Why Angel Investors Should Have an Investment Thesis

an angel investor

Few angel investors have investment theses, short summaries of the person’s strategy for what kinds of startups he or she will fund. Fewer still have these theses written down in a form that can be shared with others.

That’s a mistake. Angels should have clear, written investment theses. Having them imposes discipline on their investment selection and facilitates communication with entrepreneurs and other investors.

Venture capitalists all have investment theses, which they need to raise money from their limited partners. Because venture capitalists have a fiduciary duty to invest the LPs’ money in ways consistent with the approach they have outlined to their limited partners when obtaining capital, they need investment theses. The thesis allows the LPs to verify if the promised approach has been followed.

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Because angels don’t raise money from others, they don’t have to have investment theses. But they should.

What is an Investment Thesis?

An investment thesis is a roadmap for investing. It guides the investor towards the investments that fit their objectives. If you invest in start-ups, founders will pitch you for money. Without an investment thesis, you are likely to find it difficult to stay disciplined and concentrate on the start-ups that match your investment objectives. At a minimum, you will find it more difficult to decide which founders to talk to and what questions to ask them. For example, you don’t want to talk to medical device company founders if you only want to invest in companies in lightly regulated industries. And you don’t want to focus your due diligence on start-ups’ financial statements if you only want to invest in pre-revenue companies. Without an investment thesis, you are likely to waste a lot of time talking about the wrong things to the wrong people.

Additional Benefits of an Investment Thesis

An investment thesis is also a clear indicator to start-up founders of whether you are the right investor for their companies. If the only thing founders know about you is the size of your net worth, they are going to ask you for money even when you are not going to give it to them. That’s a waste of their time and yours. Moreover, your investment thesis provides founders with insight into how you will work with them post investment, and what kind of information you will seek from them. This is also important in getting the right kind of founders to match up with.

A third benefit of having an investor thesis is better communication with co-investors. Deal flow is very important to the success of angel investors, and those deals often come from other angels, venture capitalists, accelerator directors — other early stage investors. People do not like to refer deals if the person receiving the referral isn’t interested. That makes the referrer feel like they are bothering the recipient and makes them look like they don’t know what they are doing to founders. Simply put, other investors will find it easier to make referrals to you if you have articulated your investment thesis to them.

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While you don’t need an investment thesis to get the capital to invest in start-ups if you are an angel, you should have one. It will make you more disciplined in your approach to investment and allow you to communicate more efficiently with founders and co-investors.

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Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

One Reaction
  1. An investment thesis is mandatory because without it you can easily fall into emotional investing. You need a clear path, at least when you’re still a beginner. You need to remember that you do this for yourself, not for others. That’s the safest bet. When you gain some experience you can trust your gut and go invest in some underdog startup if you like, but my professional opinion is that emotions and investments do not mix well.