the value creation potential of each business, BCG uses a metric we call internal TSR (or iTSR), a direct proxy for how a business is likely to create value and contribute to the company’s overall share price and TSR. (The components of TSR are described in the sidebar in “ Creating Value Through Active Portfolio Management .”) Exhibit 2 shows the output of one such analysis for a company with 19 independent business units. The bars show the iTSR of each business—that is, the sum of the business’s estimated revenue growth, margin improvement, multiple improvement, and generation of free cash flow. The end result of this analysis is a detailed picture of each business’s contribution to the company’s share price, free cash flow per share, and overall TSR.

The power of the iTSR analysis is that it reveals not only how much TSR each business is likely to contribute but also where that will come from—revenue growth, margin improvement, the generation of free cash flow, or an improving valuation multiple. Knowing the sources of each business’s contribution to TSR is critical for determining the role of the business in the company’s overall portfolio strategy. (See the discussion of portfolio roles below.) The iTSR approach can also be used within a business to estimate the impact of specific strategic initiatives on TSR.

Ownership Perspective. So far, we have focused on the value creation potential of each business in a portfolio. But it is not enough to consider a business in isolation. Its role in the portfolio as a whole, including strategic and operational linkages and synergies with other businesses, should also be examined.

This all-important ownership perspective is partly a matter of portfolio balance. Does the portfolio have an appropriate mix, for instance, of businesses that offer short-term growth and those that promise long-term growth? If access to capital is limited, are there enough cash-generating businesses to fund growth businesses? Is the portfolio sensibly diversified in terms of business risk?

Equally important is determining if a company is the best owner of the businesses in its portfolio. For example, do the businesses fit the company’s investment thesis and basic style of competition? Are there synergies across them? Can the businesses take advantage of certain assets or capabilities provided by the corporate center to create more value than they could on their own? 3 3 See First, Do No Harm: How to Be a Good Corporate Parent , BCG report, March 2012. Notes: 3 See First, Do No Harm: How to Be a Good Corporate Parent , BCG report, March 2012. Is the value of the portfolio, taken as a whole, truly greater than the sum of the parts?

Finally, an important part of determining whether a portfolio as a whole is well designed is understanding how the company’s largest and most important investors view it. Many companies have a so-called bimodal portfolio, in which different businesses have different financial characteristics or risk profiles—and therefore attract different types of investors, whose priorities for the company may conflict. As a result, these companies often suffer from a valuation discount in the capital markets. The right move in such situations may be to reshape the portfolio so that the company’s business, financial, and investor strategies are aligned to appeal to a single investor type (for instance, growth-at-a-reasonable-price, or GARP, investors). Or, if senior management is confident in the long-term sustainability of the company’s investment thesis and portfolio makeup, then the answer may be to do a better job of communicating the underlying logic of the portfolio in order to attract the appropriate investor type.

Developing a Robust Portfolio Strategy

This three-part analysis sets the stage for developing a robust and actionable portfolio strategy. To develop such a strategy, senior executives must first determine the precise role a business will play for the company and then act accordingly, setting the appropriate budgets, performance targets, and other measures.

Defining Portfolio Roles. A business in a company’s portfolio can play one of five roles:

• Growth Engine. The businesses that create value largely through revenue growth are the portfolio’s growth engines and should therefore receive the lion’s share of investment. Typically, these businesses grow at least twice as quickly as GDP and consume more cash than they generate. Their goal is to establish market leadership and drive revenue growth organically and through acquisitions, not to generate free cash flow or optimize margins.
• Growth Funder. Other businesses, by contrast, generate strong and sustainable cash flows but don’t necessarily have much potential for organic growth above the rate of GDP growth. These mature and stable businesses should fund growth elsewhere and help return cash to shareholders. While they should strive to grow with their underlying markets, their main goal is to maintain healthy margins and generate strong free cash flow.
• Balanced Business. Some businesses play a role between the extremes of growth engine and growth funder. They have the opportunity to achieve moderate growth and even expand market share, but they also need to generate some cash. While the tradeoffs depend on the business in question, the goal is to achieve the right balance of reinvestment for growth and generation of cash.
• Harvest Business. Some businesses generate cash and contribute near-term TSR, but, unlike the growth funders or the balanced businesses, they face competitive pressures and long-term secular decline, which will end up destroying value. These businesses need to be harvested by dramatically reducing (or even eliminating) investment and maximizing free cash flow in order to redirect investment to uses with higher returns. Eventually, these businesses may become divestiture candidates if their remaining value can be monetized.
• Turnaround. Last are the businesses that face serious financial and market challenges and are destroying value today. They must be either fixed or sold. The focus should be on margin expansion instead of growth and aggressive cash management that ultimately improves free cash flow.

