David Teten
More posts from David Teten
Venture capitalists love to talk investment theses: on Twitter, Medium, Clubhouse, at conferences. And yet, when you take a closer look, theses are often meaningless and/or misleading.
OpenVC is a new, open-source initiative to collect and analyze all publicly available VC theses to help founders more efficiently find the right investors — and vice-versa. For the first time, we are sharing here our initial conclusions. We hope you’ll upload your own thesis to benchmark yourself. We’ve identified six common patterns of how VCs articulate their theses and some best practices in doing so.
Our analysis is based on two complementary datasets:
- 125 theses so far submitted by investors into the OpenVC database.
- 36 theses pulled directly from U.S. VC websites by David Teten and Sam Sabin, co-founder of Hireblue.
Our four primary conclusions:
- Public theses are often inconsistent with how firms actually deploy capital.
- VC theses are often so vague that they’re meaningless.
- We found seven categories of VC theses, plus an eighth: the non-thesis.
- Investment theses are just hypotheses; the portfolio shows how accurate the hypothesis was.
For the sake of simplicity, we will consider “investment thesis” and “investment criteria” as equivalent terms moving forward, although we argue that the thesis leads to the investment criteria. We summarize how they interrelate in the table below.
1. Public theses are often inconsistent with how firms actually deploy capital
A typical VC thesis: “We invest in tech startups in Europe at an early stage.” However, our experience shows that in many cases “Europe” means a handful of countries, for instance, France, U.K. and Germany; and “tech” means B2B SaaS/fintech or consumer apps.
Thirty-four VC firms in OpenVC call themselves “early stage.” Yet 30% of those don’t actually invest in pre-revenue startups. The phrase is quite ambiguous; we suggest quantifying check size so that your investment preference is clearer.
Almost every VC says that they invest in the “best” founders. However, according to PitchBook Data, since the beginning of 2016, companies with women founders have received only 4.4% of venture capital deals. Those companies have garnered only about 2% of all capital invested. This is despite the fact that the data show you’re better off investing in women.
This lack of transparency results in confused founders who chase the wrong investors. In turn, investors are overwhelmed with poorly qualified opportunities.
2. VC theses are often so vague that they’re meaningless
Christoph Janz from Point Nine Capital wrote on Twitter:
The modal VC thesis is: “We invest in great teams addressing large markets with disruptive solutions.” Who invests in lousy teams addressing tiny markets with outdated solutions? Theses also tend to use the same words across many firms, e.g., “daring” and “bold.”
In particular, in our second dataset, we found a disproportionate number of theses focused on “technical” companies (vaguely defined) and focused on companies attacking “problems of the future rather than the present,” in various permutations of that language.
| Top Visible Heuristics (in dataset of 36 U.S. VCs) | Occurrences |
| “Technical” companies (i.e., any mention of a focus on tech companies) | 26 |
| Local affinity or bias | 10 |
| Attack problems of the future rather than the present (or some variant) | 9 |
| Technical founders | 7 |
Why are the investment criteria so imprecise on the VC websites? We have three theories, in descending order of importance:
- Option value. Investors don’t want to be too restrictive and miss out on a deal. However, we’d argue that for most smaller managers who are not brand names, it’s better to be highly identified in your niche than being a generalist. Most limited partners we speak with agree.
- A desire to look “sexy” and politically correct as opposed to being honest. This is probably a major reason. For example, saying publicly, “We invest mostly in white/Asian men who went to Stanford like us” accurately describes numerous VCs, but doesn’t sound very politically correct.
- VCs are afraid to give out their secret sauce. We think this doesn’t make much sense; you can share your criteria without telling the whole logic behind them. Many top-tier VCs share detailed public theses.
3. We found seven categories of VC theses, plus an eighth: the non-thesis
What makes an excellent — or at least clear — investment thesis?
Typically, investors either have a very loose nonrestrictive strategy to investing or maintain a strict focus on a few particular areas. As two extremes:
- Founder Collective describes itself as “deliberately anti-thematic. Visionary founders have shown us that the weird use cases of today can become the hot themes of tomorrow.”
- By contrast, Right Side Capital has a very tight thesis:
- Check Size: $50,000 to $200,000. Vast majority $100,000 to $150,000.
- Total Round Size: $50,000-$500,000. (Occasional exceptions to $1 million.)
- Valuation: $1 million-$3 million. (Rare exceptions to $6 million with extreme traction.)
- Traction/progress: Almost always $5,000 to $30,000/month in gross profit. No ideas or prototypes.
- Sector: Anything in tech. But you must be doing real engineering of some kind.
- Headcount: Usually at least two full-time founders. Often a few full- or part-time workers.
We take from this that there is little consensus on whether VC investing should be thesis-driven or not. And even the “thesis-driven” VC firms often make investments outside of their stated thesis.
Of the firms that articulate a thesis, most fall into one of, or a combination of, the following seven buckets:
(1) Industry funds. Warren Buffett famously said that “diversification is protection against ignorance. It makes little sense if you know what you are doing.” In venture capital, the industry- or sector-focused funds specifically disavow diversification:
- Andreessen Horowitz, which is a generalist as a whole, has launched dedicated funds across crypto, bio and fintech.
- AgFunder, focused on the food and agricultural sectors, aims to solve challenges brought by climate change, failing soils and population growth.
