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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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Top 10 Investment Thesis Templates with Examples and Samples

Angeline Babu

Rose Wilson, a passionate entrepreneur, is keen to present her innovative Robotics Company to potential investors. She and her enthusiastic team hope to secure funding for their groundbreaking technology that uses AI and automation to increase recycling and recover recycled products for raw materials. At the end of the presentation, the investors liked the concept but needed to figure out the product's future. They needed to see concrete data, but Rose did not have any, as this was a reasonably new invention, and the team needed more financial records or past results to showcase before them. Rose tried to convince the case, but the investors insisted on seeing numbers.

The question is:

Did Rose secure her funding?  And was she right in asking for investment without accurate data?

The obvious answer is no; she did not secure funding because she needed accurate statistics to prove to investors that her company has the market stability to be profitable.

So, what are the future steps Rose should consider exploring? Develop an Investment Thesis! 

It is the ideal way forward for Rose as it helps to determine the potential for profit using a set of criteria and principles. An investment thesis is a written document recommending a new investment based on research and analysis of its profit potential. This thesis can be used as a strategic decision-making tool.

This blog focuses on the Top 10 Investment Thesis Templates. Utilize our templates to showcase accurate data and connect with your investors. Our slides are ideal for portraying a convincing narrative to potential investors that helps secure the funding for your dream project.

If you want more information on investment proposals, please read our blog, " Top 10 Investment Proposal Templates."

Let us explore the templates!

Template 1 - Business Investment Thesis and Guidelines Model

A business investment thesis provides definitive reasons to follow a particular investment strategy supported by research and analysis. Businesses and investors need this insight actually to commit to an investment. Our slide is an ideal representation of a well-analyzed business investment thesis. Financial professionals, business analysts, etc., who are keen to secure a potential investment will find it comprehensive as it helps incorporate relevant data such as funding sources, various sources, grants, nonprofits, government," etc. Download our templates now and use them to secure the venture capital for your dream project!

Download Today

Template 2 - Investment Thesis and Strategic Rationale Framework

An investment thesis is a strategy for accurate decision-making. Investors require vital statistics before buying stocks or taking over a company. Further, it can be utilized to analyze a prior course of action and understand the need to take the right one. This template captures the investment thesis and strategic rationale framework by detailing industry favorability, growth opportunities, and favorable retune opportunities. Using our slides, you can offer an in-depth introduction to a project, investment analysis, valuation, and implementation methods. Download our slides and present a well-documented presentation of your project's investment thesis. 

Template 3 - Key Investment Thesis Showing 6 factors

Investors require crucial data backed by research to make timely and accurate financial decisions to achieve profitability. An investment thesis provides them with relevant information to decide before an essential financial investment. Our slide presents the Key Investment Thesis by showcasing the six factors to consider before investing. It outlines the monetary value, operational trends, strategic aspects, human resources, infrastructure, and internal/external factors. Download our slides to highlight positive reasons for investment and grab the opportunity to fulfill your goal as a successful entrepreneur.

Template 4 - Business Investment Thesis 4 boxes Model Showing Return Opportunities

Seeking funding from an investor is challenging. However, if you highlight the potential growth benefits and subsequent return on investment, you have sealed the deal. Most investors would look for statistics on the performance of similar industries, the growth strategy, and the business model you follow. Our slides focus on the "4 boxes" model showing return opportunities. It clarifies the industry's favourability, growth opportunities, return opportunities, and the result. Download our slides to present data-based financial projections to your potential investors, giving them good reasons to invest in your company!

Template 5 - Investment Thesis Industry Tailwinds Framework

Industry tailwinds in investment analysis are specific factors or events responsible for profits and revenue growth. In business, quite a few factors can lead to tailwinds. Consumer response to new policy, changing regulatory framework, or consumer demand are some tailwinds supporting investment possibilities. The tailwinds to check for an IPO would be industry trends, government regulations, and market volatility. Our slide overviews share price appreciation by considering Industry Tailwinds, Shareholder-Friendly Management, and Attractive Valuation. Download our slide to portray an attractive representation of the industry tailwinds framework to help you understand and decide the best time to invest!

Template 6 - Investment Thesis Valuation PPT PowerPoint Presentation Show Topics

When investors decide to invest in a particular fund or a business venture, they first and foremost observe the market conditions. They must be favorable as it is vital to the profitability of the investment. The factors that help develop a strong investment thesis are market research, industry trends, and challenges. It also considers the gaps, problems, and solutions. Our slide depicts the market conditions, the desirable portfolio at an attractive valuation, etc. Using the data, your investors can arrive at a positive conclusion, giving them a prize-winning investment opportunity.

Template 7 - Investment Thesis Business PPT PowerPoint Presentation Slides Icons

An investment thesis is highly dependent on the type of investment and the nature of the investment. Therefore, investors would look for an in-depth analysis to acquire a rival company, but for that of an individual investor, the investment thesis will have a less complicated overview. Ultimately, investors look for strategic data, such as if the investment is directly aligned with an intended goal or could have negative results. Our slide offers a "consensus view" and the 'our view" in a well-defined manner. It lists the negative impacts of the investment and suggestions that can help overcome them. Download our slides today to communicate a clear investment strategy perspective to your potential stakeholders.

Template 8 - Investment Thesis 5 Improvement in Margin High PPT PowerPoint Presentation Model Graphics

While tracking the improvement in Margin in a business, Data Analysts consider the profit margin, pricing strategies, and ways to reduce costs. These factors are crucial to the profitable projects the company can focus on and determine the best prices to increase profit margin. Furthermore, a reduction in operational costs increases profits. Our slide offers "key highlights" that show the driving factors that help improve an industry's profit margin. Use our attractive pre-designed slide to communicate vital statistics to prospective clients, providing essential strategies to maximize return on investment.

Template 9 - Investment Thesis Market Research Company Profile CP SS V

No investor is likely to invest in a company that does not have a vision, principles, or profitability factor. Therefore, business owners looking for investment must provide potential investors with an accurate market analysis reflecting product growth and stability. Our slide uses the Neilson Investment Thesis approach that helps provide strategic insights into consumer behavior and market sentiment. It highlights four crucial factors: "Recurring Revenue Model," "Driving Profitable Growth," "Disciplined Capital Expenditures," "Strong Cash Flow," and "Greater Capital Flexibility." Download our slides today to highlight consumer trends and market behavior accurately.

Template 10 - Investment Thesis Showcasing Key Growth Drivers

Identification of key growth drivers is crucial to a business's performance. These drivers can be internal or external, qualitative or quantitative. Market analysts look for customer behavior patterns, competition, and market trends. Our slide offers an attractive representation of "Key Growth Drivers" and "Positioning." Assess performance and set measurable targets using the data. Further, you can track and set achievable benchmarks that help to achieve profitability and growth. Download our slides today to showcase key growth drivers to potential investors and win them over with accurate statistics!

An investment thesis is a research-backed analysis that helps to understand the reasons for choosing an investment strategy. It offers several factors to identify potential business opportunities. Further, it aids in the decision-making process and provides a framework for monitoring and assessment. Our templates are ideal for analyzing critical parameters to evaluate investment and understand market dynamics. It also assists in highlighting the emerging trends and opportunities that help make accurate investment decisions. Download our slides today to offer potential investors and stakeholders a well-structured investment thesis that includes in-depth market research and valuation metrics. 

P.S. To know more about Equity Investment, read the  Top 5 Equity Investment Templates blog.

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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.

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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

Our posts may contain links from our affiliate partners. This supports helps support the site as we donate 10% of all profits to sustainability organizations that align with our values. However, this does not influence our opinions or ratings. Please read our Terms and Conditions for more information.

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.

See Related : How to Invest in Community [Step-by-Step Guide]

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.

See Related : How to Do a Stakeholder Impact Analysis?

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.

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Investment Thesis Template

Create your own investment thesis slide with this free template

Prior to becoming a Founder for Curiocity, Hassan worked for Houlihan Lokey as an Investment Banking Analyst focusing on sellside and buyside  M&A , restructurings, financings and strategic advisory engagements across industry groups.

Hassan holds a  BS  from the University of Pennsylvania in Economics.

Currently, Adin is an associate at Berkshire Partners, an $16B middle-market private equity fund. Prior to joining Berkshire Partners, Adin worked for just over three years at The  Boston Consulting Group as  an associate and consultant and previously interned for the Federal Reserve Board and the U.S. Senate.

Adin graduated from Yale University, Magna Cum Claude, with a Bachelor of Arts Degree in Economics.

This template allows you to create your own investment thesis slide detailing your overall strategy.

The template is plug-and-play , and you can enter your own text or numbers. The template also includes other slide pages for other elements of a financial model presentation.

According to the WSO Dictionary ,

"An investment thesis aims to take an abstract idea and turn it into a functional investment strategy. An investment thesis helps investors evaluate investment ideas, ideally guiding them in selecting the best ideas that can help meet their investment objectives."

A screenshot below gives you a sneak peek of the template.

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How to Develop Your Own Investment Thesis: A Critical Step for Aspiring Venture Capitalists

s an aspiring venture capitalist, you hold the key to unlock the untapped potential of startups, propelling them to soaring heights and reshaping industries. But in this electrifying landscape of opportunities, how do you navigate through the ever-changing tides? The answer lies in the essence of venture capital success: developing your own investment thesis.

What exactly is an Investment Thesis?

An investment thesis is your North Star, an illuminating beacon that guides you through the vast ocean of startups, helping you navigate toward the brightest prospects. It's a strategic framework, meticulously crafted to align your investment approach, criteria, and aspirations.

With an investment thesis, you define the types of companies you want to invest in, the industries you're interested in, and the stages of startups you believe have the most potential. It's like setting your preferences and priorities before you begin the journey.

Why is an investment thesis so critical for aspiring venture capitalists? The answer is simple—this well-defined roadmap sets you apart from the crowd and gives you the edge to thrive in this fiercely competitive world. It empowers you to make informed decisions, uncover hidden gems in the startup ecosystem, and unlock the true potential of visionary entrepreneurs.

In this blog post, we will explore the essential steps to create a compelling and potent investment thesis

Getting Started With Your Investment Thesis: Conducting Market Research

At the core of any successful investment thesis lies comprehensive market research. Understanding industry trends, evaluating market opportunities, and assessing the competitive landscape are vital steps to identify lucrative investment prospects. 

Keep a finger on the pulse of the business landscape and stay attuned to shifts and disruptions. Analyze the forces shaping various sectors, from cutting-edge technologies and regulatory changes to changes in consumer behavior. Identifying and understanding these trends will enable you to anticipate the future landscape, positioning you as an astute investor who can spot opportunities before they materialize.

With a keen understanding of industry trends, venture capitalists must evaluate market opportunities with a discerning eye. Look beyond the surface and assess the long-term growth potential of markets and industries. Identify white spaces and areas where innovation is likely to flourish. Be mindful of macroeconomic factors, such as GDP growth, inflation rates, and demographic shifts, as they can profoundly influence market dynamics. A comprehensive evaluation of market opportunities will empower you to focus your investments on ventures that have the potential to become tomorrow's industry leaders.

In the vibrant world of startups, competition is the norm. As such, to excel as a venture capitalist, you must also gain a panoramic view of the competitive landscape. Analyze existing players and their strengths, weaknesses, opportunities, and threats (SWOT analysis). Identify startups that have the potential to disrupt established markets and challenge the status quo. Furthermore, seek out market gaps, where unmet needs and underserved customer segments await innovative solutions. Investing in startups that address these gaps can lead to remarkable returns on investment and foster a positive impact on society.

Market research is not a mere exercise of intuition and speculation; it thrives on data-driven insights. Leverage data analytics, market reports, and industry research to augment your understanding of market trends. Embrace technology and data tools that can provide you with a wealth of information at your fingertips. By making data-driven decisions, you'll foster a more robust investment thesis and bolster your credibility as a venture capitalist.

While conducting market research, it's crucial to remember that the startup ecosystem is dynamic and ever-changing. Be prepared to pivot and adapt your investment thesis in response to new information and shifts in the market. Stay agile and flexible, allowing your investment strategy to evolve as you gain deeper insights. Successful venture capitalists are those who can navigate uncertainty, staying attuned to emerging trends and swiftly adjusting their course to capitalize on unforeseen opportunities.

