Cheryl and Maxine

Okay, three, two, one. Hey, I'm Cheryl. I'm Maxine. This is First Check, part of Day One, the network dedicated to founders, operators, and investors. If you want to be a better early-stage investor, this is the show for you. So TLDR, if you don't want to suck at investing, listen up.

Cheryl

Okay, so now we get to talk about one of the funnest parts of angel investing, which is, I love this bit. It's my absolute favourite part of investing. I know, right? That is actually deciding on what you want to invest in. And it's something that I feel like has huge ramifications, but so many people don't think about it enough in the early days.

Cheryl

And there's totally a good reason for that, right? Like, I didn't think about it a lot in the early days because I simply just didn't know what I was supposed to be thinking about. And that's understandable, but now we've got lots and lots of data around how you can build your thesis.

Maxine

I love that extended drum roll.

Maxine

We were like, it's really great. We love it so much. It's the best part. It's the most important. We're talking about investment theses. Yay! No, but I think it's really important, right? Like, as the saying goes, if you have better information against the market, you should in theory be much better positioned to make better decisions and therefore invest in better companies, even better, better information, better decision-making abilities, then you get a much better, or in theory, a much better outcome from an investing perspective.

Maxine

But you're right. Very often I see folks step into the ecosystem and be like, my investment thesis is, I like it. Like, well, that's not really a thesis, is it? If we're honest.

Cheryl and Maxine

And if you don't want to be honest about that, then that's cool too. It's

Maxine

not gonna be a great outcome, but that's cool.

Cheryl

I have seen outliers to be fair, but I also think that the investors who have a stronger investment thesis tend to be happier with their outcomes and more confident in their decisions and outcomes, even when those outcomes are not good.

Maxine

Oh, interesting.

Cheryl

That's fascinating. Anecdotally. Anecdotally.

Maxine

Yeah. I believe that to be true, you know, because I think a lot of people, especially in angel investing, acknowledging that there's a lot of people that invest as an angel, not necessarily purely for financial returns. There might be some social benefit that they're trying to push forward.

Maxine

Education. Yeah. They're trying to learn about a new space. And so they develop their thesis to kind of hone in behind that. And so financial returns is a very important part, but not the only part of the way that they or what they're looking to get out of it. So do you want to start us off with the definition?

Maxine

Yeah. What is an investment thesis and why does it matter? Ooh,

Cheryl

definition. I shouldn't, okay, so I'll come up with one. I don't have one like off the top of my head, but just riff on the investment thesis as I stall so I can like get it clear in my mind here. So I think your investment thesis is the set of predetermined parameters, heuristics, and criteria that you use to determine the optimal

Cheryl

portfolio construction for your level of risk and desired outcomes.

Maxine

I love it. I think that that's pretty good. Good crack. I probably have a much less uh, erudite sounding definition of an investment thesis. Yeah, I mean, that sounded really formal. You did.

Cheryl

I should put that in a chat GTV and be like, ELI5 version of this.

Cheryl

Yes. Can you do it, Maxine? What's the five-year-old version of that?

Maxine

Ooh, I think my five-year-old version, an investment thesis is your belief on what you think will win for your stage and your strategy. Okay. Yeah. Do you reckon a five-year-old would grok that? I reckon that's more like 15.

Cheryl

Yeah. That's probably more like a 15-year-old.

Cheryl

Let me try. Okay. It is the number and type of investments you want to make. That best achieves the type of return you want to get, accounting for the risk you want to take.

Maxine

That's pretty good. I think that's pretty solid. I mean, you can hear us here fumbling through our definitions of investment thesis, but essentially it is, you know what you want to invest in, where you think that that is going to be valuable or why you think it's going to drive value and then therefore your predicted return and also your portfolio construction, right?

Maxine

How many companies you're going to be investing behind, um, and over what kind of timeframe.

Cheryl

Yeah. I think an important one that often gets forgotten is like, it has to account for the level of risk that you want to take, because. If you're just like, ah, I really like this, and I want to invest in lots of this, that often doesn't take into account the level of risk that you're trying to take, so.

Cheryl

But, like, let's break it down, right? So, there are a number of things that I think are important to think about, and I can probably put them into, like, a couple of buckets, so one of them being Like focus areas of industry or sectors. So things like you can, uh, choose things like, you know, I want to invest in fintech and edtech and HR tech and not invest in biotech and, uh, hardware and AI.

