A private equity fund or Venture Capital having an investment thesis. It is essential to achieve the financial objectives and goals of the fund and its investors, but how does it work and what is it about?
The Venture Capital investment thesis is a strategy that seeks to add value and attract investors with affinities to the fund. Through this figure, it is determined in what and how the capital is invested.
What is an investment thesis?
An investment thesis of a private equity investment fund is a general set of guidelines to follow to make or not make an investment.
The Founder Institutea global business accelerator , in seed-stage,explains on its site that aninvestment thesis in Venture Capital is the way to have discipline at making decisions and adding new emerging companies and ventures to the portfolio..
Among the key pieces of each fund, General Partners (GP) are responsible for detecting sectors and companies with the higher potential to invest in. With a Venture Capital investment thesis these investors will be able to support their investment decision and achieve a greater commitment from Limited Partners (LP).
Every equity fund has its own thesis, considering what type of companies, sectors and industries it will invest in. For Moisés Carbajal, director of the Eugenio Garza Lagüera Entrepreneurship Institute of the Tec de Monterrey, this thesis will depend on each fund.
You can also read: What are Private Equity funds and how does it work?
What is the purpose of an investment thesis?
The Founder Institute explains that an investment thesis in private equity funds takes in consideration different elements. Having an investment thesis is important because it will determine the direction of the investments. Once you have a project mapped out in the background, you decide in which projects and sectors you should invest in, seeking for the best returns.
These are the main characteristics of an investment project or thesis:
Investor experience
An equity fund determines its investment thesis from the most specialized partners. In the composition of a fund, General Partners have the responsibility of analyzing every investment decision and thus determining which new companies or sectors will be added to the portfolio.
Going forward, in a thesis, this expert and the ability to evaluate the potential of an investment will be fundamental.
Market research
A Venture Capital investment thesis should be supported by market research and not only intuition. As in any industry,market research and data analysis about trends and potential sectors will define where, when and how much to invest
Undoubtedly, a research with the correct data about the market in which you invest or intend to invest will be key to achieve the fund capital objectives.
Investment strategy
Once the information about the potential companies and new markets is collected, the next step will be to develop a plan to give structure to the investment thesis..
In this part, details about the fund are defined such as the total of capital that will be invested, interest in the sectors, types of companies and the phase in which they are.
The investment thesis focused on companies' stage and disruptive models seek certain characteristics of the business model that can be scalable and complement each other.
Moisés Carbajal, director of the Entrepreneurship Institute of Tec de Monterrey.
In the investment strategy it is important to consider in which phase the company in which you invest is placed, since the capital needed is different.
A win-win strategy
Each equity fund makes a decision to draw up its investment thesis. Moisés Carbajal specifies that the factors that define each fund will depend on the fund managers.Without the Venture Capital key pieces, it would not be possible to determine in which type of companies invest the capital of the fund.
In more consolidated markets, such as the United States, investment firms define their thesis according to the market behavior. Although the experience of the most specialized investors also influences.
With zero doubts, this type of investment is under development in the Mexican market. However, it is necessary to develop an information culture to facilitate decision-making for investors, says the Tec de Monterrey academic.
Venture Capital and Venture Debt models penetrate the market as an alternative to invest in ventures and entrepreneurs.
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