Assigning roles should not be a mechanistic process. This analysis should be thought of as an initial stake in the ground that then needs to be debated and pressure-tested with business unit management. For each business, a detailed fact base should be assembled and debated. The goal of this debate should be to agree on the role each business will play in the portfolio.

In addition to defining the role of each business, this process identifies imbalances or gaps that must be addressed. For instance, a lack of sufficient growth engines to sustain the company’s TSR trajectory may call for the acquisition of additional growth businesses or increased investment in organic growth. In this respect, the exercise of assigning portfolio roles also serves as the foundation for the company’s M&A and capital allocation strategies. (See “Reshaping the Portfolio Through M&A: Lessons from Successful Serial Acquirers.”)

RESHAPING THE PORTFOLIO THROUGH M&A: Lessons from Successful Serial Acquirers

Sooner or later, actively managing the corporate portfolio requires reshaping it through M&A. In our study of the M&A practices of successful serial acquirers, we found that the factor that most often distinguishes these acquirers from the rest is their willingness to invest large amounts of leadership time, money, and organizational focus in support of their M&A strategy—in advance of any particular deal. 1 More specifically, successful serial acquirers invest disproportionately in three key areas.

Building and Refining a Compelling Investment Thesis. When it comes to M&A, a clear and compelling investment thesis—a proprietary view of how the company creates value—is an indispensable guide. For a potential acquisition, an investment thesis helps answer the questions, Why us? Why now? and How do we get there?

An investment thesis should be specific enough to clarify where the organization should be looking for transactions and to help the company avoid me-too or off-strategy transactions that are unlikely to add value or do not match the company’s style of competition. A high degree of precision in the investment thesis empowers the organization to source transactions proactively, rather than just react to bankers’ pitch books (which almost always involve a public auction that drives down returns for acquirers). Finally, by defining precisely how the company will make the acquired business more valuable, an investment thesis gives the buyer confidence in future earnings power. This helps both to define the “walk away” valuation (the price above which a deal will not create value) and to identify situations in which paying an above-average premium will still result in attractive retained value for the buyer.

Investing in an Enduring M&A Network and Culture. Successful serial acquirers also invest continually in developing internal capabilities, building their M&A network, and cultivating potential sellers.

This investment starts at the top. The CEOs, presidents, and general managers of businesses are active “hunters” who are expected to spend a significant portion of their time exploring potential business combinations. These executive leaders often oversee the M&A process and mobilize the organization to identify and cultivate potential targets. In the process, they make deal sourcing and the patient cultivation of targets part of the organization’s culture.

Distinctive Principles for the M&A Process. Most executives today know that effective M&A requires a structured end-to-end process, from deal sourcing through integration. What distinguishes successful serial acquirers, however, is less the existence of such a process (“the letter of the law”) than the way that process is endowed with rigor and discipline by underlying principles and policies (“the spirit of the law”).

The best acquirers recognize that no two deals are exactly alike. Therefore, rather than develop detailed (and often highly bureaucratic) “cookbooks,” they run their M&A process according to a short list of principles designed to take time and cost out of the M&A process and to ensure that each acquisition delivers maximum value.

Such principles focus an organization’s M&A teams on the issues that matter most at each stage of the transaction process. For example, during due diligence, agree on the key deal breakers early on and focus the lion’s share of effort on resolving them. During bidding, establish a firm “walk away” value. During integration, allocate the majority of resources to activities (innovation, procurement, or pricing, for example) in which most of the value is expected to accrue.