- Foundry Group, investing primarily in “software and internet,” follows six major themes, e.g., human-computer interaction (HCI) or distribution.
- USV invests in companies that increase “access to knowledge, capital and well-being by leveraging networks, platforms and protocols.”
Data from OpenVC showed that VCs typically focus on two technology classes. Software is by far the most sought-after class, with 94% of VCs investing in it. Deep tech follows as a distant second with 57%. Hardware and therapeutics lag well behind.
Out of 125 funds in the database, 33 state they invest in one type of technology (e.g., “software”); 43 invest in two types of technology (e.g., “software” and “deep tech”), and so on.
(2) Business-model-defined funds. These firms also sometimes target startups that serve a specific kind of customer (e.g., B2B versus B2C) within the business model preference. For example, Point Nine Capital focuses on B2B SaaS and marketplaces at the seed stage across many industries.
(3) Geography-defined funds. Apart from the usual country-specialist investors and foreign offices of U.S.-based VCs, we see three dynamics at play:
- VCs investing in specific geographies. Avataar Ventures invests exclusively in companies that fit these criteria: $15 million with annual recurring revenues; tech-led B2B and SaaS Companies; core operations in India/Southeast Asia; and open to active partnering. In 2019, according to the CVCA, Real Ventures invested in 42 rounds, with the total value of those rounds equal to that of the next three most active private VC firms combined. Real sees 80% of all seed deals in Canada.
- VCs investing abroad or in binational companies, typically with technology based in a second- or third-tier market, and sales/marketing in a first-tier market. Data from OpenVC suggests that 75% of funds invest in more than one country. These results are consistent for both U.S.- and Europe-based VC firms. Explore why venture capitalists are investing in international startups and why international startups love New York, and vice versa.
(4) Entrepreneur-defined funds. This is most commonly seen in funds that focus on underrepresented founders, but we’ve seen other focused communities as well.
- Female Founders Fund, AmplifyHer Ventures, Halogen Ventures and many others invest exclusively in women-founded businesses.
- a16z’s Cultural Leadership Fund aims to “enable more young African Americans to enter the technology industry.”
- J-Angels “is a community and a VC fund of top American investors (Jewish American and Israeli-born) in Silicon Valley and San Francisco.”
- Diaspora Ventures is a “pre-seed fund … looking to back the next generation of French entrepreneurs building tech companies in the U.S.”
A special subset of this is investors that focus on mission-driven founders and typically have explicit ESG criteria. For example, City Light VC only invests in “companies where there is a direct relationship between financial outcomes and measurable social impact.”
(5) Structure-defined funds. Versatile Venture Capital, Indie.VC and other revenue-based finance and flexible VC investors state they focus on companies with a short-term focus on profitability. These firms typically invest using a nontraditional “flexible VC” structure, which allows founders to pay back their financial obligation to the fund through a combination of revenue-sharing and/or equity payback.
(6) Situation-defined funds. Some firms optimize around certain aspects of the investment situation. Alpha Partners and Proof provide capital when their partner VCs don’t have pro rata and share the economics on the investments. Correlation Ventures invests in under two weeks when there is “at least one other venture capital firm also making their first investment into the company.”
(7) Stage-defined funds. These funds tend to focus their investments in startups at a specific stage or seeking a certain check size. First Round Capital invests in rounds up to Series A and is often the “first money in,” backing entrepreneurs at the first stages of the company they’re creating.
4. Investment theses are just hypotheses; the portfolio shows how accurate the hypothesis was
We cannot formally prove a priori whether one thesis is better than another. They exist as heuristics, but at the end of the day, deal flow trumps everything. If a fantastic opportunity shows up, most VCs would invest, regardless of their thesis.
Investment theses are marketing assets toward LPs and startups. As such, there are three stakeholders when building a thesis: the investing partners, the LPs and the founders.
We can see in the example above how the thesis is not “pure” from the GP point of view. It incorporates influences from the LP and, more and more, from the founders.
Faced with the daily deal flow, the investment thesis feels like nothing but “a set of strict rules, loosely applied.” Does it mean the investment thesis is just an irrelevant practice that should be ignored or abused? We think not.
In the battle for deal flow, the thesis is at the core of a fund’s value proposition. It’s part of a VC brand and identity. It’s what makes it unique and distinctive.
We’d argue that for most smaller firms, it’s better to be highly identified in your niche than being a generalist. A fund should aim to be identified as “the” specialist in one or a combination of the seven buckets listed above. “Even at a later stage, it’s better to be talked about [as] something than nothing at all,” startup mentor Alexander Jarvis said. “You can always mention you do other things later, as they reach out knowing you are awesome at something.”
Most important, show your data: the number of checks written at each stage; the number of checks in each size level ($500,000-$1 million, $1 million-$5 million and so on); follow-on ratio; etc. Almost every investor is glad to share the winners in their portfolio, but only a few will share detailed analytics. Some worthwhile examples are First Round Capital’s 10 Year Project and FJ Labs’ 2020 Year in Review.
“VCs bury their dead quietly; they write Medium posts when things went well,” Jarvis observed. We hope more firms over time will feel comfortable sharing the real data as to how their data lines up relative to their investment thesis … and their investment hypotheses.
David Teten has advised Real Ventures and Right Side Capital. Thanks to Paulina Symala and Prabhat Gusain for research and analytical help, and to Alexander Jarvis for detailed and thoughtful comments.
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