Maxine

Yeah, I think, I mean, maybe some examples here of industry-based theses that we see out in the market. One, AI. Can't be seen everywhere. So, there are a bunch of funds that were raised in 23, that were all focused behind theses around AI, believing it to be a platform shift or a fundamentally game-changing technology.

Maxine

And so you had investors stepping out and saying, we're investing in AI as a thesis, right? The thesis, the theory being that AI will fundamentally shift the way that value is created in businesses, that there will be huge outlier companies built in this platform stage. And then they are investing in companies everywhere between pre-seed all the way up to growth stage companies, trying to buy positions in companies that we think will fit to that thesis.

Maxine

Another thesis that you see out there in terms of industry, uh, particular verticals. So there is a fund, for example, based in the U.S. that is all Chief people officer, chief HR officers, chief, etc., and they have an industry belief that there is fundamental reshaping going on in the HR stack. And so they pull their capital together and they invest into companies that are in the HR

Maxine

Stack. And so they have a fundamental thesis about, uh, you know, a particular industry, right? HR tech. And that's what they're investing behind. It's also where they value add.

Cheryl

Yeah. And I think what is interesting about that example is like AI is a, like, horizontal across all, like AI can be applied to HR tech

Cheryl

Or it could also be applied to fintech, or it could also be applied to any other industry versus HR tech is a vertical, right? And then there's a whole bunch of other kind of, uh, intersections of lines. And if you could see me, I'm waving my arms wildly, but you can kind of layer things on so you can decide to

Cheryl

invest in AI and then layer things on on top of that. Or you can decide to invest in a vertical, but like the next layer could be something like the stages, right? So if you're doing AI, you may want to choose to invest across stages versus you could also just decide I'm going to do pre-seed AI only. So that's like another layer that you can add on to

Cheryl

the, your investment thesis, which is all right, well then let's decide what stage to invest in. And it could be that you just choose one stage, or it could be that you decide to invest across one or two or three or across any stage.

Maxine

Yeah. I mean, obviously in Australia, our largest venture funds, right, Airtree, Blackbird, SquarePeg, they are all stage-specific theses.

Maxine

They invest early stage and then they have an opportunity fund that follows off on from them all the way up. Or they have a multi-stage, right? I think Blackbird is the least thesis-oriented fund of all of them, at least when it comes to stage. So they'll invest from pre-seed all the way. But there are funds out there, for example, us, where we just invest in one stage.

Maxine

So pre-seed, that is all we invest in. We don't invest in seed. We don't invest in Series A. We don't invest in anything else. And so some people invest behind their thesis is on a stage basis as opposed to an industry vertical or horizontal stage.

Cheryl

Another layer that I can be added on is the business model.

Cheryl

So we often see funds that then add another layer on top and say, in addition to AI at the pre-seed, I am only going to invest in B2B SaaS, or only invest in B2C, or only invest in B2B, but it could be anything from marketplaces to SaaS to Fintech to, or to, other businesses, but the like customer is B2B.

Cheryl

So that kind of business, we group it as a, uh, the whole layer is business models, but that's another layer that you can add on top to say, okay, this is something I want to also filter by.

Maxine

Right. And FX jumps to mind here as an example, right? The network effects fund that's based in the U.S. I mean, they grew up in the marketplace era where

Maxine

Network effects were everything, uh, but now they apply those network effects to say data moats and network effects as they apply to LLMs and generative AI. There are lots of companies, also every single B2B SaaS fund you've ever encountered fits into this category. Yeah.

Cheryl and Maxine

Every, every fund in Australia. So we invest in B2B SaaS.

Cheryl and Maxine

Oh, okay, great. Yeah. What about you? So we're, we're B2B SaaS.

Maxine

Which, I mean. Each of these theses, there's a why behind them, right? There's a reason that they invest just in B2B SaaS. In theory, repeatable. In theory, long-term lock-in. In theory, high margin. High margin, very lucrative business overall. But then, you know, there is a reason that people invest in the other theses as well.