Translating Portfolio Roles into Budgets and KPIs. Once a company has defined roles for its businesses, it must translate those roles into actions by establishing KPIs, performance targets, capital budgets, and, ultimately, detailed business and financial plans. Three factors are especially important:

• Capital Allocation. Instead of making the common mistake of allocating capital to a business on the basis of its size, previous level of investment, or some principle of equality, a company should base investments on the business’s ability to use capital to create value, as defined by the business’s role in the portfolio. (See the example in Exhibit 3.) A 2014 BCG study 4 4 See “ Invest Wisely, Divest Strategically: Tapping the Power of Diversity to Raise Valuations ,” BCG Focus, April 2014. Notes: 4 See “ Invest Wisely, Divest Strategically: Tapping the Power of Diversity to Raise Valuations ,” BCG Focus, April 2014. found that companies that systematically direct capital to their most attractive businesses can overcome the conglomerate discount many diversified companies face.

• Managerial Attention. Sometimes, even more important than the allocation of capital is the allocation of scarce management time and attention. Not all businesses have the same needs in this regard. For example, a turnaround typically requires substantially more time and attention from senior executives in order to get the business on a positive value-creation track than does a highly stable growth funder.
• KPIs. Many companies use the same KPIs to manage each business in the portfolio—usually on the theory that consistency is important or for reasons of fairness. However, a large mature business that generates a lot of cash but has minimal growth prospects shouldn’t be assessed in the same way as a small business that produces far less free cash flow but has strong growth prospects. For the former, a growth funder, generating returns above the weighted average cost of capital will be an important KPI, as will a high free-cash-flow yield. In the latter, a growth engine, delivering value-creating growth by increasing revenues without eroding margins will be the main KPI. Other types of businesses should be evaluated on metrics tailored to their role and competitive situation. (For an example of the KPIs appropriate for three portfolio roles, see Exhibit 4.)

Although the details will vary depending on the business and industry, we believe that all companies should go through some version of the steps outlined above: defining an investment thesis, determining the value creation potential of the portfolio of businesses, and developing a robust portfolio strategy.

Managing Director & Senior Partner

Senior Advisor

Partner & Director, Shareholder Value Strategy

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How private equity operating partner roles are changing

• May 13, 2024

Operating teams and partners are transforming to help meet the demands of today’s market

An emerging position in private equity (PE) firms, the operating partner or operating team is designed to help counsel the portfolio company (portco) through the value creation plan — from pre-diligence through exit — that is integral to the original deal thesis. This role traditionally has helped serve multiple purposes from providing strategic insight and advice, to supporting board initiatives or even being on the board itself and, when necessary, stepping in to help portcos execute the value creation plan.

We are seeing an industry shift that is moving the operating partner role to more prominence by relying on their experience to work closely with portco management. The operating partner role now spans the deal life cycle, from diligence through exit and provides support across the value creation levers — growth, cost, and risk. Since 2010, 47% of value creation has come from operations, up from 18% in the 1980s. Meanwhile, financial engineering’s contribution to value creation has fallen to 25% from 51% in the same period. 1 A few causes for this trend are worth highlighting:

• With valuations maintaining record highs, traditional financial or management team improvements (i.e., company restructuring/reorganizing) are having less impact on the value of the company as changes in how the company operates.
• Many industry leaders in dealmaking know that there may be no winding back of the clock to a time when inflation wasn’t a major factor and interest rates were low. They can adapt to the new macro conditions that favor operations.
• With valuations at current levels, fewer deals are taking place, giving a new focus on more substantial transformation of the portcos currently held by the PE firms.
• With high interest rates here to stay, limited partners (LPs), the parties investing in PE firms, aren’t looking for firms to do deals based around traditional financial engineering. Many LPs have increased demand for sophisticated operating teams and are looking for specific capabilities in operations. LPs are demanding both industry and functional knowledge to support current portfolio and future investment.

It is our opinion that these market realities can cause PE firms to rethink how their teams are structured and the way the firms go about creating value at their portcos.

Some firms have met the challenge posed in the market, but many others continue to struggle to develop the kind of operating teams that can create value for their current investors. Based on our discussions in the PE industry, we have identified a few areas where we have seen firms struggle, and how industry leading firms have met those challenges to help thrive in this environment. The new economics of value creation are forcing firms to rethink their operating team strategy — our belief is that you can’t wait and still get ahead.

What are the execution difficulties operating partners and teams face?