Defining The Investment Criteria for your Investment Thesis

Once you've gathered market insights, now it’s the fun part - it's time to define your investment criteria. Determine the stages of startups you want to invest in, such as seed, early-stage, or late-stage companies. Consider the industries you're passionate about or have domain expertise in. 

Additionally, establish your preferred investment size and the level of diversification you aim to achieve within your portfolio. Having clear investment criteria will streamline your decision-making process and keep your investments focused on your goals.

Determining the Stages of Startups

Venture capitalists invest in startups at various stages of their lifecycle, each offering distinct opportunities and risks. Deciding which stage aligns best with your expertise and risk appetite is pivotal. Consider if you want to invest in seed-stage companies, which are in their infancy and require significant support, or if you prefer early-stage startups with a product and initial traction. Alternatively, you may focus on later-stage companies that are scaling and need capital to expand rapidly. Your chosen stage will dictate your involvement level and the potential return horizon of your investments.

Geographical Preferences and Target Industries

Venture capital is a global endeavor, and you can choose to invest locally, regionally, or even globally. Geographical preferences may be influenced by factors like your network, knowledge of specific markets, and comfort with regulatory environments. Moreover, identifying the industries you're passionate about or have domain expertise in is crucial. Investing in industries you understand well will allow you to provide strategic value to the startups you support, beyond just financial backing.

Investment Size and Portfolio Diversification

The size of your investments and portfolio diversification strategy are interlinked. Determine the average investment size you are comfortable with, as this will influence the types of startups you can back. Some venture capitalists prefer larger, concentrated bets on a select few startups, while others spread their investments across a broader range of smaller companies to diversify risk. Striking the right balance is key—too few investments can expose you to concentrated risk, while too many might dilute your ability to provide adequate support to each startup.

Alignment with Personal Values and Objectives

As an aspiring venture capitalist, your investment criteria should be in harmony with your personal values and long-term objectives. Consider what impact you want to make through your investments. Are you driven by social impact, environmental sustainability, or a particular mission? Aligning your investment criteria with your values will not only enhance your satisfaction as an investor but may also attract entrepreneurs who share your passion, fostering a mutually rewarding relationship.

Market Fit and Growth Potential

While defining your investment criteria, focus on identifying startups that exhibit strong market fit and immense growth potential. Market fit refers to the startup's ability to address a specific problem or need in the market effectively. Investigate whether the startup's product or service resonates with its target audience and has the potential for widespread adoption. Moreover, evaluate the scalability of the business model, as this will determine the startup's growth trajectory and its potential to become a market leader.

Synergy with Your Expertise and Network

Leverage your expertise and network to your advantage when defining your investment criteria. Aligning with startups that can benefit from your insights and connections will create a symbiotic relationship. As an investor, you can offer more than just financial support; your guidance and connections can be invaluable in helping startups navigate challenges and scale their businesses. Synergy with your expertise and network can significantly enhance your value proposition as a venture capitalist.

Balancing Risk and Return

Investing in startups inherently involves risk, and your investment criteria should reflect your risk appetite and tolerance. Strive for a balance between risk and potential return that aligns with your investment objectives. High-growth startups often carry higher risk, but they can also offer substantial rewards.

On the other hand, more established companies may provide a steadier return, albeit with potentially lower growth potential. Understanding this balance is essential in defining your investment criteria and building a well-rounded portfolio.

Balancing risk and potential returns is a fine art, and your investment thesis should outline how you plan to approach this delicate balance. Furthermore, learn to measure and quantify risk in the startup ecosystem using various risk assessment techniques to make informed investment choices.

Identifying Key Performance Indicators (KPIs) for Your Investment Thesis

Key Performance Indicators are quantifiable metrics that provide critical insights into the performance and achievements of a business. By tracking relevant KPIs, venture capitalists can assess the overall health and direction of a startup, enabling them to support portfolio companies effectively. Moreover, KPIs offer a basis for comparison, allowing you to benchmark a startup's progress against its peers and industry standards.

Tailoring KPIs to Startup Stages and Industries

While KPIs share a common goal of tracking performance, their significance can vary significantly based on the stage and industry of a startup. For example, early-stage companies might prioritize metrics related to customer acquisition, retention, and product-market fit. In contrast, late-stage startups might focus on revenue growth, customer lifetime value, and profitability. Tailoring KPIs to suit the unique needs and challenges of each startup stage and industry is vital for meaningful performance assessment.

Selecting Actionable and Measurable Metrics

When identifying KPIs, seek metrics that are both actionable and measurable. Actionable KPIs provide clear guidance on how to improve performance, helping startups identify areas that need attention and enhancement. Measurable KPIs, on the other hand, are quantifiable, allowing you to track progress and changes over time. The ability to take action based on KPIs and measure their impact ensures a proactive approach to enhancing a startup's performance.

Common KPIs in Venture Capital

While KPIs can be highly specific to individual startups and industries, certain metrics have proven valuable across the venture capital landscape. Some common KPIs include:

Customer Acquisition Cost (CAC): The cost to acquire a new customer, helping evaluate marketing efficiency.

Monthly Recurring Revenue (MRR): Provides insight into the company's predictable revenue stream.

Customer Churn Rate: Measures customer retention and the ability to maintain long-term 

relationships.

Burn Rate: Tracks how quickly a startup is spending its capital, indicating runway and sustainability.

Gross and Net Profit Margins: Assessing revenue generation and cost efficiency.

Customer Lifetime Value (CLV): Estimates the value of a customer over their entire engagement with the startup.

The Power of Data-Driven Decision Making

KPIs are not merely numbers on a dashboard; they fuel data-driven decision-making. By continuously monitoring KPIs, you can identify strengths, weaknesses, and potential roadblocks. Data-driven insights enable you to provide tailored guidance and support to your portfolio companies, helping them navigate challenges and seize growth opportunities.

Building a Well-defined Due Diligence Process

A well-structured due diligence process empowers you to make informed decisions, mitigates risks, and will help you identify the startups that align best with your investment thesis!

Let's delve deeper into the key steps involved in building an effective due diligence process so you can include it on your Investment Thesis:

1. Defining Your Due Diligence Objectives

Start by clarifying your objectives for the due diligence process. What key aspects do you want to evaluate in potential startups? Identify the critical areas of focus, such as market opportunity, team capabilities, competitive landscape, financials, and scalability. Setting clear objectives ensures that you leave no stone unturned while assessing potential investments.

2. Gathering Essential Information

Begin the process by collecting comprehensive data and information about the startup under consideration. Request financial statements, market research, business plans, and any other relevant documentation. Engage in one-on-one discussions with the startup's founders and management team to gain insights into their vision, strategy, and execution plans. Gathering essential information lays the groundwork for a detailed evaluation.

3. Market Analysis

Conduct a thorough market analysis to assess the startup's positioning within its industry. Analyze market trends, potential for growth, competitive landscape, and potential threats. Understanding the market dynamics helps you gauge the startup's competitive advantage and potential for success.

4. Team Evaluation

Evaluate the startup's team to understand their expertise, experience, and alignment with the company's vision. Assess the cohesiveness and complementarity of the team, as a strong and capable team is a significant factor in a startup's success.

5. Financial Due Diligence

Perform rigorous financial due diligence to examine the startup's financial health and viability. Analyze revenue streams, cost structures, cash flow, and projections. Scrutinize financial ratios and indicators to assess the startup's financial sustainability and growth potential.

6. Product and Technology Assessment

Evaluate the startup's product or technology to gauge its uniqueness and potential market fit. Understand the value proposition it offers to customers and how it addresses market needs. Assess the scalability and defensibility of the product or technology to ensure long-term competitiveness.

7. Legal and Regulatory Review

Conduct a legal and regulatory review to identify any potential legal risks or compliance issues. Scrutinize contracts, licenses, intellectual property rights, and any pending legal disputes. Ensuring the startup operates within legal bounds safeguards your investment from unnecessary risks.

8. Customer and Partner Feedback

Gather feedback from customers, partners, and industry experts to gain external perspectives on the startup's product or service. Their insights can validate the startup's market fit, customer satisfaction, and potential for growth.

9. Risk Analysis

Identify and assess potential risks associated with the investment. Consider market risks, operational risks, technological risks, and competitive risks. A thorough risk analysis helps you make informed decisions about risk-reward trade-offs.

10. Decision-Making and Post-Investment Monitoring

Based on the findings from the due diligence process, make data-driven decisions on whether to invest in the startup. If you decide to proceed, establish a monitoring plan to track the startup's progress and performance after the investment. Continuously monitor the startup's performance against the initially defined objectives and pivot if needed.

Refining Your Thesis and Iterating

It’s also important to keep in mind that an investment thesis should not be static; it should evolve with your experiences and the changing market dynamics. Embrace flexibility and adaptability, and be open to learning from both successful and unsuccessful investments. As you gain insights from your portfolio companies and the market, update and refine your investment thesis to enhance its effectiveness continually!

Developing your own investment thesis is a critical step for aspiring venture capitalists. It provides you with a structured approach to identify and seize opportunities in the dynamic startup ecosystem. 

Through comprehensive market research, clear investment criteria, risk assessment, and an adaptable approach, your investment thesis will act as a guiding force throughout your venture capital journey. Embrace the continuous learning process, and don't hesitate to iterate and refine your thesis as you gain experience in the thrilling world of venture capital.

Interested in the full research paper?

You might also like, the anatomy of a venture capital firm: understanding structure and operations, unlocking opportunities: venture capital in the sportstech boom, mastering startup valuations: a comprehensive guide, venture capital mythbusters: dispelling 15 common misconceptions, the skills you need to be successful as an early-stage, late-stage, and growth equity investor, decoding pre-seed and seed funding: a comprehensive guide for entrepreneurs, about goingvc.

GoingVC is built around the idea of making venture capital education, investing, networks, and talent more accessible to those with the desire to succeed.

How to Write an Investment Thesis in Private Equity

Get looped in.

Recent years have posed significant challenges for M&A activity, with private equity deal volume experiencing a stark 46% decline compared to the previous year in 2022. Similarly, venture capital deals globally saw a notable 42% decrease in the first 11 months. Moreover, the mounting dry powder, surpassing $1 trillion USD in the US alone, underscores the urgency for firms to adapt their business strategies to thrive in 2023 and beyond.

Amidst this landscape, transitioning to a direct sourcing model alongside intermediary deals is imperative. However, economic uncertainties compel firms to further refine their outbound strategies to capitalize on opportunities efficiently. Dealmakers face the crucial task of optimizing their time and focusing on strategic investments that align with their objectives. Crafting a compelling investment thesis becomes paramount, guiding direct deal sourcing efforts and enabling firms to differentiate themselves in a competitive market.

Read on to discover how a meticulously crafted investment thesis can drive success in direct deal sourcing strategies.

What Is an Investment Thesis in Private Equity?

An investment thesis is, quite literally, a thesis statement. It's succinct, yet comprehensive enough to serve as your firm's guiding principle to both source and secure ideal investments. 

Imagine you're back in school and writing a term paper. Remember how a thesis was treated as a single defining statement that guided the development of your entire paper? The same is true of an investment thesis for your private equity firm. Unlike your term paper, however, firms often have more than one thesis because they often focus on multiple types of deals at once. 

Dealmakers' theses can also be broken down into two specific types: top-down and bottom-up. A top-down investment thesis is something that helps your team understand and seek out ideal investment targets when sourcing.

Top-Down Investment Thesis for Venture Capital Example:

‍ "This $10MM seed fund focuses on US-based cannabis startups that are furthering the industry through technology and infrastructure research and development that can leverage our partners' vast experience in the logistics and supply chain sectors."

Once your firm has identified an ideal company that fits its top-down thesis, it's time to create a bottom-up version. Far more direct and specific in nature, a bottom-up investment thesis includes everything from particular information about the target company including financial statements and forecasting, future business plans, funding strategy reasoning, industry trends, etc. as well as why your firm is the best choice.

