Crafting a Winning VC Investment Thesis for Angel Investors

Investment thesis for angel investors

Written by Matt Wilson, Founder & Managing Director, Allied Venture Partners

Aspiring angel investors frequently ask me, "How do you decide which companies to invest in, given the vast array of opportunities?"

The answer starts with one crucial component: a well-defined investment thesis.

Whether you’re new to angel investing or looking to refine your approach, understanding what a thesis entails and how it guides decision-making is foundational.

Let’s dive in!

Why You Need an Investment Thesis

A thesis serves as a filter, guiding all your investing choices by focusing on specific sectors, geographies, and stages of investment. Without a thesis, it’s easy for new investors to become overwhelmed by various opportunities, potentially leading to poor decision-making and a diluted return on investment (ROI).

Here's a clear, actionable investment thesis example based on my experience that you can use as a starting point in your own investing journey.

Step 1: Define Your Interests and Passions

A great investment thesis venture capital strategy begins with personal alignment. As a former founder, I love early-stage company building—taking an idea from inception to a viable, revenue-generating product—going from zero to one. I think there’s no greater thrill than creating a product from scratch for which people will pay their hard-earned money. Therefore, I prefer companies that:

  • Require minimal initial investment,

  • Have a rapid MVP (minimum viable product) development cycle,

  • And leverage the internet for rapid and cost-efficient distribution.

Additionally, my professional background and expertise is in enterprise and consumer software, which helps me spot opportunities in these sectors. Equally important, I’m aware of what I know very little about, such as industries outside my domain of expertise, including medtech, biotech, cleantech, and hardware-focused startups.

Our Thesis in Action: Leveraging my background and expertise, I will focus on seed-stage software startups (enterprise or consumer) while avoiding medtech, biotech, cleantech, and pure hardware.

Step 2: Choose Your Geographic Focus

For me, supporting companies within North America aligns with my knowledge of local regulations and gives me an advantage through my professional network.

For example, I know nothing about the legal, tax, and regulatory implications of investing in foreign regions like Africa, Asia, or South America. Additionally, I possess no unique insights or advantages into these various markets since I have never lived or operated a business there. For these reasons, I leave investing in these regions to the experts who know them best.

My goal is to support startups where my network and expertise can provide a strategic advantage. Investing in North American startups enables me to offer strategic support and insights, thereby enhancing the chances of success for my portfolio companies.

Step 3: Establish Your Desired Return Profile

Understanding the VC investment thesis approach to high-risk investing is essential (e.g., the Power Law).

For example, since startup investments are inherently risky and illiquid, I look for companies that fit the “venture-scale” profile (i.e., companies with the potential to achieve $100 million in top-line revenue and a $1 billion+ valuation within 7 to 10 years). This would provide a venture-scale return of 100x or more on my initial investment (pre-dilution), offsetting any losses.

With this return profile in mind, I must limit my initial investments to companies valued below $25 million but, ideally, below $10 million to achieve a 100x ROI on a $1 billion terminal enterprise value.

Summary: Our Investment Thesis So Far

With these initial filters, my thesis is starting to take shape:

“Seed-stage enterprise or consumer software companies in North America with a maximum post-money valuation of $25 million.”

This foundational thesis allows me to easily eliminate any opportunities that don’t fit, keeping me focused on investments that align with my goals.

Let’s keep going…

Step 4: Determine Stage, Product Readiness and Traction

In today's enterprise and consumer software market, building an MVP and generating early revenue has never been easier. Thus, I look for companies that have at least launched an MVP and are earning a few thousand dollars in monthly revenue (i.e., post-product and post-revenue).

However, depending on the markets you are targeting, startups may require considerable time and capex before they can launch an MVP into the hands of early customers (e.g., medtech, biotech, robotics, etc.). Additionally, you may prefer to invest even earlier in a startup's lifecycle (i.e., when it’s still an idea on a napkin). This choice is entirely yours. Just ensure it aligns with your interests, investment horizon, and return profile.

Step 5: Rata Rights for Future Investment

If the startup does well, I want the opportunity to continue supporting and investing in the company so that I can maximize my return on investment. For this reason, I aim for opportunities that grant pro-rata rights, allowing me to increase my investment in subsequent financings.

Note: Not receiving pro-rata is by no means a deal breaker. However, I have yet to meet a founder who is heavily opposed to it for initial investments at pre-seed or seed. In my experience, if a founder refuses to grant pro-rata rights to their earliest supporters, it likely means one of two things:

  1. The founder does not view the investor as adding any value beyond providing capital.

  2. The founder is excessively focused on ensuring flexibility in future funding rounds.

In either case, it’s a red flag for both the founder and investor, and they should likely think twice before embarking on a decade-long partnership.

Step 6: Final Thesis Summary and Screening Criteria

Ok, let’s review the current status of our refined thesis:

“Post-product/revenue seed-stage enterprise or consumer software companies in North America with a maximum post-money valuation of $25 million and pro-rata rights.”

With this clear thesis, I can now efficiently screen incoming opportunities, focusing on those that meet my criteria.

Screening Criteria Based on my Investment Thesis Example

In practice, using my newly developed thesis, here’s how I can quickly and efficiently filter investment opportunities:

  • Company is based or registered outside of North America: Pass

  • Company is pre-product or pre-revenue: Pass

  • Company is in medtech, cleantech, life sciences, or pure hardware: Pass

  • Company is raising at a valuation above $25 million post-money: Pass

  • No pro-rata rights: Pass (rare exceptions apply)

TL;DR for Building an VC Investment Thesis

  1. Invest in What You Know: Stick to industries, geographies, and sectors you understand.

  2. Use Clear Filters: Screen based on your thesis.

  3. Stay Disciplined: Avoid wandering outside your criteria.

  4. Start Small: Scale up as you gain experience.

  5. Double Down on Winners: Press your breakout winners.

Frequently Asked Questions (FAQ)

1. What if I want exposure to industries outside my thesis?

This is an excellent opportunity to consider becoming a limited partner (LP) in a venture capital fund specializing in those sectors. Funds bring specialized knowledge and access that individual angels may lack.

2. How should I think about check size?

Maintain consistency. Write the same amount into each investment, regardless of your personal feelings about a company. How to angel invest effectively requires avoiding biases and treating each opportunity systematically.

3. How should I think about capital deployment pacing/timing?

Decide on the total amount of capital you want to allocate to angel investing based on your net worth, risk tolerance, and overall portfolio strategy. Then, divide it evenly into 48 equal chunks to be deployed monthly over four years. This "time diversification" method allows you to steadily build your portfolio while diversifying across multiple startup vintages.

4. How should I approach pro-rata and follow-on investments?

Start by evaluating the company’s growth and market traction:

  • Is revenue growing rapidly?

    • e.g., 3T2D – tripling revenue each year in the first three years, then doubling revenue in the next two years.

  • Are valuation increases justified by metrics?

    • e.g., revenue has tripled while the valuation has only doubled or tripled.

  • Is a notable investor leading the new round?

  • Is the team continuing to execute exceptionally well and attracting top talent?

If the answer is yes to all of these questions, it’s worth considering a follow-on investment.

Disclaimer:
This guide is provided for informational purposes only and should not be interpreted as financial or investment advice. Developing an investment thesis is a strategic approach to filtering investment opportunities but does not guarantee success or financial returns. Angel investing is inherently high-risk, and readers should consider their own financial situation, conduct thorough due diligence, and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results, and all investments carry the risk of loss.

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