In the past, operating teams based their support on the investment thesis and associated playbooks that they could apply generally to portcos after they are acquired. Sometimes these still work, but many firms are finding that the business transformation required to unlock value needs nuance and a level of domain knowledge that traditional managers typically did not have. As such, firms are looking for operating partners with specialist knowledge, be that sector experience or transformational experience (technology, operations structure, etc). For example, many firms are looking for operating team members who can quickly work with a portco, have the experience and knowledge to understand what the issues are, and are able to help deploy targeted responses to each of those problems. Some firms may only need certain specialists’ part of the time, as opposed to bringing on additional headcount in the operation team, which may be limited by their investment prospectus.

Further, some operating personnel have come up in the environment of the last 10 years, with low interest rates and without significant inflation. A different skillset is needed to find success in the current market. Regardless of the source of the talent gap, finding the personnel who have the right experience (or have done the work) can remain a perennial struggle. Industry leaders who manage to find success despite these issues succeed by tying their operating team capabilities directly to the overall deal themes and required capabilities of their firm.

While this can differ from firm to firm, the deals team at times tends to be one of the leading voices on how a value creation plan needs to be executed, but the operating team may find issues with the company on the ground that may not seem as serious to the deal team, causing conflict. As such, it can happen where deals teams and operating teams may not see eye-to-eye on how appropriately one can realize the PE firm’s investment thesis. These types of issues can come about for a variety of reasons, such as a lack of defined role for each team across the investment cycle, a lack of trust among teams, difficulties in determining how much of the portco change came from the operating team’s involvement, or unclear accountability for a portco not reaching its goals. Whatever the cause of the conflicts, industry leading firms succeed by making their culture an open topic in internal discussions and making the changes needed to thrive.

Market conditions are leading even larger PE firms to acquire middle-market companies that may have less experience and sophistication than the larger targets we have previously seen many firms focus on. This can bring its own set of issues. For example, management at the portco level may be less experienced than needed to both see how the business will need to change in the future and to help scale the business following the value creation plan. They may also be focused on the wrong metrics. With interest rates being at their current height, earnings before interest, taxes, depreciation and amortization (EBITDA) is no longer the only data point that matters, with some firms looking beyond EBITDA to cash flow conversion in this market. These types of issues and slowdowns can force the private equity owner to replace the management team, causing additional delays across for the value creation plan. Industry leaders are assessing how appropriately one can work with management early (sometimes even at diligence) to understand how to make management true partners in value creation.

PE funds often have a ceiling built into the origination agreement that limits the total spend on operating functions and value creation plans. This makes right-sizing the PE operating team much more critical and difficult. Further, a focus of the operating team is not to go outside of the deal plan on what needs to be done to the portfolio company. If the changes needed go outside of the plan, then a cost discussion can occur around both what the firm absorbs versus the portco and what kind of value improvement the portco can expect to see as a result. There is no one-size-fits-all answer to any of these questions, but firms can often get bogged down in cost management and miss the bigger-picture opportunities. Industry leaders have a detailed understanding of the personnel and structure that helps make the most sense for their firm and are developing a network of advisors to help fill any remaining gaps.

How are leading PE firms finding success in improving their operating teams?

Focusing on your niche for growth and enhancing it.

It’s almost impossible to be the best at everything. How you build out your team can be directly connected to how you want to generate value. Do you have a sector specialization focus? What about  digital transformation ?  Sustainability ?  Emerging technology ? Investing in your operating team’s niche and being top class in that field can lead to success.

Managing costs at a granular level

Industry leading firms target their spend to produce the highest value. Operating teams will always have a limit built into the fund origination agreement, so every dollar of spend needs to bring return on investment. A complete assessment at the top of the portco, including understanding management’s capabilities, can help avoid costly pitfalls and find the path forward with only the necessary capital outlay. Also, leaders in this space supplement their in-firm skill set by maintaining a pool of external advisors with a breadth of experience in various sectors and technical capabilities that can help assist in keeping costs down.

Building a culture of trust across the firm and into the portco level

Open communications  and alignment between the deals team and the operating team are essential. Additionally, many firms are enhancing their communications by using industry leading technology to build real-time communication among the deal team, operating team and management. Further, bringing the teams together as one from pre-diligence to pre-exit can help both sides get a more complete picture of the potential of any portfolio company.