‍ Bottom-Up Investment Thesis for Private Equity Example:

‍ "Smith Partners is seeking to invest a $20MM Series A round in Asclepius, Inc. to aid in their rapid growth and contributions to the advancement of the healthcare industry. Their dedication to modernization combined with SP's vast network of cutting-edge automation manufacturers and forward-thinking healthcare providers make this partnership particularly exciting."

A bottom-up thesis would then continue into specifics about the company, detailing financial and employee records, proprietary knowledge or advantages such as patents, and more about what your firm brings to the transaction. A final bottom-up thesis can take many different forms: e.g., a comprehensive document, presentation, or video.

The key to both a top-down and bottom-up investment thesis is specificity. Every thesis your firm creates should be valid only for your firm . The combination of geographic location, sector or industry, company stage or type, fund size, reasons behind the investment or focus, and your firm's specific differentiators should make each of your theses unique.

Steps for Building an Investment Thesis Framework

Creating an investment thesis framework will help your firm draft theses more quickly and make sure all of the necessary information is included. Answering the following series of questions is a good place to start building a framework for both top-down and bottom-up theses:

• What is the goal of this thesis? This answer takes one of two forms: to find new target investment opportunities or to secure a potential deal. But before you can detail the rest of the thesis, you must know your end goal. ‍
• What are the basic parameters of your ideal deal? Once you have your overall goal, sort out the basics first: overall available capital, company demographics (e.g., location, size, industry), etc. ‍
• What are the influencing internal factors? What is your firm hoping to get from a deal that would fit this thesis? Do you need to bridge a valuation gap in your portfolio, for example? ‍
• What are the influencing external factors? If you've ever gone through a thematic sourcing exercise, this will feel similar. While your thesis should not be nearly as large in scope as a thematic investing strategy, socioeconomic or industry trends can be a driving factor for why your firm is looking at this type of investment and should be called out in your thesis. ‍
• Why your firm? While this is the simplest question, it's not only the most difficult to answer but also the most important. Your differentiator "what only your firm can offer to the industry or target company" and why you are particularly suited to this segment of the market (in a top-down thesis) or specific deal (in a bottom-up thesis) is the key to crafting a successful investment thesis in private equity. ‍
• Why this deal? For a bottom-up thesis, you must detail why this deal should be transacted: - Why this company? Is it the founder that instills confidence? Do they have intellectual property that makes the deal worthwhile? How are their financials impacting this decision? - Why now? - What does the future look like and what are your plans post-transaction? - What is the eventual exit strategy? When would you plan for that to happen? - How does this deal impact your portfolio?

The framework you build from answering these questions can then be refined into a single statement or document that serves as your thesis. But be prepared to make iterations. You must continually refine your theses as you gather more data, learn more about your ideal investment, and the world continues to evolve and change.

Putting Your Investment Thesis to Work

Once your firm establishes a thesis, it's time to leverage it effectively. Remember, a well-crafted thesis serves as a guide for qualifying opportunities and determining their potential value. Integrating your top-down criteria into a robust deal sourcing platform facilitates market mapping, identifies relevant conferences, enables direct sourcing, and offers comprehensive insights into target companies and their competitive landscape.

With over 190,000 sources and millions of data points, Sourcescrub's deal sourcing platform has consistently enhanced research productivity by 42.8% and expanded deal sourcing pipelines by 36%. Let's chat to explore how we can assist you in developing and executing your investment theses in any industry landscape.

Originally posted on “January 10, 2023”

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S T R E E T OF W A L L S

Building an investment thesis.

Now that you understand what characteristics make up attractive long and short ideas, it is time to explain how to formulate an investment thesis. Being able to construct a real and actionable investment idea is in the heart and soul of an analyst’s work in the hedge fund industry. Building a successful thesis begins with (1) rigorous due diligence at the Micro level, (2) aligning that view with the Macro environment, and (3) understanding the overall trade setup.

Good Company Qualities

• High return on capital
• Barriers to entry
• Growing industry
• High margins relative to competition

Good Management

• High insider ownership
• Well respected
• Clean accounting
• Infrequent restating of earnings
• Not overly promotional
• Good allocators of capital

All of these qualities are obvious and won’t differentiate your pitch, but they are qualities you will have to talk about, so make sure you understand them well.

Target Price = Your Earnings Estimate × Multiple

Company Earnings

• Will the company beat earnings expectiations in the next quarter or in the next year?
• If so, what are the catalysts that will cause the Company to beat earnings (e.g., higher revenue, higher margins, lower interest expense, share buybacks, etc.)? Paint the picture of how, when, and why there will be a catalyst that supports your view. Providing an opinion without fully understanding and explaining the relevant value drivers will be a recipe for failure.
• What’s your confidence the company will beat earnings? What’s the probability?
• What’s your margin of safety? What can go wrong?
• Does your pitch rely on multiple expansion? Why? Where is the company trading relative to its historical multiple? Should the multiple trade at a premium or discount given how the company has changed over the years, and where we are now in the business cycle?
• Where is the company trading relative to its peer group? If the entire market has seen multiple expansion, then is it fair that this company should too? In other words, is it expensive or cheap relative to itself historically and/or its peers, and can you explain why this might be wrong?
• What catalyst is going to cause this multiple to start expanding? Again, paint the picture of how, when, and why there will be a catalyst that supports your view.
• What is your confidence in multiple expansion? What’s the probability?

Target Price:

Your target price is the product of a forecasted earnings metric multiplied by the expected multiple. This multiple can be P/E, EV/EBITDA, EV/Sales, FCF/Market Cap, or any other reasonable metric. Some metrics are industry-specific and more valuable for those industries than the aforementioned general ones.

Regardless, if you provide a target price, you need to explain how you arrived at this target, and the stages of your thought process to get there. for example, if you claim that a stock is going to have +50% upside, but feel they won’t beat consensus earnings, then you are calling for +50% multiple expansion, pure and simple.

Although not ideal, stocks in industries with bleak macroeconomic outlooks can still be good investments. It is important to understand what is taking place at the company level, sub-sector level, industry level, and national level. This approach will help you determine whether you are investing in a “good house in a bad neighborhood.”

• How has the stock performed heading into the catalyst, i.e, before you put the trade on? If it has already gone up 10% recently, for instance, it will be much harder to outperform on the catalyst.
• How crowded is the trade? Are a lot of hedge funds already invested in the name? One easy way to determine this is to speak to a sell-side research analyst and ask whether they are getting a lot of calls from other funds regarding the company.
• Is the general public bullish or bearish? If you are researching a short pitch, it is key to check for existing short interest (SI function on Bloomberg). If it is a long, you should review the list of major holders of the stock (HDS function on Bloomberg). If the top holders are several hedge funds, then the stock pitch is likely overcrowded and may not be actionable. One of the biggest mistakes in a hedge fund interview is to pitch a stock that every hedge fund has already heard of and evaluated.

Crowded names can still work, but investors must tread lightly. When the market sells off or there is a change in sentiment, crowded names typically perform the worst. To check this, there is an index on Bloomberg of high hedge fund ownership stocks; you can use it to see whether your idea is on that list to make sure it isn’t already an overcrowded trade idea.

Other technical tools that can help evaluate the setup for a stock include RSI (relative strength index) and moving averages. The RSI is a momentum indicator—below 30 is considered oversold and above 70 is considered overbought.

Ideally, you want a stock that has recently underperformed its peers, is lightly owned by hedge funds, and is heading into a catalyst that you think will have a positive surprise . By contrast, a crowded name that has already outperformed based on the expectation of a positive catalyst will likely get a limited reaction if and when the catalyst does occur. For example, it is very common for companies to beat earnings expectations but not to experience an increase in their stock prices, because the general public or hedge funds are already expecting the earnings surprise. In today’s hyper-competitive market, one needs a truly different variant perception in order to outperform the market.

Other Investing Thoughts

• What constitutes a good investment idea? What does that phrase even mean? The answer is that it means something different to every person–that is what provides opportunities in a market. That is why some investors own a stock and others short it. If everyone agreed on what makes a good investment then everyone would own the same stocks.
• How much should you make per idea? Investors do not even agree on this principle. Developing frameworks for investing will help you follow a set of guidelines that you can refine over the years through experience, and as part of that, you will learn to determine what the expected profit and acceptable risk for a particular investment are.

Value Investing Framework

• Benjamin Graham defined the first basic tenant of value investing as follows: when the price of a security diverges from its intrinsic value (its corresponding cash flows), a value investor should work to exploit that divergence.
• The second basic tenant of value investing is the margin of safety: a security should preferably be purchased at a deep discount to its intrinsic value, to help limit the amount of downside risk the investment has.

Street of Walls Investing Framework

• It is very easy to get ideas from other investment professionals, but it will be very obvious in your pitch whether you have done the analytic work yourself or not.
• This is typically discovered when you are questioned on your assumptions in the model. If you built the model yourself, you can likely defend the assumptions much more intelligently.

Industry Analysis

Market size and growth.

Study the market size and growth of the company’s core industry. Even though you may be studying the beverage industry, the manufacturing companies and distribution companies have very different dynamics. The beverage manufacturers may not be growing much faster than CPI, but the distributors may be going through a massive consolidation period and therefore have earnings that are growing at a much faster pace.

Historical Industry Returns

A security may be cheap and look attractive, but that may be because the returns of the company and the industry are not attractive. For example, the stock Owens Corning (OC) traded at 8x earnings for a long time. This sounds inexpensive, but it was ultimately justified because operating margins were in the single digits. Eventually, however, industry did consolidate and operating margins expanded to 20%. Thereafter, the company’s earnings multiple expanded into the low teens.

Unit Economics

Most bottom-up, fundamental analysis is used to study the unit economics of a company. For example, what does it cost to make and sell one unit of output, and what is the profit on that unit? What are the pricing and volume trends? It is important to understand the value drivers clearly in order to build a detailed operating model for your pitch.

Competitive Positioning

• Do certain companies control industry pricing?
• How sustainable is the company’s competitive advantage?
• Are there high or low switching costs?
• Does branding matter
• Are there regulatory protections, such as tariffs?
• What important considerations are there with respect to the company’s customers and suppliers?

Cyclical / Seasonal

An industry may be in a strong growth period and look very attractive, but it may also be at the peak of a cycle that is possibly about to turn substantially negative. For example, the housing industry looked extremely attractive in the early 2000s, but crashed and was extremely unattractive into the late 2000s and beyond. This is due to both an economic downturn and a systematic overbuilding of homes that collapsed in the middle of the decade. In addition to the economic/business cycle, certain industries have drivers of cyclicality that are very specific. One example of this is the Oil & Gas industry—the price of oil alone can have a huge impact on a Oil & Gas company’s earnings potential.

It is also important to understand the seasonality of the business. Retailers tend to sell more product during the fourth quarter of the year, because of the holiday shopping season. Therefore, it may be wrong to extrapolate a trend in March and April if the majority of the company’s sales take place in the later months.

Investment Considerations

When you start working for a hedge fund you will quickly learn that each fund has their own unique investment style. Some hedge funds simply will not invest in companies that have weak management teams. It does not matter how attractive the opportunity or valuation is—the fund simply won’t invest. This principle often results from an investor getting burned from a bad management decision, such as a bad acquisition, or a focus on short-term earnings at the expense of long-term objectives. After gaining experience analyzing companies, you will eventually develop your own philosophy. Still, bear in mind that other investors may have an opinion on this topic that differs from yours, and you need to consider the philosophies of your teammates when evaluating an investment idea.

In studying management teams, you should look at the management team’s track record and understand both the buy-side and sell-side opinion on the management team. Study the company’s internal philosophy: how do they allocate capital? Is the current management team following what the company has always done? Another key to understanding how a management team will probably act is to study how the members are compensated. Is their compensation tied to revenue or earnings, return on capital, or some other metric? How much stock does the management team currently own? How much risk are they taking? Are they buying or selling stock? How many options do they have outstanding?

Study both relative and absolute valuation. A stock may appear cheap when compared to a stock in another sector, but very expensive against its peers. Thus, different investment situations call for different valuation metrics to be used.