Maxine

And I think the last layer

Maxine

in this bucket, there's lots of layers and buckets in this, in this podcast, but I think the last layer in this bucket of things that you can use to form your thesis is geography. So some investors will choose to focus on a particular geography or be agnostic. Most funds in Australia do focus on the Australian geography, partially because of the rules around the ESVCLP fund mandate needing to invest in at least 80 percent Australian companies.

Cheryl

But I think the other piece, and I think this is probably true for you and me is that we just genuinely believe that there is. Alpha, uh, I was trying not to use a jargon word there and couldn't come up with one, so I still used

Maxine

it. I paused, I paused, I paused, and then I said the word alpha. Definition of alpha means that it's the amount that you return above the average for the market.

Maxine

So the beta for the market, the alpha is the difference between the average for the market and the amount that you've returned.

Cheryl

Arbitrage

Cheryl and Maxine

was the word I was looking for. There's arbitrage to be had here. Alpha and arbitrage. You don't want to arbitrage without

Maxine

alpha. That sucks. Don't never arbitrage without alpha.

Maxine

So obviously for us, we are a semi-geography-focused fund. Geography being the humans that come from Australia. So we invest in Australians all over the world. Someone actually did make the point to me that they were very confused why all of Australia seems to focus just on Australians. We're in other markets.

Maxine

They focus on the rest of the world. I think you're exactly right. I think the ESVCLP is a forcing function. That means that we are domestically focused. I've made this point before, but I will shout it from the rooftops again. I think it's a really useful and was a really useful incentive to get capital flowing into the domestic economy.

Maxine

But I think actually we might be starting to get to a scale where it's becoming. slightly problematic by forcing capital in Australia, just to be investing into Australian companies, as opposed to raising capital in Australia against deployed internationally in the same way that you will see out of the U.S. which crazy statistic, but pitch book.

Maxine

reported that 30 percent of the capital that was raised globally came out of San Francisco last year. Wow.

Cheryl

30%. 30%. One-third basically of the world's capital. Yeah. Came out of San Francisco. Like San Francisco, not California. We're talking about like the city of San Francisco. Yeah. Yeah. We're talking about

Cheryl

Not even like Bay Area. Nope. San Francisco. How are we defining that

Maxine

though? Like, surely It's an area code. You just, like, assign the area codes or the collection of area codes to where those funds are based. Wild, right? Yeah. Totally

Cheryl

wild. That is nuts. What is it then? Like, California was 50%? Like, what?

Maxine

I don't know.

Maxine

That's interesting. Yeah, because then you would include LA. I'm not sure.

Cheryl

Yeah, right? Like, LA and even, like, Bay Area. Like, there are a lot of funds that are in the Bay Area, but not specifically in San Francisco. Yeah. I have follow-up questions for this stat. Anyway, carry on.

Cheryl and Maxine

Mm.

Cheryl

Lots

Maxine

of questions. But can you imagine in Australia if we had funds that were investing really well globally into global Companies, and then that carry was accruing back to Australia?

Maxine

That would be extremely material. Now, I think you can make the argument, which we're going to talk about in a moment with a thesis. Part of it is thinking about product-market fit. Part of it is thinking about why should you win over everyone else that has the view that this might be a place that value is generated, but I think we can be more ambitious as an ecosystem to think about why do we win in global deals in the same way that

Maxine

So, you know, there's lots of global funds that invest out of Europe and out of the U. S. that win in excellent deals.

Cheryl

Yeah. Look, I think your thesis is right there and, and perhaps the, the regulations haven't quite caught up, but yeah, we'll see what happens, honestly, like. I think there is an argument to be made for opening that up and allowing more returns to come back into the Australian market that would potentially, actually benefit the Australian market more than forcing money here.

Cheryl

But anyway, topic for a different time. I think there's a few things that can be helpful to ask yourself as an angel to determine what makes sense for you. And in those, so the four buckets are sorry, the four layers that we just named was industry focus, business model, focus, stage focus, and geography focus.

Cheryl

So when thinking about how you may want to refine your investment thesis, uh, based on those four layers, a couple of questions that I tend to ask investors and. I just asked myself when I went through it, things like what areas do I most enjoy or do I want to learn most about? How much risk do I feel comfortable taking?

Cheryl

This pertains particularly to the stage one. Where do I believe there is likely to be the best opportunities for strong returns? Where do I believe I may have an outsized advantage for identifying the best opportunities for strong returns? What types of companies do I want to spend my time with? For example, if you, you know, you may know a lot about fintech, but you might be really, really interested in edtech.