Collaborate with portco management on value creation opportunities

Management is an invaluable resource for perspectives on operations and opportunities for improvement. Many industry firms see the operating team role as a counselor, guiding management and  the board of directors  toward the end goal and receiving feedback in the process. A functioning collaboration between the firm and portco is essential to unlocking value.

Highlight your operating team’s strengths in the broader market

Whether it's fundraising with prospective LPs or demonstrating your firm’s strengths to future portcos, leading PE firms include the operating team’s capabilities as part of their marketing materials. Both LPs and portcos are looking to collaborate with firms that can help bring their returns to the next level, and you can use the investments you have made in building a world-class operating team to your advantage.

Build a strategy around combining the latest technologies with a subsector focus

Portcos that have found transformative growth use  a combination of the right technologies for their needs and a focus on subsector strategy  that allows them to quickly find opportunities in the market. Further, they plan out a leverage model to help determine where it makes sense to reach out to third parties for assistance.

Where do operating teams go next?

Ten years ago, a sophisticated operating team with knowledge on how technology can transform a portco’s operations was a niche capability. Now, it is table stakes. LPs are looking for teams that can help transform their underlying portcos for the better. They want the teams to produce the kind of high-value businesses that can generate the returns they come to private equity for in the first place. Firms that have built out the kinds of operating teams that can make these changes are already ahead of the game and will likely have a much easier time fundraising than their competitors.

Beyond fundraising, we are seeing more PE firms create individual deal thesis with a greater focus on operating improvements. Some firms have even included as part of their value creation plan an operations transformation built around a combination of strategy, tech and analytics to create value opportunities that may not have been available previously. This shows that industry leading firms have recognized the realities of this market and are treating their operating teams as a strategic differentiator to help enable the returns that their investors expect. Delaying investments in your operating team can put you behind other firms that can see the signs and move quickly. Now is the time to build the capabilities that will help your firm create value into the future.

1: Ted Bililies, “Private Equity Needs A New Talent Strategy,” Mondaq Business Review, October 26, 2023, accessed via Factiva, January 16, 2024.

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Private equity investments in tech services: Three considerations

The global tech sector attracted $675 billion from private equity (PE) in 2022, up from $100 billion in 2012. 1 McKinsey analysis based on reported PE deals in tech. Within this world, software and the software-as-a-service (SaaS) sector have long been preeminent thanks to a combination of growth, profitability, and sectorwide multiple expansion. But our analysis found that recent market corrections have depressed valuations in the space by more than 40 percent.

Recent marquee exits by PE firms in the tech services segment have also brought tech services into the spotlight for investors that were traditionally more focused on software. 2 Tech services include IT professional services, managed service providers, communications service providers, business process outsourcing, and outsourced product development. We estimate that tech services currently accounts for 25 to 30 percent of the total assets under management in tech. This represents a ten-percentage-point increase over the past decade.

Disruptive technological innovations have created opportunities across a range of assets. However, understanding the structural differences between software and SaaS and tech services—particularly between their business models—is important. Stakeholders, especially PE investors, may consider carefully evaluating these differences when assessing the segment. Here are a few key insights.

Disruptive technological innovations have created opportunities across a range of assets. However, understanding the structural differences between software and SaaS and tech services—particularly between their business models—is important.

Tech services: Three considerations

We observe three considerations that PE firms could keep in mind when venturing into the tech services space.

The Rule of 40 applies. Tech services companies have lower valuations compared to software and SaaS companies with analogous performance as measured by the Rule of 40 (that the sum of a software company’s growth rate and profit margin should be greater than 40 percent). However, tech services companies that exceed the threshold of the Rule of 40 see a disproportionate jump in their valuation multiples (Exhibit 1). 3 PitchBook and S&P Global revenue, EBITDA, and free cash flow data for software and tech services companies, January 2018 through April 2023, accessed May 10, 2023. Our analysis shows that the enterprise-value-to-revenue ratio almost doubles when companies cross the Rule of 40 threshold compared to their counterparts with annual earnings growth of 30 to 40 percent. The difference between these two cohorts is explained by the difference in their revenue growth profiles. In short, investors are willing to pay a premium for tech services companies that can deliver industry-leading revenue growth with high efficiency.