One example of this principle is that it is completely unhelpful to use P/E if the company has no earnings (or negative earnings). You should also study the rate of growth of the earnings metric you chose. A company may look expensive at 30x earnings, but if it is doubling revenue every year and tripling earnings, it may not be so expensive after all. In fact, if you believe that this trend can continue, it may be an excellent long investment idea.

• Is there a difference between your earnings estimates and those of the street?
• If not, is your thesis really interesting, or is it just a “consensus trade”?
• What are the key events that the street will care about? Is it an earnings release, a new product release, or something more unusual?
• Does the street care about what happens next quarter or are they more focused on the potential signing of a big contract that could take place at any time?

Donald Rumsfeld once said there are “Known unknowns and unknown unknowns.” Some risks are riskier than others. How does the company control for this? How do you as the investor assess the downside risk from this?

• What has to happen for the downside case to play out?
• What has to happen in order to lose some benchmark amount, say 20% or more?
• If that event plays out, what will happen to the multiple? Will it go down or actually expand?
• All in all, what is the probability of a downside event and what is the maximum potential loss you might face in such a scenario?

Catalysts are extremely important in identifying when you are going to “get paid.” This is a crucial factor in sizing positions. If a catalyst is expected to take place in the near future, you probably want to have your position fully sized immediately. If not, it may make sense to taper into a position.

Framework for Investing: Large Market Movements

Rising Markets: The typical reaction to a rising stock price is to “chase” the returns. That means when a stock continuously goes up, day after day, the investor feels like he or she is missing an opportunity, and will be inclined to buy the stock. This pile-on mentality causes more investors to become a part of the action. This is a classic, human reaction to a strongly outperforming stock, and it can often lead to poor returns due to an undisciplined approach and the fickle nature of the market.

The same thing can happen when a stock continues to drop in price. Investors tend to panic and sell at exactly the worst time. During the heat of the battle, people tend to get emotional and sell their best stocks out of fear.

• Tell yourself it is normal to react this way when you are losing a lot of money. Fear is normal: both the fear of missing an opportunity and the fear of continuing to lose more money.
• Ask yourself, “Has my investment thesis changed?” If it has, then sell, but if it has not, then ignore your fears and hold the position.
• Have strict target prices in place. This will help you exit a position once your target has been achieved, and thereby avoid the trap of trying to “ride a winner.”

Here is a related excerpt written by Benjamin Graham, from The Intelligent Investor:

• “Imagine that in some private business you own a small share that costs you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects, as you know them. Often, on the other hand, the value he proposes seems to you a little short of silly.
• If you are a prudent investor or a sensible businessman, will you let Mr. Market’s daily communication determine your view of the value of $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.”

Trading Considerations

The liquidity of a single stock is not a reason for a fundamental investor to buy a stock, but it can definitely be a reason for an investor not to buy a stock. The less liquid a stock is, the riskier the position becomes, as it is difficult to exit an illiquid position—especially during turbulent market conditions, when liquidity is often demanded.

In order to determine how liquid a stock is, you need to see how many shares trade on a regular basis. For example, if the average daily volume of a $10 stock is 1 million shares, then the stock trades $10 million per day. If you have a $1 million hedge fund, and you want to take a 10% position, you will need to buy $100,000 worth of stock, or 10,000 shares. If you wanted to buy all of that stock in 1 day you could, as you would only account for 1% of the daily volume ($100,000 in stock to be purchased ÷ $10,000,000 daily volume = 1%). A reasonable rule of thumb is that you do not want to account for more than 10-15% of a stock’s daily trading volume if you do not want to influence its price. So in this example, you could buy up to $1,500,000 worth of stock per day without moving the share price. If you were to buy $2,000,000 of stock in 1 day, or 20% of the daily volume, you would likely cause the stock price to increase (at least temporarily). If your desired position is much larger, then it could take many days to accumulate the desired position – and similarly, it could take a long time to unwind the position when you want to exit. This makes the investment much more risky.

Therefore, a stock may have fantastic management, excellent earnings growth, and an attractive price, but if there is no liquidity you probably simply cannot buy it.

Shareholder Base

You may think that you have found a gem: a rare and precious investment opportunity that no other hedge fund is talking about. Fortunately, that notion is relatively easy to confirm or disprove. To check and see whether other sophisticated investors are involved in the company you’re researching, you can pull up the company’s quarterly holdings report on Bloomberg and see who the largest shareholders are.

For example, suppose that W.R. Grace (GRA) offers an exciting investment opportunity, according to your analysis. However, looking at the holders list, you determine that other hedge funds are well aware of this opportunity, as the top shareholders include large hedge funds such as Lone Pine, York Capital, TPG Axon, and Hound Partners.

It may not be a bad thing that other hedge funds are involved. You will probably be invested in a good company in this case, as large hedge funds rarely get involved in unsound investment ideas. That being said, crowded trades can, again, be very risky. First, if the market is already anticipating good news, it may be that the good news is already baked into the stock price. Second, if bad news comes out, then everyone will likely be forced to run for the exits at the same time. This will lead to adverse price movement that could destroy your holding.

Hedge funds in general tend to be short-term focused, so it could turn into a situation where one investor exits swiftly and triggers a domino-effect panic, crushing other investors in the wake.

Looking at charts can be very deceiving and can create misleading signals. For example, the stock chart below shows a quickly rising stock price, but that does not mean it is expensive. It may be cheap relative to its own history, the rest of the sector, or the market as a whole. The entire stock market might have been going up rapidly, or the sector as a whole might have had a big rally, and relative to the sector the stock underperformed, so it may actually be cheap on a relative basis.

You may also want to compare several valuation metrics simultaneously. For example, a company may look expensive on a Price/Earnings basis but cheap on an EV/EBITDA basis.

In the graph below, you can see that Factset Research Systems (FDS) is trading at 20x P/E. Relative to the market that is high, but relative to its own history, that is a normal trading ratio.

Business Model Questions

It is just as important to understand the industry in which a company operates as it is to understand the company itself. For example, if you are studying a homebuilder, it is important to understand the companies the homebuilders buy supplies from. If the building products companies are raising their prices and the homebuilder cannot raise prices, the builders are going to see their margins compress. Therefore, it is important to scan what is happening with related companies across the industry and sector to get a sense of the overall dynamic affecting the company’s earnings potential.

Homebuilding Industry: Related Participants

• Building Materials – USG, EXP, VMC, SHW
• Home Builders – LEN, DHI, KBH
• Building Products – WHR, MAS
• Furniture – TPX, LZB, ETH
• Extensions – Lawn care – SMG
• Mortgage Originator – BAC, C
• Insurance Provider – PRU, MET

A change by the mortgage originator will likely have an impact on the entire industry. If Bank of America (BAC) tightens its origination standards, then people will buy fewer homes; homebuilders will buy less carpet to go inside the homes; fewer beds will be sold; etc. Therefore, before considering an investment in a homebuilder or related entity, it would behoove you to perform checks to see what else is occurring in related industries and sectors across the value chain.

Business Model Advantages

Barriers to entry.

Companies with barriers to entry have a huge advantage relative to companies that do not. These barriers can occur for a variety of reasons, but some of the most common include economies of scale, substantial investment requirements, technological innovation, favorable government regulation, and networking effects. eBay, for example, is an extremely difficult company to compete against, because the company has established a formidable position as the largest Internet-based auction site available. Both buyers and sellers are unlikely to go to other sites, because both realize that eBay offers more individuals on the other side of the aisle to transact with. This makes it hard for new auction companies to compete with eBay effectively.

Companies in most industries will claim that they have high barriers to entry, but time will often show that a company earning significantly higher than its cost of capital will attract competitors. Put simply, if the company is earning outsized returns on the capital it invests, then it will attract competitor investment seeking to earn comparable returns. This competitive investment will result in increased production and sales competition, and diminished profit-earning potential will surely follow in the future.

Cost Advantages

The low-cost producer can have a huge advantage over its competition. In industries with large legacy assets, such as cement or coal production, the players with the newest assets are typically the lowest cost providers, and that allows for lower pricing often results in greater market share.

Alternatively, there is also a learning curve that can create the reverse effect, wherein the older industry participants have lower costs as the newer players are still “figuring it out.”

Customer Habits

Repeat purchase items, such as paper or office supplies, can create a strong advantage for the producer. The more entrenched companies become within their customer bases, the higher the switching costs for those customers. For example, a large technology roll-out may effectively lock a customer in to the provider’s products, as it costs too much to execute a complete technology overhaul to switch to a different vendor.

Economies of Scale

Companies with large fixed costs need scale in order to make a profit. The larger the fixed costs, the larger the scale needs to be. Incremental margins can be very high once a company crosses a certain threshold and is able to sufficiently leverage its cost base. This can make a company highly attractive and cause a company to trade at a high multiple, once the threshold production level has been achieved. This phenomenon is sometimes referred to as “operating leverage.”

Oligopolies, or Monopolistic Competition

Functioning oligopolies can act similar to monopolies, in terms of locking in outsized profit margins from its business. These situations should not take place for long according to basic economic theory, but they can and quite often do. For example, the roofing industry has greatly consolidated in recent years, so that four players currently control 80% of the roofing shingle manufacturing market. When one of the four manufacturers raises its prices, the other three can easily follow. For the past five years, none of the players has broken from the pack and tried to steal market share from the other three by offering a lower price. As a result, the industry has seen its operating margins grow from 8% to 20% in recent years. Whether this increase in margin is sustainable over the long term remains to be seen.

Expected Return

What is a “good” return for a portfolio? How do you know? What is a good return for an individual investment?

The Academic Approach

Expected Rate of Return = Risk-free return + Beta × (Expected Market Return – Risk-free return)

This is the equation from the Capital Asset Pricing Model (CAPM), which you will learn in school—but try pitching this to a portfolio manager at a hedge fund. He or she will likely tell you to get lost!

Theoretically this makes perfect sense, but most hedge funds don’t use this as a hurdle rate. Most funds target a 20% return—though very few are capable of actually achieving that return consistently.

The Practical Hedge Fund Approach

A more practical approach is to study what percentage of the time you will make money and lose money on your investments. From there, you need to understand how much you make when you are right and how much you lose when you are wrong. Here is an example of this framework:

As you can see:

Average Return per Idea = (% Right × Avg. Return When Right) + (% Wrong × Avg. Loss When Wrong)

% Right is often referred to as your “Hit Rate,” and Average Return When Right is often referred to as your “Slugging Rate.” The magnitude of your wins relative to that of your losses is referred to as your “Win/Loss Ratio.”

The best analysts are right about 60% of the time. Most people think they will be right closer to 75%, but the sad truth is that most investors will not do much better than 50%. You can still make money being right only 50% of the time, but you have to be very disciplined about cutting your losses. That is why maintaining a 2-to-1 Win/Loss ratio is so important.

Here is what is so troubling about the example given above: a fantastic analyst who is right 60% of the time, makes a 30% return when right, and maintains a 2-to-1 Win/Loss ratio, will only earn an average return of 12% per idea. However, as we noted, most hedge funds try to earn 20%, so how can they do this?

One possible solution is to employ leverage, but from an analyst’s perspective, he/she typically does not have control over this. So how can an analyst generate a higher return per idea?

A higher Hit Rate is very difficult to achieve. Also, achieving greater than a 2-to-1 Win/Loss ratio is also not realistic, as it would require tighter stop-loss controls that may result in the premature exit of lucrative investments simply because they took an initial “hit” before panning out.

Therefore the only real area to control is the Slugging Rate. If this is the lever, then the analyst cannot afford to invest in stocks that will only earn 10%, 20%, or even 30%. It is just not a high enough annualized return. At a 40% Slugging Rate, the analyst can get closer to the elusive 20% total return hurdle.

40% thus tends to be a “sweet spot” for many hedge fund analysts, as a minimum hurdle rate of return for putting on a position. If the investment only has a 6-month duration, then the return only needs to be 20%, which is roughly 40% on an annualized basis.

