Thank you for reading this new edition of The Private Market Whisperer! I hope you will be enjoying the read. I am planning to start the startups investment recommendations via equity crowdfunding platforms early March.
In any case, please feel free to share your questions and comments!!
Today we will address a basic but hyper important question when you start investing in private markets.
What is your investment thesis?
In a previous edition I explained how to set your budget as you start investing in private markets, if you have not read it, check it out.
I am a firm believer that you need an investment thesis whether you are an institutional investor, a family office, a super angel or a business angel.
Your thesis will not be as formalized as a VC if you are a business angel but you should have some guidelines, especially as you start investing in private. As you get more experienced you can expand your investment criteria.
I will focus on some of the top criteria.
First, what stage do you want to invest in? Usually your budget will drive part of the answer. If you are a business angel you will likely invest at the very early stages of the company lifecycle, such as pre-seed, seed and seed-extension (and I will expand on this notion in subsequent editions). This is simply because as companies grow the checks required to invest also grow and becomes inaccessible to most investors. So institutional investors / professional investors (or high net worth individuals / family offices) are likely to be the only ones investing at the latest stages of a company development.
Second, in what geography do you want to invest in? Proximity tends to be valued with private investors so they can step in and support the company if necessary. Depending on where you are located the opportunity to invest can be more or less abundant. So you might have to expand your radius. You might also want to invest in other geographies to get exposure to certain areas of expertise or certain end markets. Access to deal flow and tax impacts should also be taken into consideration when selecting your geography of predilection. Several factors can then influence the geography you decide to focus on.
Third, what industries do you want to invest in? I tend to recommend to invest in industries you know well, especially as you start investing in private markets. First, it will be easier for you to do the due diligence. Second you will be able to provide support to the company if necessary. Also if it is a competitive deal, meaning the deal is oversubscribed, in other words the demand is higher than the supply, your expertise will differentiate you from other investors. To define your investment thesis, you should get one or two level down from the industry. For example, my expertise lays in financial services and I focus on B2B software for the financial services industry (Fintech) with a preference for asset and wealth management.
You can also have additional filters to your investment thesis, such as diversity and inclusion, or socially responsible investing.
This investment thesis is very important as it will prevent you to be distracted by shiny objects and you will use it to qualify your investments so you don’t waste precious resources on deals that don’t make sense for you.
Some investors put valuation limits, I personally don’t like that. Valuations are highly subjective, they depend on where we are in the cycle, industry, geography, founding team, lead investor, terms,…, so I find it difficult to have an hard and fast rule.
Now that you have a better understanding of why you should have an investment thesis, in the next edition I will be writing about how to source deals.
And if you enjoy videos too, please check my YT channel to watch interviews of business leaders and more on angel investing!
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Take care and keep investing!!
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