Investors value revenue growth more highly than margin growth. A company’s service portfolio mix is critical for revenue and returns (Exhibit 2). Specialization and exposure to new digital technologies—such as the cloud, data and analytics, cybersecurity, the Internet of Things, and blockchain—are essential for higher performance and valuation.

We’ve observed that system integrators with a mix of digital and traditional technologies and providers focused on infrastructure services tend to trade at a discount and struggle to significantly boost their earnings. In contrast, companies that specialize in digital and new technologies have shown that they could produce higher revenue, margins, and returns. This suggests that it is important for tech services companies to have a well-defined service portfolio mix.

Sustaining or elevating performance is a bigger factor in returns than multiple expansion. Multiple expansion in software and SaaS has been a prime driver of the sector’s high returns, particularly when PE investors invested in assets that were about to breach the Rule of 40 threshold and when they’ve exited through IPOs.

Although they enjoy a valuation premium, high-performing tech services companies above the 40 percent threshold from the Rule of 40 have still delivered unlevered returns (assuming that 100 percent of investments are equity, with no leverage) of 20 to 25 percent. 4 S&P Global revenue, EBITDA, TSR, and multiples data for tech services companies, 2018–22, accessed May 10, 2023. If these were typical tech services deals, which use leverage for 50 to 60 percent of the funding, the levered returns would be 40 to 45 percent (Exhibit 3).

Our experience suggests that, unlike in software and SaaS, returns in tech services are mostly the result of performance rather than multiple expansion. However, our assessments of recent exits show that PE investors that significantly boost a tech services company’s performance have also received an additional 25 to 30 percent in returns from multiple expansion in the sector.

These findings underscore the importance of a thorough evaluation of tech services targets’ business models. Investors would ideally account for factors such as targets’ service portfolio mix, specialization, and exposure to emerging technologies.

It’s also important to assess the potential for using operational improvements to achieve higher multiples. However, evidence from the recent past suggests that this is the exception rather than the rule, and PE investors would ideally avoid relying on multiple expansion to generate returns in tech services.

A proven value-creation playbook for stable returns

Our analysis of past PE deals in tech services found many successful exits and a few that generated outsize returns of more than 25 percent. We found almost no failed exits. A close examination of those deals revealed that the companies had five things in common:

• They scaled or differentiated their competencies. Those companies focused on two to four competencies in either vertical offerings, such as the cloud, or analytics or digital service lines.
• They shifted their portfolios to serve tech-native customers and customers who continuously reinvest in digital capabilities, who we project will drive about 75 percent of incremental tech spending over the next seven to ten years.
• They increased their sales efficiency by increasing the share of large deal wins to their largest accounts.
• They boosted their capital efficiency by optimizing platform costs and deriving more synergies from M&A.
• They had entrepreneurial, customer-focused leaders who delivered consistent performance even in uncertain times.

The playbook for these outcomes is fairly straightforward, and a few PE investors use this as their go-to approach for achieving stable and satisfying returns in tech services.

Less glamorous than software or SaaS, tech services companies create value through performance. Decision makers attuned to the dynamics specific to the sector may uncover insights and returns.

Marco Carpineti is an associate partner in McKinsey’s New York office, where Vish Narayanan is a partner. Gaurav Sharma is a partner in the New Jersey office.

The authors wish to thank Parv Aggrwal, Alfonso Pulido, Ayushi Singhal, and Satyam Taneja for their contributions to this article.

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Galaxis Introduces AI-Powered Suite to Revolutionize Community Creation for Creators

Zurich, Switzerland, May 17, 2024 (GLOBE NEWSWIRE) -- Galaxis , a leading platform for creators in the Web3 space, notable for its partnerships with high-profile figures such as Mike Tyson, Steve Aoki, and the NBA, has announced the upcoming launch of its new AI-powered Community Creator suite, designed to streamline and enhance the community creation process on their Membership Card platform. This initiative is designed to enhance the community creation process for creators by leveraging the latest AI technologies.

The suite introduced by Galaxis in the upcoming period revolutionizes the community creation process. This includes the Galaxis Assistant, a tool that aids creators during the ideation and generation process, offering insights and suggestions to enhance projects and make creativity more accessible and efficient.