Searching for 40% Returns

What needs to happen in order for a stock price to increase? Either earnings need to expand, or the multiple needs to expand, or a combination of the two. The first step is to look at where the sell-side estimates are for the current year and two years into the future. If AAPL is trading at $611 today and is expected to earn $54 in 2013 and $63 in 2014, it is trading at 11x P/E and 10x P/E in 2013 and 2014. In order for the stock to reach $855, or 40% higher, you might project earnings to be 20% higher than the street in 2013 at ~$65, and for the multiple to expand by 20% to ~13x. Or, you might predict stronger earnings growth and less multiple expansion, or vice versa.

As you can see, it pays to think through different scenarios needed to achieve your target return.

A common mistake analysts make is to say that they believe a stock will appreciate by an amount but have earnings expectations that equal or are very similar to those of sell-side earnings estimates. That means that for the investment thesis to prove correct, the stock must increase entirely due to multiple expansion. That is generally viewed as a “low-quality” thesis, as expansion in a valuation multiple is more difficult to predict and gain confidence in than is growth in earnings.

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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Example of Investment Thesis: AstraZeneca

The recent acquisition of Alexion Pharmaceuticals provides an opportunity to affirm our AstraZeneca investment expectations. Developing a set of differentiated fundamental expectations that are codified in an investment thesis for each company is an important component of the Crawford Investment Counsel investing process. AstraZeneca remains one of our preferred stocks in the BioPharma sector and Healthcare industry, primarily because the company’s management team gives us confidence that our expectations will materialize and result in superior shareholder returns. Specifically, our expectation is that over a three-year timeline, AstraZeneca should have the highest revenue and operating profit growth in large-cap BioPharma, reaping the rewards from overinvesting in research and development for at least the last six years. With no more significant product losses and a slightly improving valuation gap, our annual total shareholder return of 12.5%-15.5% over the next three years is one of the highest expected in the BioPharma industry.

AstraZeneca is a long-held position in several Crawford Investment Counsel portfolios, with the initial purchase in early 2016 for higher income-oriented strategies. Our initial thesis was simple: AstraZeneca’s significant dividend (>4.0%) could be sustained through an upcoming difficult operating period. From 2015 through 2017, AstraZeneca was losing significant revenues from patent expirations on several large products, most notably Crestor, Nexium, and Seroquel. The market had negative sentiment towards this, but the shift in thought that led to our initial investment was a capable management team combined with promising clinical results and early launch feedback from a new trio of oncology products.

Investing is largely a fluid process and not an on-and-off switch. As our familiarity with AstraZeneca increased, we felt the company’s pipeline would be significantly larger than Consensus and even our initial expectation. From there, our next step was determining if AstraZeneca would be a fit for other portfolios such as those seeking a more balanced combination of growth and income. For this we needed to shift our perception from a company that simply provided a sustainable above-average dividend to a company that could produce consistently higher returns and growth. The answer was discovered in the mindset of AstraZeneca’s management.

In a series of meetings in 2016 and 2017 with AstraZeneca, it was very difficult to get a satisfactory answer regarding the dividend. Initially, this was perceived to be a risk. At Crawford Investment Counsel, we use steadily growing dividends as an initial proxy to help identify what we believe to be higher-quality companies. It was clear AstraZeneca could afford its current dividend. It was also clear that AstraZeneca was going through a transformation that could significantly accelerate cash flow, but management was adamant it would not be increasing the dividend.

This is where flexibility in thought took precedence over strict investment rules. With AstraZeneca, we recognized that management was resolved to grow the franchise. With each quarter, research and development spending was trending up faster than we expected, a “problem” because it appeared the company was missing our internal forecast. With each quarter, sales and marketing costs were trending higher which was also a “problem” as the company was falling behind our projections. But through this early phase of ownership, patience and a number of outside performance metrics showed the potential for a better company than our early numbers suggested. We came to realize AstraZeneca’s management was not managing the business for each quarter or even the current year. We had discovered a management team focused on providing the best long-term return to investors, not massaging quarterly results or managing for the short term.

Management was not satisfied with just a handful of oncology drugs and expanded its plan rapidly. The result is that today AstraZeneca has ten recently launched products across the oncology, respiratory, endocrinology, and cardiovascular therapeutic areas. AstraZeneca has forged forward in China at a faster pace than any other outside pharmaceutical company, capturing the growth in the Chinese market as it becomes more developed. But the hallmark and sometimes controversy with AstraZeneca amongst investors remains its bold and aggressive use of capital in business development.

When we think of AstraZeneca’s business development, the company has pursued three types of transactions. First, AstraZeneca cannot be all things and thus has divested older, slower growth products that do not fit its therapeutic focus. Second, AstraZeneca has been prescient in partnering to bolster its focus franchises. A good example is a partnership with Merck to market Lynparza, an oncology drug that was not initially praised. However, Merck’s ability to significantly increase revenues for Lynparza including further clinical development has proven this to be a mutually beneficial partnership. Lastly, AstraZeneca has aggressively brought in new assets to develop. These range from the underappreciated Lokelma (for high potassium levels) to the very flashy Enhertu (a next-generation drug antibody conjugate), and others which contribute to the platform expanding.

And this brings us full circle to the recent Alexion acquisition. The majority of analysts and investors see Alexion and worry about its lead therapy, Soliris. Soliris treats a rare red blood cell disease, and despite losing patent protection in two or three years, AstraZeneca sees opportunity. Part of this opportunity includes extending the franchise’s life cycle with Ultomiris. We tend to agree and like the risk/reward of this endeavor.

Our view is that it will take hard work and time, but our investment thesis remains firmly intact. We think in three years’ time, investors will no longer be worried about Soliris because Ultomiris will have replaced it. In three years’ time, it is possible that Ultomiris will have additional indications and be larger than current projections. Within three years’ time, AstraZeneca has likely expanded Alexion’s base products globally, especially in China. It is not a stretch that in three years’ time AstraZeneca’s third-generation complement inhibitors will be closer to clinical reality. And we believe that is how AstraZeneca will  create a new diseasevertical center of excellence and sustainable growth. They identified something that most pharmaceutical competitors have discarded because of a flaw and then proved that the flaw was only a minor part of the longer-term success. Because in three years’ time, we feel AstraZeneca will be strengthened by the contribution from the Alexion transaction as it begins to see competition against some of its current therapies.

The other necessary components of the Crawford Investment Counsel equity research process are quality and attractive valuations.

Why do we view AstraZeneca as QUALITY? AstraZeneca’s pharmaceutical roots go back to 1913, and the company has paid a consistent dividend since the merger of Astra and Zeneca Group in 1999. AstraZeneca is committed to basic research, having launched ten new products in the last five years in areas such as oncology, respiratory, and cardiovascular. Earnings consistency, balance sheet strength, and profitability all indicate a very high-quality business. This is non-negotiable in the Crawford Investment Counsel process.

How do we view AstraZeneca’s VALUATION? Because of AstraZeneca’s higher growth rate and improving financial profile, the company trades at a deserved premium to other BioPharma companies and the Healthcare sector. In our view, this company is an example where paying a modest premium is worth the risk. Our expectation is for faster growth that should be more sustainable and lead to higher returns.

Why is AstraZeneca in the portfolio? On the most basic level, AstraZeneca has the highest revenue and operating profit growth of any of the large-cap BioPharma companies due to a very strong recent product launch schedule and a lack of products losing patents over the next five years. More importantly, we view AstraZeneca as a biotechnology company, not a pharmaceutical company, with the difference being an aggressive management team that is willing to invest significantly in research and development and actively deploy capital to sustain growth. We continually evaluate the AstraZeneca investment on the bases of current valuation, quality, and the investment thesis.

Disclosures:

Crawford Investment Counsel Inc.(“Crawford”) is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Crawford including our investment strategies and objectives can be found in our ADV Part 2, which is available upon request. Past performance is not indicative of future results. All investments carry a certain degree of risk of loss, and there is no assurance that an investment will provide positive performance over any period of time. This material is distributed for informational purposes only. The statements contained herein reflect opinions, estimates and projections of Crawford as of the date hereof, and are subject to change without notice. Forecasts, estimates, and certain information contained in this commentary are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Any projections herein are provided by Crawford as an indicator of the direction Crawford’s professional staff believes the markets will move, but Crawford makes no representation such projections will come to pass. Crawford makes every effort to ensure the contents have been compiled or derived from sources believed reliable, and contain information and opinions that are accurate and complete; however, Crawford makes no representation or warranty, express or implied, in respect thereof; takes no responsibility for any errors that may be contained herein or omissions; and accepts no liability whatsoever for any loss arising from any use of or reliance on this report or its contents. Crawford reserves the right to modify its current investment strategies and techniques based on changing market dynamics or individual portfolio needs. CRA-21-009

The opinions expressed herein are those of Crawford Investment Counsel and are subject to change without notice. This material is not financial advice or an offer to sell any product. Forward-looking statements cannot be guaranteed. This document may contain certain information that constitutes “forward-looking statements” which can be identified by the use of forward-looking terminology such as “may,” “expect,” “will,” “hope,” “forecast,” “intend,” “target,” “believe,” and/or comparable terminology. No assurance, representation, or warranty is made by any person that any of Crawford’s assumptions, expectations, objectives, and/or goals will be achieved. Nothing contained in this document may be relied upon as a guarantee, promise, assurance, or representation as to the future. Crawford Investment Counsel is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training.

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A Guide for Impact Investment Fund Managers

A step-by-step resource to creating and managing a private equity impact fund

Creating a Strong Investment and Impact Thesis

The number of investment funds increases every year according to the GIIN’s Annual Impact Investor Survey , making it all the more important for a fund to differentiate itself through a compelling investment and impact thesis . A clearly articulated thesis is coherent and evidence-based, stands out among competitors in the market, and can be distilled to a concise and persuasive pitch.

A well-crafted, coherent investment and impact thesis integrates all the pieces of a complex investment strategy into a single narrative that is thoughtful, thorough, and supported by data and other evidence. Impact investment funds have more complex stories to tell than traditional funds, which makes it especially challenging to develop a coherent fund narrative. From the outset, fund managers should have a clear sense of their fund’s intended impact in the context of their investment strategy and managers should be prepared to share it externally.

In crafting a clear fund thesis, fund managers might ask themselves: What existing need in the market does my investment thesis address? What is the evidence that the need exists, and what is the extent of the need? What is the theory of change ? What underlying assumptions does the thesis imply? Do my proposed sector of investment, deal size, and deal type fit existing market needs? Do the expected returns and exit strategies seem realistic and appropriate given the market, investee potential, and investor expectations?

Demonstrating how a fund fits into the competitive market landscape is an important part of a coherent story. Fund managers might ask themselves: Would the fund be unique in the marketplace? How is it unique? What would make the fund compelling to investors? How does the fund’s impact strategy compare to others in the market? Answers to these questions influence key fund management practices, such as which types of LPs to target or investee businesses to approach given their capital requirements. For example, a venture capital fund that focuses on early-stage companies in the concept phase expects high risk and high return. The fund management team must also be assembled carefully, as team members’ individual experiences in a given sector or industry and their local relationships can make or break a fund’s success.

