Having an investment thesis can help make you a more focused investor, and is a good place to start when setting out to start angel investing. A strong investment thesis will help guide how you will source deals and how you will make decisions.
A strong investment thesis can be the basis for a very strong angel investment portfolio, a weak, or misguided investment thesis, on the other hand, can lead to lower portfolio performance. Some angels and venture capitalists build out very detailed investment theses, whereas others are more general.
Many investors focus their thesis on a specific sector where they have domain expertise as it can can give them an upper hand in creating deal flow and in picking winning companies. Popular sectors today include; Fintech, Cleantech, Digital Health, Hardware, Enterprise Software, Cybersecurity.
You should be able to list out criteria under your investment thesis, helping to guide what you choose to invest in and what you don’t. By investing in companies that fall within your investment thesis, you should see a greater fit with your ability to help the companies growth through your expertise and connections, and an opportunity for large investment returns, over a period of time.
Once you’ve had an opportunity to think about your own investment thesis, can you think of any successful companies in today’s market that had you seen them in the early days you would have invested, based on your thesis?
If you choose to focus your investments around a particular sector, be sure to diversify on other factors like product, technology, geography, business model, customer segment etc in order to create a balanced portfolio.
When focusing on a sector you can also become much more focused in your deal sourcing. There are venture capital funds and other angels focused on particular sectors that you can align yourself with, for example, RockHealth, a San Francisco accelerator and investment fund for healthcare startups. There are also industry events and tradeshows that you can attend to meet new companies. (For more on dealflow and sourcing deals, see our post on building your pipeline).
You will find quickly that sectors are very tight-knit communities. Before long — if you put enough effort into connecting with key players in the industry — you will start to see how the ecosystem works and begin to build a name for yourself.
A word of advice if you plan to invest in businesses in the same industry, that may compete now or in the future, the best thing to do to maintain strong relationships with your founders is to be honest about any conflicts up front. By knowing you have a conflict, founders can choose what information to share more selectively given your competing interests.
Note that if you are a company director you may have legal limitations to invest in competing businesses, be sure to check with a lawyer beforehand.