The assistant also supports creators in designing their membership systems, assisting with determining card benefits, quantities, and more for a seamless operational process. Additionally, the suite incorporates an advanced image generation tool powered by GPT-4o and other models, allowing creators to produce high-quality images and art for their membership cards, thus democratizing the creative process.

"We are excited to introduce our AI-powered suite, which underscores our commitment to supporting and empowering creators," said Andras, CEO of Galaxis.

"By integrating advanced AI tools, we are not only streamlining the community creation process but also providing creators with the capabilities to produce exceptional work. Our goal is to ensure that every creator can thrive in the Web3 space."

Please follow the official Galaxis channels for more updates about the AI-powered suite and how it can enhance your creative process.

How It Works

• It all starts with a chat interface where creators describe their envisioned community.
• The suite generates assets like logos and other design materials based on the input.
• Automatically, the community page is populated with relevant content.
• The logic behind the membership cards, such as benefits, is generated and set.
• Creators can keep interacting with the assistant to change all the variables, ensuring everything aligns with their vision.
• Once satisfied, creators simply publish their page and membership collection, making it accessible to their community.

Galaxis is committed to improving the creator experience, providing customized guidance to meet each creator's unique needs, all integrated into the platform. It ensures every creator can maximize their potential and achieve their goals. The platform stays ahead of industry trends, constantly developing and integrating advanced AI tools, all accessible and controlled through natural language, making it highly accessible.

About Galaxis

Galaxis  is a pioneering platform dedicated to supporting creators in the Web3 space. Known for its innovative tools and partnerships with high-profile figures such as Mike Tyson, Steve Aoki, and the NBA, Galaxis offers a comprehensive suite of resources designed to empower creators and foster community engagement. With a track record of significant success, including over 64,000 ETH traded in secondary markets and over $9 million USD raised through Galaxis Engines, the platform continues to lead the way in the creator movement.

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The B2B Creator Economy Is the Next Big Thing. Here's the Company Making It Happen. Tech founder David Walsh details the launch and growth of Limelight, a powerful new collaboration platform for brands and B2B creators.

By Dan Bova May 13, 2024

Key Takeaways

• David Walsh, founder and CEO of Limelight, built a thriving business after he identified the opportunity to connect influential B2B creators with brands looking to get in front of engaged audiences.
• The company was recently backed by Entrepreneur Ventures, an early-stage venture capital firm partnered with Entrepreneur Media.

Entrepreneur Ventures is an early-stage venture capital firm partnered with Entrepreneur Media that is dedicated to backing passionate and innovative founders as early as day one. In this series, we are profiling the amazing entrepreneurs that Entrepreneur Ventures is working with to share their insights on building and growing a thriving business.

Please give us the elevator pitch of your business. My name is David Walsh , I'm the founder and CEO of Limelight . We've built this pioneering B2B creator collaboration platform that revolutionizes how B2B brands achieve virality. We help brands identify B2B creators who have built large followings for specific niches in business, and on the creator side, we recommend brands that are looking for creators via a recommendation engine and allows them to book advertising across all of their channels (LinkedIn, newsletters, podcasts, etc.) They find each other on the platform, manage the partnership and performance, as well as pay each other.

What inspired you to launch Limelight?  I have been in tech for 10 years and after exiting my last company, I took some time off and asked myself what I wanted to do next. Get into the venture race? Join another company? I landed on, "I want to be my own boss" and that narrows down your options! I'm from Ireland and was living in Los Angeles. I had high rent and expensive childcare, so I decided I'd better build something! I was very deliberate in my approach. I knew I wanted to launch a company in the revenue tech space because it's very sticky. If you help a company grow, everyone will keep you on.

So I was posting content on LinkedIn to raise capital, build awareness and drive leads. And as I did that, I became aware of this whole ecosystem that exists, the B2B creator economy . These individuals have created large audiences, 50,000 up to 600,000, posting content every day on a specific niche. As we know, people who buy products today are greatly influenced by individuals they know and trust on their social media feeds. I realized, why don't we build a product for these creators? So that's what I did with Limelight.