ADDITIONAL RESOURCES:

A public good managed by the GIIN, IRIS+ is the generally accepted system for measuring, managing, and optimizing impact. The system, used by thousands of investors around the world, provides a pathway to translate impact intentions into real impact results. With IRIS+ investors can:

• Frame their goals in a common way, following generally accepted investment themes (such as Financial Inclusion or Clean Energy Access), the UN Sustainable Development Goals (SDGs), or both;
• Review existing research and evidence base to inform their impact thesis and theory of change.
• Identify key indicators to track in order to assess progress towards their goals in a way that produces clear, consistent, and comparable data (IRIS+ Core Metrics Sets and IRIS Catalog of Metrics); and access best-in-class resources and practical “how-to” guidance to improve their impact measurement and management practice.
• Emerging Managers: How to Analyze a First-Time Fund, Probitas Partners
• Being the Early Bird: Re-Focusing Emerging Manager Programs on Debut Funds and First Closes, Morgan Creek Capital Management, LLC
• Preqin Special Report: Making the Case for First-Time Funds , Preqin
• Introducing the Impact Investing Benchmark , The GIIN
• Great Expectations , Wharton Social Impact Initiative (WSII)
• Impact Investing Finds Its Place in India , McKinsey & Company
• 2017 Symbiotics MIV Survey , Symbiotics
• Benchmarking Impact: Australian Impact Investment Activity and Performance Report , Impact Investing Australia
• The Social Investment Market through a Data Lens, EngagedX
• A Tale of Two Funds , Boston Consulting Group (BCG)
• Christian Super 2023 Annual Report
• Microfinance Equity Exits: Data on Company and Fund Level Returns , Grassroots Capital Management
• Gray Ghost Microfinance Fund: Building the Bridge to Impact Investors , Gray Ghost Fund
• Evolution of an Impact Portfolio: From Implementation to Results , KL Felicitas Foundation
• Triodos Renewables Europe Fund: A Sub-Fund of Triodos SICAV II , Triodos Renewables Europe Fund
• 2017 Annual Impact Investor Survey
• The Landscape for Impact Investing in Southern Africa
• The Landscape for Impact Investing in East Africa
• The Landscape for Impact Investing in West Africa
• The Landscape for Impact Investing in South Asia

In addition, The Aspen Network of Development Entrepreneurs (ANDE) , together with the Latin American Private Equity & Venture Capital Association (LAVCA) and LGT Impact Ventures , published a report about the growing landscape of impact investing in Latin America .

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The Global Impact Investing Network is the global champion of impact investing, dedicated to increasing its scale and effectiveness around the world. Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.

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What’s in an Equity Research Report?

If you're new here, please click here to get my FREE 57-page investment banking recruiting guide - plus, get weekly updates so that you can break into investment banking . Thanks for visiting!

Even though you can easily find real equity research reports via the magical tool known as “Google,” we’ve continued to get questions on this topic.

Whenever I see the same question over and over again, you know what I do: I bash my head in repeatedly and contemplate jumping off a building…

…and then I write an article to answer the question.

To understand an equity research report, you must understand what goes into a  stock pitch first.

The idea is similar, but an ER report is a “watered-down” version of a stock pitch.

But banks have some very solid reasons for publishing equity research reports:

Why Do Equity Research Reports Matter?

You might remember from previous articles that equity research teams do not spend that much time writing these reports .

Most of their time is spent speaking with management teams and institutional investors and sharing their views on sectors and companies.

However, equity research reports are still important because:

• You do still spend some time doing the required modeling work (~15%) and writing the reports (~20%).
• You might have to write a research report as part of the interview process.

For example, if you apply to an equity research role or an equity research internship , especially in an off-cycle process, you might be asked to draft a short report on a company.

And then in roles outside of ER, you need to know how to interpret reports quickly and extract the key information.

Equity Research Reports: Myth vs. Reality

If you want to understand equity research reports, you have to understand first why banks publish them: to earn higher commissions from trading activity.

A bank wants to encourage institutional investors to buy more shares of the companies it covers.

Doing so generates more trading volume and higher commissions for the bank.

This is why you rarely, if ever, see “Sell” ratings, and why “Hold” ratings are far less common than “Buy” ratings.

Different Types of Equity Research Reports

One last point before getting into the tutorial: There are many different types of research reports.

“Initiating Coverage” reports tend to be long – 50-100 pages or more – and have tons of industry research and data.

“Sector Reports” on entire industries are also very long. And there are other types, which you can read about here .

In this tutorial, we’re focusing on the “Company Update” or “Company Note”-type reports, which are the most common ones.

The Full Tutorial, Video, and Sample Equity Research Reports

For our full walk-through of equity research reports, please see the video below:

Table of Contents:

• 1:43: Part 1: Stock Pitches vs. Equity Research Reports
• 6:00: Part 2: The 4 Main Differences in Research Reports
• 12:46: Part 3: Sample Reports and the Typical Sections
• 20:53: Recap and Summary

You can get the reports and documents referenced in the video here:

• Equity Research Report – Jazz Pharmaceuticals [JAZZ] – OUTPERFORM [BUY] Recommendation [PDF]
• Equity Research Report – Shawbrook [SHAW] – NEUTRAL [HOLD] Recommendation [PDF]
• Equity Research Reports vs. Stock Pitches – Slides [PDF]

If you want the text version instead, keep reading:

Watered-Down Stock Pitches

You should think of equity research reports as “watered-down stock pitches.”

If you’ve forgotten, a hedge fund or asset management stock pitch ( sample stock pitch here ) has the following components:

• Part 1: Recommendation
• Part 2: Company Background
• Part 3: Investment Thesis
• Part 4: Catalysts
• Part 5: Valuation
• Part 6: Investment Risks and How to Mitigate Them
• Part 7: The Worst-Case Scenario and How to Avoid It

In a stock pitch, you’ll spend most of your time and energy on the Catalysts, Valuation, and Investment Risks because you want to express a VERY different view of the company .

For example, the company’s stock price is $100, but you believe it’s worth only $50 because it’s about to report earnings 80% lower than expectations.

Therefore, you recommend shorting the stock. You also recommend purchasing call options at an exercise price of $125 to limit your losses to 25% if the stock moves in the opposite direction.

In an equity research report, you’ll still express a view of the company that’s different from the consensus, but your view won’t be dramatically different.

You’ll spend more time on the Company Background and Valuation sections, and far less time and space on the Catalysts and Risk Factors. And you won’t even write a Worst-Case Scenario section.

If a company seems overvalued by 50%, a research analyst would probably write a “Hold” recommendation, say that there’s “uncertainty around several customers,” and claim that the company’s current market value is appropriate.

Oh, and by the way, one risk factor is that the company might report lower-than-expected earnings.

The Four Main Differences in Equity Research Reports

The main differences are as follows:

1) There’s More Emphasis on Recent Results and Announcements

For example, how does a recent product announcement, clinical trial result, or earnings report impact the company?

You’ll almost always see recent news and updates on the first page of a research report:

These factors may play a role in hedge fund stock pitches as well, but more so in short recommendations since timing is more important there.

2) Far-Outside-the-Mainstream Views Are Less Common

One comical example of this trend is how all 15 equity research analysts covering Enron rated it a “buy” right before it collapsed :

Sell-side analysts are far less likely to point out that the emperor has no clothes than buy-side analysts.

3) Research Reports Give “Target Prices” Rather Than Target Price Ranges

For example, the company is trading at $50.00 right now, but we expect its price to increase to exactly $75.00 in the next twelve months.

This idea is completely ridiculous because valuation is always about the range of possible outcomes, not a specific outcome.

Despite horrendously low accuracy , this practice continues.

To be fair, many analysts do give target prices in different cases, which is an improvement:

4) The Investment Thesis, Catalysts, and Risk Factors Are “Looser”

These sections tend to be “afterthoughts” in most reports.

For example, the bank might give a few reasons why it expects the company’s share price to rise: the company will capture more market share than expected, it will be able to increase its product prices more rapidly than expected, and a competitor is about to go bankrupt.

However, the sell-side analyst will not tie these factors to specific share-price impacts as a buy-side analyst would.

Similarly, the report might mention catalysts and investment risks, but there won’t be a link to a specific valuation impact from each factor.

So the typical stock pitch logic (“We think there’s a 50% chance of gaining 80% and a 50% chance of losing 20%”) won’t be spelled out explicitly:

Your Sample Equity Research Reports

To illustrate these concepts, I’m sharing two equity research reports from our financial modeling courses :

The first one is from the valuation case study in our Advanced Financial Modeling course , and the second one is from the main case study in our Bank Modeling course .

These are comprehensive examples, backed by industry data and outside research, but if you want a shorter/simpler example you can recreate in a few hours, the Core Financial Modeling course has just that.

In each case, we started by creating traditional HF/AM stock pitches and valuations and then made our views weaker in the research reports.

The Typical Sections of an Equity Research Report

So let’s briefly go through the main sections of these reports, using the two examples above:

Page 1: Update, Rating, Price Target, and Recent Results

The first page of an “Update” report states the bank’s recommendation (Buy, Hold, or Sell, sometimes with slightly different terminology), and gives recent updates on the company.

For example, in both these reports we reference recent earnings results from the companies and expectations for the next fiscal year:

We also give a “target price,” explain where it comes from, and give our estimates for the company’s key financial metrics.

We mention catalysts in both reports, but we don’t link anything to a specific valuation impact.

One problem with providing a specific “target price” is that it must be based on specific multiples and specific assumptions in a DCF or DDM.

So with Jazz, we explain that the $170.00 target is based on 20.7x and 15.3x EV/EBITDA multiples for the comps, and a discount rate of 8.07% and Terminal FCF growth rate of 0.3% in the DCF.

Next: Operations and Financial Summary

Next, you’ll see a section with lots of graphs and charts detailing the company’s financial performance, market share, and important metrics and ratios.

For a pharmaceutical company like Jazz, you might see revenue by product, pricing and # of patients per product per year, and EBITDA margins.

For a commercial bank like Shawbrook, you might see loan growth, interest rates, interest income and net income, and regulatory capital figures such as the Common Equity Tier 1 (CET 1) and Tangible Common Equity (TCE) ratios:

This section of the report explains how the analyst or equity research associate forecast the company’s performance and came up with the numbers used in the valuation.

The valuation section is the one that’s most similar in a research report and a stock pitch.

In both fields, you explain how you arrived at the company’s implied value, which usually involves pasting in a DCF or DDM analysis and comparable companies and transactions.

The methodologies are the same, but the assumptions might differ substantially.

In research, you’re also more likely to point to specific multiples, such as the 75 th percentile EV/EBITDA multiple, and explain why they are the most meaningful ones.

For example, you might argue that since the company’s growth rates and margins exceed the medians of the set, it deserves to be valued at the 75 th percentile multiples rather than the median multiples:

Investment Thesis, Catalysts, and Risks

This section is short, and it is more of an afterthought than anything else.

We do give reasons for why these companies might be mis-priced, but the reasoning isn’t that detailed.

For example, in the Shawbrook report we state that the U.K. mortgage market might slow down and that regulatory changes might reduce the market size and the company’s market share:

Those are legitimate catalysts, but the report doesn’t explain their share-price impact in the same way that a stock pitch would.

Finally, banks present Investment Risks mostly so they can say, “Well, we warned you there were risks and that our recommendation might be wrong.”

By contrast, buy-side analysts present Investment Risks so they can say, “There is a legitimate chance we could lose 50% – let’s hedge against that risk with options or other investments so that our fund does not collapse .”

How These Reports Both Differ from the Corresponding Stock Pitches

The Jazz equity research report corresponds to a “Long” pitch that’s much stronger:

• We estimate its intrinsic value as $180 – $220 / share , up from $170 in the report.
• We estimate the per-share impact of each catalyst: price increases add 15% to the share price, more patients from marketing efforts add 10%, and later-than-expected generics competition adds 15%.
• We also estimate the per-share impact from the risk factors and conclude that in the worst case , the company’s share price might decline from $130 to $75-$80. But in all likelihood, even if we’re wrong, the company is simply valued appropriately at $130.
• And then we explain how to hedge against these risks with put options.

The same differences apply to the Shawbrook research report vs. the stock pitch, but the stock pitch there is a “Short” recommendation where we claim that the company is overvalued by 30-50%.

And that sums up the differences perfectly: A Short recommendation with 30-50% downside in a stock pitch turns into a “Hold” recommendation with roughly equal upside and downside in a sell-side research report.

I’ve been harsh on equity research here, but I don’t want to disparage it too much.

There are many positives: You do get more creativity than in IB, it might be better for hedge fund or asset management exits, and it’s more fun to follow companies than to grind through grunt work on deals.

But no matter how you slice it, most equity research reports are watered-down stock pitches.

So, make sure you understand the “strong stuff” first before you downgrade – even if your long-term goal is equity research.

You might be interested in:

• The Equity Research Analyst Career Path: The Best Escape from a Ph.D. Program, or a Pathway into the Abyss?
• Private Equity Regulation : 2023 Changes and Impact on Finance Careers
• Stock Pitch Guide: How to Pitch a Stock in Interviews and Win Offers

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street . In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.

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15 thoughts on “ What’s in an Equity Research Report? ”

Hi Brian, what softwares are available to publish Research Reports?