Cheryl

And those are the types of companies you want to spend your time with. And the last one that I think is probably one of the most important is where do you want to have an impact? You are deploying dollars. Don't forget that. And wherever you deploy dollars is likely to have an increased, even if it's small, increased value, add impact benefits, valuation, uplift.

Cheryl

You know, wherever you're putting money is going to grow in some way, shape, or form. So think about where you want to have an impact. It's, that is the reason that a lot of funds tend to have a no tobacco, no alcohol, no gambling rules because they don't want to have a positive impact in those spaces.

Maxine

Yeah, they don't want to accelerate them.

Maxine

And that's largely driven from their big institutional investors, right? It's kind of like a term, it's called a vice clause that they pass down, but also that they don't want to be part of that.

Cheryl

Yeah, but even other funds that don't take institutional money have that. True, yeah, yeah, they don't want to fund those, those activities exactly.

Cheryl

Family offices often will have that as well. Yeah. So yeah, I think the impact question is like, where do you want to have an impact?

Maxine

Absolutely. And you'll also see this, so one or the other, I'm assuming demographics kind of fit into the geography bucket here, right? Meaning. Sometimes, and actually increasingly in the U.

Maxine

S. there's lots of funds that have a particular demographic filter. I. e. they're looking to invest in people of color, they're looking to invest in

Cheryl

Oh, that's my

Maxine

whole other bucket, Maxine. Oh, it's a whole new bucket! We're into new buckets. There's a whole new bucket! Okay, okay. I won't jump ahead then. But, you know, that obviously is a material one, as we look at the demographics of where capital is deployed today.

Maxine

That's a common one that we see people angel investing behind in particular, but also family offices investing behind to try and change the demographics of the people that get access to capital so that the companies that are built and the ideas that get an opportunity to prove that there is

Maxine

something to them is meritocratically spread as opposed to concentrated in certain populations in our country and in others.

Cheryl

Yeah, absolutely. So on that note, I guess the whole other bucket here is this is, uh, again, it's another layer, but like, this is another bucket of, of things that will help you build your investment thesis, which is essentially the company criteria that you

Cheryl

Use to determine whether a company is something you want to invest in or not. Now, this is where it gets less. Like I can't give you four specific layers. What I can give you is things that many investors tend to share similar criteria for, and. It ends up looking somewhat like, kind of like a checklist where not every box needs to be ticked, but each additional box that is ticked counts as a like plus one for this investment.

Cheryl

So let me give you some examples. Probably the, the one that is most similar across almost every investor that I know. And it's a really interesting one. Is essentially this concept of like a strong founding team. Sometimes investors call it an A plus founding team or amazing founders doing their life's work.

Cheryl

But it's interesting because this concept of a strong founding team, while is similar across most investors, it. Almost universally means different things to different investors, so sometimes that means things like co-founders instead of a solo founder. Sometimes it means feeling like the founder is doing their life's work, or they are running through walls to get where they're going, or that they have hustle culture.

Cheryl

Or other times it means that the founder has deep domain expertise and a really unique, uh, life insight or earned insight. It could mean other things. It could also mean that there is diversity in the team, uh, or that there is a specific team. A dynamic or a or a specific skill or exclusively like Maxine said that the diversity piece it could mean like the team is all female or the team is all people of color so strong founding team means a lot of different things, but it is usually one that is in the list and

Cheryl

I would encourage you to put it in your list. And then as a next layer, think about what does strong founding team mean to you?

Maxine

I think that's a really good nudge. Most people that invest in early-stage, there is a team bet that they're making, right? To some degree, actually, Elliot Strablev, who is a professor at Stanford Business School, who studies investor decision-making a couple of years ago, he did a wide-reaching survey of US investors, the degree to which they features behind their decision-making, right?

Maxine

Like essentially he was asking the question like horse or jockey or in another analogy, surfer or wave. And I think it was 60 percent of them in all stages, like all the way up through growth said it was. It's all about the founding team or the founding team is the thing that they pick the most off. So just to kind of, uh, validate that there is a lot, I mean, as investors, you have to be looking at the founding team because without them, you don't have a lot of enterprise value for the first, maybe three to five years or standalone enterprise value if they're not willing to keep executing.