How did you go about building it? I raised the capital last year, closed around December and then told my new investors I was pivoting the business model . I rebranded the company and we spoke with about 100 B2B content creators in a period of four to six weeks and a few weeks ago came out with our beta. We've had over 100 companies sign up in less than 30 days, so the thesis is working.

Related: Need Something Fast? These Entrepreneurs Created a Fleet of Self-Driving 'Stores on Wheels' That You Can Hail With the Tap of a Button.

How is your team built out? Sales, marketing, recruiting, finance, operations and products are my focus. But coding? That I can't do. I found a really strong engineer who was previously at Uber and he is the fastest coder I've ever seen in terms of velocity and quality. And I have a really strong designer who's a 23-year-old out of college, a phenomenal UI UX designer who just takes an idea, makes it an image, and then the developer develops it. So there's three of us doing it right now. And it is moving insanely fast.

What advice would you give entrepreneurs seeking investment? I think back to my experiences and the common denominator is that all dollars aren't created equal. But before you think about who it comes from, it's really important to think about how much you need. I used to think I needed as many millions as I could possibly get because I want to hit unicorn status and scale as fast as possible. Now I still think that I want to build an efficient scalable software business that still becomes a unicorn, but I don't think I need as much money to do it. 2019 to 2022 taught me that more money equals more problems and it's harder to scale.

So my advice is to calculate the amount you need to build and grow, then close the round as fast as possible because you can spend all of your time fundraising for a year and none of your time building the business.

Related: Looking for Investment? Pitch Entrepreneur Ventures Here.

You've written and spoken a lot about the power of hearing no. Can you explain that? When I started out I was making tons of cold calls every day and I loved it. The first thing you learn in sales is rejection. And I'm teaching my team members today that we're gonna get rejected all the time, so get used to it! Rejection is important because it builds up thick skin and also teaches you what your company can be doing to better serve your potential customers. I have a recorded note taker and every single sales call I make goes to my engineering team, and goes to my product team. I tag them and I say, listen to this because it's the only way to make sure that you're creating a feedback loop .

Did you always know that you wanted to be an entrepreneur? When I was 19, my dad asked me what I wanted to do. I said, "I want to own a tech company when I'm 25." So I had that ambition at an early age. I remember we were in a coffee shop and the rest of the people laughed at me. But I remember saying that, and I actually called him when I was 27 and told him I was two years late.

What advice would you give to young people with similar ambitions? Grab those moments and windows of opportunity when you can do something unique and different. There is no age cutoff, but as you get older, you'll have more life responsibilities that make the decision to jump into entrepreneurship more difficult. If I could do one thing, I'd go back to college and convince every single lecturer to talk about being an entrepreneur. You just have less risk at that age. Also, follow great leaders and managers — not big ideas. Surround yourself with the best and you increase your learning potential dramatically.

Related: All True Entrepreneurs Share This One Personality Trait, Says the Founder of Spicewell

We hear a lot about embracing tough times and needing grit to push past tough moments. You've had your share. Yes. I moved to the United States from Ireland and I worked in Indeed. I loved my time there, but I knew I eventually wanted to start my own company, so I decided to launch an internal incubator in the company. I wrote an online playbook about how to help immigrants navigate the talent acquisition process on a visa. I had four student visas at this point and felt like I was an expert. So I turned that playbook into a pitch of building a remote marketplace of talent within Indeed and helping our customers hire non-US citizens. It got lots of traction and I presented it to the CEO and Chief Innovation Officer. It got funded with $250K, but then I was called into HR. They said they didn't know I was on a student visa and basically that I couldn't remain at the company because I was technically replacing an American worker's job.

So your pitch to help people work in America got you kicked out? Essentially, but I knew I could figure it out. I actually felt free. My wife thought I was crazy, but I felt like this was a good thing. I was able to use this story to raise my next round. I had my own business and was able to stay in the States. And wouldn't you know it? Indeed's venture arm reached out 3 years later to become an investor!

So I think everyone in their career gets setbacks. Things go sideways, and curveballs get thrown at you and I think how you react in that moment is the most important component. Too many people react very emotionally on the spot like the world's ending. But if you're able to focus on what's 10 years from now and think that this happened for a reason, you can usually find your way to your greater goals.

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