Investment Thesis: What It Is, How To Write One & Examples

An investment thesis formulates the characteristics and criteria that define a potentially profitable investment. It outlines the reasons behind the investment decision, including various criteria, financial outcomes, and strategies to manage risks. Essentially, it serves as a detailed plan for investors.

What is an Investment Thesis?

An investment thesis serves as a strategic blueprint for investors, guiding their decisions and actions by providing the rationale behind their investment choices. Typically crafted by financial analysts, portfolio managers, or investment professionals, the process begins with a thorough assessment of market potential. This involves scrutinizing trends, growth forecasts, and demand dynamics to identify opportunities. The investment thesis validates the significance of these opportunities by highlighting unmet needs or areas of dissatisfaction within the market.

Furthermore, it quantifies potential gains through meticulous financial scrutiny, including revenue forecasts and return on investment assessments. Beyond identifying opportunities, the investment thesis also plays a crucial role in managing risks by employing risk management tactics such as diversification and contingency plans, helping investors navigate market fluctuations and operational hurdles effectively.

Key Takeaways

An investment thesis defines the criteria for profitable investments, providing a detailed plan and rationale for investors.
An investment thesis serves as a guiding framework for investment decisions, enhancing comprehension and facilitating well-informed choices.
Key components of an investment thesis include identifying the investment opportunity, clarifying goals, evaluating viability and risks, and assessing growth potential.

Understanding the Investment Thesis

An investment thesis is akin to a detailed plan for potential investments, often formulated by finance experts. It entails extensive research and analysis to articulate investment ideas effectively. While typically authored by professionals such as venture capitalists or private equity firms, individuals may also develop their own. This document holds significant importance in facilitating well-informed investment decisions, aiding both investors and companies in evaluating opportunities such as stocks or acquisitions.

By elucidating the reasons for investment, the thesis serves as a guiding framework for investors’ decisions. It streamlines decision-making processes, enhances comprehension of underlying rationales, and provides a means for investors to gauge the performance of their investments. Moreover, an investment thesis functions as a roadmap, charting the course toward successful investments.

How to write an Investment Thesis

Crafting an investment thesis is essential for all investors, whether individuals or professionals. An investment thesis serves as a guide for making choices, explaining the reasoning behind decisions, and providing a framework for assessing investment opportunities. Here is a simple guide with the most important steps for crafting a good investment thesis:

Steps	Description
Introduction	Summarize the investment philosophy and its main goals.
Market Overview	Analyze the market or sector, covering trends, size, growth rates, major players, and recent events.
Thesis Statement	Formulate a clear and concise statement of the investment thesis, outlining the opportunity and potential returns.
Rationale	Develop a thorough analysis to support the main idea, exploring market dynamics, competition, trends, regulations, and past performance.
Investment Strategy	Outline a comprehensive investment strategy. Specify criteria for choosing investments, such as valuation, growth potential, risk tolerance, diversification plans, and how to allocate portfolios.
Risk Factors	Identify and evaluate possible investment risks, such as market, industry, regulatory, and company-specific risks. Also, discuss strategies to mitigate these risks.
Exit Strategy	Develop an exit strategy for the investment, outlining desired returns, timeframes, and possible methods of exit such as selling to another company, acquisitions, or selling on the secondary market.
Monitoring and Evaluation	Describe how investment performance is monitored, including key indicators and success criteria. Also, explain how the strategy adjusts to new information or market changes.

Examples of an Investment Thesis

Portfolio managers and investment companies frequently share their investment strategies on their websites. Here are three examples from prominent investors:

Andreessen Horowitz

Andreessen Horowitz, often referred to as a16z, is a prominent venture capital firm established in 2009 by Marc Andreessen and Ben Horowitz. Active in the private markets, the firm invests in various sectors including AI, healthcare, consumer goods, cryptocurrency, enterprise solutions, fintech, and gaming.

Their investment strategy revolves around observing consumer trends and investing where AI intersects with consumer products. They stress the importance of developing the right AI applications to attract funding, particularly in areas like productivity enhancement and specialized tasks.