We use Word templates. Some large banks have specialized/custom programs, but not sure how common they are.

Is it possible if you can send me a template in word of an equity report? It will help the graduate stock management fund a lot at Umass Boston.

We only have PDF versions for these, but Word should be able to open any PDF reasonably well.

Do you also provide a pre constructed version of an ER in word?

We have editable examples of equity research reports in Word, but we generally only share PDF versions on this site.

Hey Brian Can you please help me with coverage initiated reports on oil companies. I could not find them on the net. I need to them to get equity research experience, after which only I will be able to get into the field. I searched but reports could not be found even for a price. Thanks

We have an example of an oil & gas stock pitch on this site… do a search…

https://mergersandinquisitions.com/oil-gas-stock-pitch/

Beyond that, sorry, we cannot look for reports and then share them with you or we’d be inundated with requests to do that every day.

No worries. Thanks!

Hi! Brian! Do u know how investment bankers design and layout an equity research? the software they use. like MS Word, Adobe Indesign or something…? And how to create and layout one? Thanks

where can I get free equity research report? I am a Chinese student and now study in Australia. Is the Morning Star a good resource for research report?

Get a TD Ameritrade to access free reports there for certain companies.

How do you view the ER industry since the trading commission has been down 50% since 2007. And there are new in coming regulation governing the ER reports have to explicitly priced and funds need to pay for the report explicity rather than as a service comes free with brokerage?

In addition the whole S&T environment is becoming highly automated.

People have been predicting the death of equity research for over a decade, but it’s still here. It may not be around in 100 years, but it will still be around in another 10 years, though it will be smaller and less relevant.

Yes, things are becoming more automated, but the actual job of an equity research analyst or associate hasn’t changed dramatically. A machine can’t speak with investors to assess their sentiment on a company – only humans can do that.

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How To Build A Real Estate Investment Thesis

“If you had $100 million to invest in real estate, where would you invest it?”

If you’re sitting across the table from a hiring manager in an interview for a real estate firm, this is one of the most intimidating open-ended questions that you can be asked.

There are so many things to think about, and with so many product types and markets to consider, how do you answer this question?

Fortunately, you don’t have to know everything about every market in order to respond in a way that makes you look good on interview day, or helps you make better investment decisions if you’re doing deals on your own.

And in this article, we’ll break down three of the biggest things to consider when building a real estate investment thesis, and how to build a framework for where you want to invest, and what you want to invest in. You can also watch the video version right here :

So let’s get back to the original question:

If you had $100 million to invest in real estate, where would you invest it?

Your answer to this question can depend on a lot of different factors, but in order to develop a well thought-out investment thesis, you really only need to break this down into three main parts.

Decide On Your Target Geographic Market(s)

The first thing that you need to decide on when building an investment thesis is the market (or markets) that you’ll be targeting.

Real estate values are very closely correlated with their location, and how attractive a location is from a real estate investment perspective essentially boils down to two things:

• Where demand is currently outpacing supply, and
• Where demand is projected to outpace supply in the future.

Demand drivers in a real estate market can be summed up as the things that make residents and businesses want to move to a given area .

The biggest ones here usually include things like job growth, tax friendliness, lower cost of living, and better weather, all of which lead to the biggest indicator of demand in a market, net migration patterns .

Net Migration Patterns and Real Estate Investing

Net migration numbers measure the amount of people moving into an area vs. the amount of people moving out of an area, essentially showing the growth or contraction of a market.

Markets with positive net migration numbers indicate more people are moving to the area, while negative net migration numbers indicate more people are moving from the area.

And this directly impacts the demand of essentially all product types in a market.

Analyze Current (and Future) Real Estate Supply

Even if demand goes up in a market, we still need supply growth to be less than the demand in a market in order for rents and property values to ultimately increase.

So with that, the second part of choosing a market is the process of analyzing the current and future supply in a market itself.

This is primarily determined by the current development pipeline, and current governmental restrictions on new development and renovation of existing structures (AKA “Red Tape”).

To find this information, the research groups at major CRE brokerage firms will generally publish Quarterly or Annual Market Reports, which will usually provide some sort of an overview of projects either planned or under construction in a market.

And if you’re looking for more in-depth information, comprehensive paid databases like CoStar will have detailed data in most markets on what supply is going to look like over the next 1 to 3 years in a number of commercial square feet, or total number of multifamily units.

“Supply-Constrained” Real Estate Markets

As far as what might be planned in the future outside of the information you can gather, information on building restrictions in a market, and also availability of land, will help you make projections about what supply is going to look like in the next decade or two and whether a market is “supply-constrained” or not.

Coastal cities like San Francisco, Los Angeles, and New York have traditionally been very highly regulated markets, creating supply constraints and upward pressure on rents and values as a result.

At the same time, non-coastal markets like Dallas, Phoenix, and Las Vegas have historically been less regulated and have a much higher probability of being overbuilt at the end of a real estate cycle, leading to supply outpacing demand and prices weakening as a result.

The bottom line is that a strong investment thesis generally involves investments in markets where demand is increasing and supply is growing either more slowly or staying static, and things like positive net migration and supply constraints in the market will make that a much more likely scenario.

Choose Your Real Estate Product Type

Once you’ve decided on your target markets, the next step in building an investment thesis is to choose the product type you want to invest in.

Choosing a product type is going to depend primarily on your research, but also your beliefs around what the future looks like for the way people live, work, shop, and play.

Right now, some investors are making big bets on remote work becoming more permanent and widespread, while others are taking a more aggressive approach and assuming office needs will come roaring back stronger than ever.

Some investors are investing heavily in necessity-based retail after seeing some really strong performance in 2020 when the rest of the sector has been down.

Other investors won’t touch the retail space because they’re predicting even greater Amazon and e-commerce disruption in necessity-based retail purchase behaviors in grocery stores and pharmacies.

Some investors are doubling down on multifamily, assuming that affordability will continue to decrease and the amount of “renters-by-necessity” will increase as a result.

Others are backing off of multifamily rentals due to millennials beginning to get married and moving to the suburbs in larger, single family homes.

At the end of the day, there is no right or wrong answer in any of these scenarios, but whatever you believe, it’s important to back this up with research and fact, and to support where you see an arbitrage opportunity in the market.

For example, if you’re planning to make a big bet on hotels coming back, you should be able to talk through how long it’s taken in the past several recessions for occupancy numbers to get back to healthy levels at hospitality properties, and which markets have recovered first.

And if you think there are repurposing opportunities in distressed assets to convert those into higher and better uses, make sure you can back up the rent and supply statistics in that product type to support that decision.

The bottom line here is that regardless of the stance you take, backing your opinions up with data is a necessary piece of the puzzle when talking through any product type or product types that you’re planning to target.

Come Up With a Research-Backed Real Estate Investing Business Plan

Finally, once you’ve decided on the markets and product types that you’re bullish on, the last step in the process is to come up with your business plan and, again, back that up with data.

If your investment thesis involves doing “value-add” apartment deals in San Diego, are people going to be paying for renovated units during a tough time in the economic cycle?

And if your plan is to renovate units and raise rents, will things like rent control restrictions be an issue in executing on that business plan?

To perform those renovations you’re planning, what are construction costs today, where are they trending, and how will they affect what you’re trying to accomplish?

Again, similar to everything else on this list, the key here is to make sure there are data points to support your decisions, and to make sure that you can point to those data points when talking through business plans that you find attractive in the real estate space today.

Where To Invest – The Bottom Line

Overall, getting clear on the markets you like, the product types you’re interested in, and the business plan you’re looking to implement are the three main steps in building a solid investment thesis for your own investments (or to explain during a CRE interview), and backing that thesis up with data is an extremely important piece of the puzzle.

And to do your research, even if you don’t have access to a comprehensive database like CoStar, free research published by firms like CBRE, JLL, Cushman and Wakefield, Green Street, and even the Bureau of Labor Statistics are all great resources to find information on each of these topics.

What To Do Next

The next time you’re asked what you’d do with $100 million, by going through these steps, you’ll know where you’d plan to put it, and why you’d plan to invest it where you would.

And once you’re dialed in on a market and you’re ready to start modeling out individual deals, if you want help with building out your own real estate pro forma models for valuing commercial properties or to prepare for an Excel interview exam if you’re applying for new jobs, make sure to check out Break Into CRE Academy for instant access to our entire library of courses on real estate financial modeling and investment analysis, access to dozens of pre-built real estate financial models and Excel exercise files, and some additional one-on-one email-based career support to get your questions answered every step of the way.

So thanks so much for reading, and I hope this was helpful in building out your own real estate investment thesis!

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Princeton SPIA Announces Exciting Lineup for 2024 Reunions and Commencement Celebrations

The Princeton School of Public and International Affairs will supplement the University’s 2024 Reunions - and Commencement -related events with a slate of SPIA-specific gatherings and special events of its own over the next week.

“We are thrilled to enhance the University’s 2024 Reunions and Commencement festivities with a series of exclusive gatherings and special events throughout the week. It is a privilege to honor our alumni and graduating students with memorable moments and unique experiences that reflect the spirit and excellence of SPIA.” Princeton SPIA Dean Amaney Jamal

This year’s Princeton Reunions take place from May 23 to 26. As always, the SPIA alumni community will be well represented, partnering with the Association of Princeton Graduate Alumni (APGA) as the largest participating graduate department.

New for Reunions this year is the Orange and Black Oasis – alcohol-free gatherings featuring jazz, craft zero-proof drinks, mocktails, and cookies. They will be held in the Murray-Dodge Café on Friday, May 24, from 8 p.m. to midnight and on Saturday, May 25, from 4 to 6 p.m. and from 8 p.m. to midnight . Princeton SPIA is co-sponsoring along with the Office of Religious Life, Students Recover, and the Princeton Alumni Association.

SPIA-specific events include:

• The Program in Law and Public Policy reception, Friday, May 24, 1:30 – 3:30 p.m., Bernstein Gallery, Robertson Hall. P*LAW invites alumni and guests — lawyers and law-curious alike — for champagne and dessert. As part of SPIA, the program follows in the tradition of Princeton’s great law and public affairs programs engaging leading legal scholars and practitioners in the work of solving the complex policy problems of the 21st century.
• Keeping the Lights On: Global Energy and Macroeconomic Policy, Friday, May 24, 2 – 3 p.m., Bowl A71, Louis A. Simpson International Building. An alumni panel will discuss the current state of global commodity markets, the energy transition, and energy policy going forward in the face of macroeconomic challenges. Speakers include Helima Croft *01, managing director and head of global commodity strategy and Middle East and North Africa research at RBC Capital Markets, member of the National Petroleum Council, life member of the Council on Foreign Relations, and a CNBC contributor; Amy Myers Jaffe ’80, professor and director of the Energy, Climate, and Sustainable Justice Lab at New York University, co-chair of the Women in Energy Initiative at Columbia University, and former senior advisor on sustainability to the chief investment officer of the University of California Regents; and Edward Morse *69, special advisor at Hartree Partners and former global head of commodities research at Citi and deputy assistant secretary of state for energy policy. Abhiram Karuppur ’19 of Harvard Business School will moderate.
• Geopolitics to the Fore? Prospects for Globalization in an Uncertain World, Friday, May 24, 3 – 4:30 p.m., Bowl 16, Robertson Hall . An alumni-faculty forum will explore the politics of today’s global economy. Speakers include Nawaf S. Al-Sabah ’94, CEO of Kuwait Petroleum Corporation; Layna Mosley, a professor of politics and international affairs; Meicen Sun ’12, an assistant professor in the School of Information Sciences at the University of Illinois; James Vreeland, a professor of politics and international affairs; and Carl Westphal *13, deputy director of international monetary policy at the U.S. Department of the Treasury.
• SPIA All-Alumni Reception, Friday, May 24, 3:30 – 5 p.m., Schultz Cafe, Robertson Hall. Dean Amaney Jamal will offer brief remarks.
• Why Ukraine Matters: A Conversation with Ambassador Marie Yovanovitch ’80 and General Mark Milley ’80, Friday, May 23, 3:45 – 5 p.m., Room 10, McCosh Hall . This conversation on the global implications of Russia’s war in Ukraine will be moderated by Lauren Bleakney ’13, foreign service officer, with an introduction by Dora Chomiak ’91, CEO of Razom for Ukraine, and closing remarks by Lydia Zaininger ’83, executive director of the Ukrainian Institute of America.
• World in Flux: The Dynamics of Global Power, Saturday, May 25, 10:30 – 11:45 a.m., Room 50, McCosh Hall . This alumni-faculty forum features panelists Nawaf Saud Al-Sabah ’94, CEO of Kuwait Petroleum Corporation; Zeynep Zehra Dereli ’99, executive board member and CEO of the Industry Group at Calinos Holding; Jennifer Pan ’04, Sir Robert Ho Tung Professor of Chinese Studies, professor of communication, senior fellow at the Freeman Spogli Institute for International Studies and professor, by courtesy, of political science and of sociology at Stanford University; and Peter Schram ’09, assistant professor of political science at Vanderbilt University. Nadia C. Crisan, the executive director of SPIA’s Liechtenstein Institute on Self-Determination, will moderate.
• SPIA 20th, 25th, and 50th Reunion Brunch, Sunday, May 26, 10 a.m. - 1 p.m., Schultz Cafe, Robertson Hall.