In this example, the firm explores how Moore’s Law contrasts with Eroom's Law in healthcare costs. They propose leveraging AI to cut costs and enhance outcomes by gradually integrating it into workflows. Combining AI with life sciences advancements offers transformative opportunities, advocating for a gradual transition to revolutionize healthcare and life sciences.^[1]

Goldman Sachs

Goldman Sachs is a global financial powerhouse operating in major financial hubs worldwide, offering services in investment banking, IPO underwriting, securities trading, wealth, and asset management.

The bank’s investment thesis has resulted in a $1 billion investment in companies led by diverse individuals through the “Launch With GS” program aimed at supporting diverse leadership.^[2] Goldman Sach collaborates with clients to invest in diverse General Partners across various strategies and offers the Entrepreneur Cohort for growth, reflecting their commitment to diversity and inclusion for achieving strong investment returns and driving industry innovation.^[3]

Ark Invest

ARK Invest provides ETFs focused on disruptive innovation like AI and blockchain. The firm remains committed to long-term growth, leveraging innovative strategies and deep research across various sectors, including cryptocurrencies.

The Ark Invest thesis revolves around disruptive innovation, targeting transformative technologies nearing tipping points. They focus on five innovation platforms: AI, Robotics, Energy Storage, DNA Sequencing, and Blockchain. Ark Invest’s approach blends top-down and bottom-up research for early innovation capture and long-term value creation. Emphasizing high-conviction bets, long-term investment, and industry focus, Ark Invest anticipates exponential growth to benefit from technological disruptions.^[4]

What should be in an investment thesis?

As an important document, an investment thesis explains why an investment opportunity is expected to be profitable. It should include key components to thoroughly analyze and guide decision-making effectively. These 7 pieces of information are indispensable:

The Investment in Question: Identify the reason and the investment opportunity under consideration.
Investment Goal(s): Clarify the investment's aims and aspirations by defining its objectives and goals.
Viability of the Investment: Evaluate the investment's potential, considering any favorable trends or factors.
Potential Downsides and Risks: Address and analyze the risks associated with the investment, highlighting any potential challenges or drawbacks.
Costs and Potential Returns: Evaluate the financial aspects of the investment, including costs, expected returns, and potential losses.
Alignment with Intended Goals: Ensure that the investment aligns with the overall investment objectives and strategies.
Growth Potential: Assess the growth prospects of the investment opportunity.

What is the difference between investment thesis and investment mandate?

An investment thesis is the reasoning behind an investment strategy, based on research and analysis, helping investors make informed decisions. Conversely, an investment mandate is a set of instructions given by an investor to a manager, guiding how to manage funds according to the investor’s goals, risk tolerance, and desired outcomes. Here are the key differences:

Aspect	Investment Thesis	Investment Mandate
Definition	Explain why a certain investment or strategy is likely to succeed.	Define rules for investing.
Purpose	Provide an understanding of the investment opportunity, including analysis, risks, and returns.	Provide clear guidance and direction for investment professionals.
Components	Define Market trends, industry dynamics, company fundamentals, competitive positioning, potential catalysts, and risk factors.	Define Asset classes, geographic regions, industry sectors, investment style, risk tolerance, and compliance guidelines.
Scope	The scope of an investment thesis provides a roadmap for investors, guiding decision-making through research and analysis to aid informed and effective investment choices.	The scope of an investment mandate defines instructions and parameters for managing investments.

What is a trade thesis?

A trading thesis is essentially an idea or argument made by a trader or investor about a particular financial instrument, market or asset. This process explains the reasoning behind a trading decision, considering things like market trends, economic indicators, and technical or fundamental analysis. This thesis acts as a plan for understanding the reasons behind a trade and what factors are likely to influence its outcome, aiding in making informed decisions in financial markets. Having a clear trading thesis helps traders and investors clarify their strategy and evaluate the possible risks and rewards of a trade.

Article Source

Andreessen Horowitz: “AI at the Intersection: The a16z Investment Thesis on AI in Bio + Health”
Goldman Sachs: “Launch With GS”
Goldman Sachs: “Goldman Sachs Research”
Ark Invest: “Big Ideas 2022”