Princeton’s Commencement will be held on Tuesday, May 28, at 10 a.m. at Princeton Stadium, with the student procession beginning at approximately 9:40 a.m.  SPIA-specific Commencement-related events are as follows:

• SINSI Graduation Brunch, Sunday, May 26, 10 a.m., The Atrium at Carl Icahn Laboratory
• SPIA Hooding and Awards Ceremony, Monday, May 27, 9 a.m., McCarter Theatre (open to MPP/MPA grad and guests, SPIA staff and faculty).
• SPIA Class Day ceremony, Monday, May 27, 2 p.m., Richardson Auditorium (open to all); reception to follow on Alexander Beach.

Those posting about Commencement to social media are asked to use the hashtag #SPIAProud2024. The School's handle on Instagram, Twitter, and Facebook is @PrincetonSPIA.

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The Asahi Shimbun

Girl researches for 3 years to prove specimen is Japanese wolf

By FUMI YADA/ Staff Writer

May 24, 2024 at 07:00 JST

TSUKUBA, Ibaraki Prefecture--Hinako Komori quickly recognized that a stuffed specimen at a museum storehouse was likely a long-extinct Japanese wolf. But the elementary school girl faced difficulty trying to convince adults of her theory.

It took Komori, now a 13-year-old second-year junior high school student in Tokyo, more than three years to get the science world to confirm the animal was indeed the sixth known specimen of the long-lost wolf.

In November 2020, Komori, a fourth-grader in elementary school, took her first tour of the storage facility of the National Museum of Nature and Science in Tsukuba. The facility is usually closed to the public.

A specimen on the lowest level of a shelf caught her eye.

“Ah, is this possibly a Japanese wolf?” Komori thought to herself.

The Japanese wolf is a subspecies of the gray wolf, which inhabits wide areas in the Northern Hemisphere. The Japanese variety is said to have lived in mountains on the main islands of Honshu, Kyushu and Shikoku.

The last known Japanese wolf was caught in 1905 in Higashi-Yoshino, Nara Prefecture.

Komori asked a research staff member about the specimen but could not receive any clear answers because the staffer was not a mammal specialist.

LONG INTEREST IN ANIMALS

Komori started reading illustrated reference books and watching movies of animals after turning 3. She was especially intrigued by extinct species, and she had seen several pictures of the Japanese wolf.

“Those creatures’ unknown features and their strange appearances make them lovely,” Komori explained.

The stuffed specimen at the museum had a short neck, short forelegs and a bushy tail.

“The radar system inside me rang, identifying it as a Japanese wolf,” Komori recalled.

At the time, there were only five confirmed stuffed Japanese wolves in the world, including three stored in Japan. One of them was displayed at the Ueno main hall of the National Museum of Nature and Science in Tokyo.

Komori was so curious about the specimen that she emailed the museum the day after the tour.

A reply came three months later, saying, “The specimen in question is a kind of ‘yamainu’ (mountain dog).”

There are a number of theories about what “yamainu” means. One is that the term has been used for “wolf.”

Komori grew more confident that the specimen was a Japanese wolf and started her own research project to ascertain its identity.

She noted that external characteristics of the specimen were consistent with those of known Japanese wolves, including the flat part between the forehead and the tip of the nose, the long head and the blackish fur at the center of the back.

But she needed more evidence.

Komori turned to the museum’s database for information and found that the animal had previously been kept at Ueno Zoo.

However, there was no data on its origin or how it arrived at the zoo.

She found another document that stated the wolf originated in China. She also found database records that said the the specimen had been disposed of.

Komori amassed other documents and materials from relevant facilities. She spent days going through the fresh information.

She concluded that the specimen was likely a Japanese wolf that had been cared for at Ueno Zoo around 1888.

“The possibility of the sample being a Japanese wolf increased as I examined much more information,” Komori said. “The process made me feel full of energy.”

In February this year, Komori released an academic paper to illustrate her conclusion about the Japanese wolf specimen.

For two years, she worked on the thesis while studying with Shinichiro Kawada, a mammal taxonomy expert at the National Museum of Nature and Science.

“I am happy above all else that I was able to share what I had exclusively known with other members of society,” she said.

Many mysteries remain about the Japanese wolf.

“I will be working hard to uncover the species’ secrets from now,” Komori added.

Kawada summed up the research project.

“This is truly a triumph of curiosity,” he said. “The lesson appears to be that if you carry out careful investigations, you can see things that were formerly invisible to you.”

The National Museum of Nature and Science last year gained more than 900 million yen ($5.7 million) in donations through a crowdfunding campaign to preserve specimens and documents.

The drive’s specialized website emphasized the need to pass down as many specimens as possible to posterity.

Confirmation of the sixth Japanese wolf specimen was possible only because the animal was preserved for a century.

“This research project reaffirms the importance of treating any specimen with care to hand them down to the future generations,” Kawada said.

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Can cybersecurity keep pace with attackers? ‘The limits are being tested’ – Bugcrowd

Bugcrowd's founder and CSO Casey Ellis and CEO David Gerry discuss the company's evolution and it the cybersecurity landscape.

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Approaches to cybersecurity may need to be fundamentally changed to remain effective against attackers, according to Casey Ellis , founder and chief strategy officer of crowdsourced cybersecurity provider Bugcrowd.

Speaking to Verdict following yesterday’s (23 May) announcement that the company has acquired Informer , Ellis explains: “The ping time between what the cat does and what the mouse does, it’s getting shorter. I think artificial intelligence (AI) is accelerating that feedback loop pretty rapidly. The rate of acceleration of those iterations is going up, and, at some point in time, that iteration circle gets so tight that it’s almost impossible to be inside that loop.

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“I do feel like we’re approaching that, and we’re testing those limits at this point in time.”

The Bugcrowd story

Bugcrowd is something of a darling of the tech community, having reached a valuation of $1bn at its last round of funding, when it raised $102m to drive growth through the continued innovation of its platform and bolstering its workforce around the world.

Speaking alongside Ellis, CEO David Gerry says: “The piece that maybe we didn’t give enough credit to when we did the fundraise was how powerful of a partner [US venture capital firm] General Catalyst was going to be both from a leadership standpoint and in terms of putting the right people around the business when we need them the most – but also just being in the trenches with us.

“I talk to a lot of CEOs and I do a lot of funding reference calls and things like that for a lot of different VCs. That’s what I continually tell these folks is, ‘Make sure you have the right partner around the room that’s aligned with the vision,’ because, I will tell you, it makes it a hell of a lot easier when you’ve got the right board and the right investors lined up saying, ‘Hey, we’re bought into the vision that you’ve laid out, and we’re going give you the governance that a board does, and we’re going to help guide you, but, ultimately, we’re bought in’.”

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Founded in 2012, Bugcrowd is credited with pioneering the crowdsourced cybersecurity category.

“To me, that just made the most sense – the idea of being able to take the latent potential that exists in the white hat hacker community and plug it into as many different cybersecurity problems that we can find,” says Ellis. “That seems to be a really good way to outsmart an army of adversaries. It’s basically connecting an army of allies. That was really kind of the founding thesis.”

The premise of the company is straightforward – its platform connects clients with half a million hackers offering a variety of cybersecurity skills. The flexibility this offers is as much a part of the value on offer as the skills themselves.

“The idea of one person being paid by the hour in the context of pen testing and being expected to outsmart all of the potential bad guys that are out there with all the different skill sets they have – and, meanwhile, defending all of the different possibilities for attack surface that have also been created by humans who are awesome, but imperfect – that that one person is going to fail, and it’s not actually their fault,” Ellis argues. “It’s a math problem.”

The future of Bugcrowd

Bugcrowd’s own math makes for impressive reading. Last year it added about 40% onto its top line, 130 employees, 225 customers and 50,000 hackers to its community.

Gerry says: “We’ll probably add 100 to 120 people this year. We added 20 to 30 just this week. We added another 60 customers in the first quarter, grew the business well over 30% again – so we’re seeing that that growth is now sustainable. We’ve got five or six quarters of really high levels of growth, and 60% of our customers come over from another platform.”

Gerry adds that channel sales accounted for virtually zero a couple of years ago but are now up to around 20% and are targeted long-term at 40-50%.

“And then the last piece is really around the M&A front,” he says. “The fact that we’ve got our first acquisition done just about 90 days after the fundraising announcement certainly is a good indicator, and we’ve got a pipeline of deals to go do as well.”

Attack surfaces

Like others in the cybersecurity industry, Ellis and Gerry believe the attack surfaces of organisations are much bigger today than many realise, and its acquisition of Informer – a provider of external attack surface management (ASM) and continuous penetration testing – is aimed at reinforcing its capabilities there.

Asked whether attack surfaces are growing or organisations are simply unaware of some potential threats, Gerry says: “It’s both.”

He explains: “Now, you have the rapid onslaught of everything is an API, everything is an app, everything is a web property, everything is a portal. Okay, how are we going to keep track of that? There’s no way for organisations to be able to secure everything they have if they don’t know they have it. So, the first foundational piece of this is we need to have a discovery story of what do we actually have out there?”

Another growing cybersecurity threat is, of course, artificial intelligence (AI) – both in the hands of adversaries and through organisations’ own insecure rollouts of AI applications.

“In the hands of defenders and attackers alike, it decreases the time to success and it democratises the access to power,” says Ellis. However, he points to the race to roll out the technology as a major issue.

“In my opinion, what is going to end up being the biggest actual threat is the idea of integrating AI into everything,” he explains. “We’re doing it right now, the idea of slumping an LLM onto an existing system with a great degree of speed because everyone’s trying to compete with their peers to get this kind of technology into whatever it is that they’re doing as quickly as possible. Whenever we’ve seen that in the past, it’s always bad at some point in the future.”

“You’ve got folks trying to move as quickly as they can and making even R&D decisions that end up being pretty badly insecure. So there’s an almost infinite number of things that could go wrong in that domain.”

By way of agreement, Gerry adds: “Businesses are incentivised to get products to market as quickly as possible. Security is still an afterthought, right?”

Do the basics

Such are the rudimentary oversights that organisations make where cybersecurity is concerned – in relation to AI or otherwise – that attacks themselves are not evolving a great deal. They are simply being facilitated in more sophisticated ways.

“If the front door is unlocked, an economically rational bad guy is just going to walk in through the front door,” says Gerry. “They’re not going to bother doing all the fancy stuff if they can get it done simply, right? That’s just economics.”

Ellis expands: “The attacks are actually staying roughly the same. When you look at a lot of the key exploitation that’s happened out of nation-states over the past four years has been exploiting old vulnerabilities. It’s not zero-day. It’s not crazy, sophisticated stuff. It’s just the result of poor hygiene.”

The two implore organisations to simply “do the basics”, but of his contention that doing the basics may not be enough for much longer, Ellis asks: “How will we fundamentally alter the game theory and the economic incentives around security so that we can start to think about it through the lens of being like anti-fragile and resilient by default, not just reactive to what the bad guys are doing?”

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