Maxine

And there's an argument you can be made, you know, that's important all the way through even post-IPO, even, you know, the ability for founders to generate enterprise value post-exit is also really strong.

Cheryl

And I think this is where that concept of like, it's hard to determine what you think good looks like if you are not exposed to what good looks like enough before making some of these decisions.

Cheryl

Like if I think back to the first few investments that I made, and if I had sat down and tried to build my investment thesis at that time, I might have picked things that, I, I wouldn't agree with now because I just hadn't been exposed enough to what a good founding team looks like at that stage.

Maxine

Right.

Maxine

Yeah. It's all about lifting that bar over time because a reminder, we all live and breathe the power law. Yes. All hail the church of the power law.

Cheryl

Which is where I think syndicates can be really helpful in those early days to get exposed to what good looks like. By joining a few syndicates, getting a few deal notes, seeing a few reps, seeing what others are investing in.

Cheryl

Uh, even if you don't make your own investments by those syndicates, it can be really good to see what good looks like from someone who has done it multiple times. 100%.

Maxine

Yeah. Very, very valuable.

Cheryl

And on that note, if you are interested in joining any syndicates, I would definitely recommend that you head over to AussieAngels.

Cheryl

com and, uh, and join a couple of syndicates. There's no cost to join or requirement to invest, but it is a great way to, uh, see reps of what good looks like.

Maxine

Absolutely. Yeah. Also for those syndicate leads, right. Those syndicate leads by showing them, by showing you kind of how you get the conviction on a deal, showing what kind of

Maxine

information they're collecting will give you some indication on what their thesis is. In fact, some of those syndicate leads might even talk to why a particular thesis, right, there are syndicates on Odyssey Angels that are focused on say climate in its broad sense, maybe electrification in particular or focus theses on particular business models on particular spaces.

Maxine

And so it will also give you a really interesting kind of overview of a bunch of different theses of how they are developing, where they think value sits in the market today and how they're investing behind that value.

Cheryl

Yeah, absolutely. There's a few more I'll maybe, maybe call out, uh, under this bucket of like things that Many investors tend to put in their criteria list.

Cheryl

Uh, another one is a large market opportunity. And again, this comes in like different forms where, uh, it could be like, you know, Blackbird, for example, is global from day one or a huge TAM, total addressable market, or even like a lot of, uh, VCs tend to have a, like 1 billion requirement. Like we have to believe that this company can be, can get to a billion dollar valuation.

Maxine

Or more now.

Cheryl

Yeah, I think it, I think actually it's, it's 10 X in the

Maxine

last little bit,

Cheryl

like effectively

Maxine

we get to a 10 billion valuation now. Right. And I think this is something worth calling out as well, because as these funds get bigger, the math that they're doing is essentially they need to see their investment in the business return their fund.

Maxine

So if you're investing out of a billion dollar fund, then you and you're planning on as an investor, stepping in and buying 20 percent of that company and defending that the whole way up, that means essentially that company needs to be a five to 10 billion enterprise value for you to be able to return your fund on that investment.

Maxine

And so you can do a quick back of the envelope, the number of companies that have just raised billion dollar funds, uh, and are investing out of those funds. And so. That also helps you if you're thinking about, as a founder, you're thinking about, okay, what is the thesis of these funds and am I a good fit for them?

Maxine

Is it even worth my time reaching out to them?

Cheryl

I think what's interesting is that angels don't necessarily have that same requirement, right? And so angels can be investing for a shorter time horizon or even dividends, uh, if it's a, it's a cash generating business. So I'm seeing lots more of those out in the market.

Cheryl

Yeah.

Maxine

Yeah. The market is hot for dividends right now, which I understand. Cash dollars.

Cheryl

Cash dollars. So I think as an angel or as an investor, as part of your thesis, thinking about like what does the returns model look like for you is also part of developing your thesis. Actually, that's a whole other bucket.

Cheryl

Next is your time horizon risk versus return. Um, but sorry, going back to the market opportunity, deciding as to like how, like what does a big market opportunity look like to you or is it not something that matters? A interesting, like, kind of, um, con conflict dichotomy is Blackbird's requirement for global from day one, but at the same time they have, they have publicly stated several times that they're not that concerned with a huge market size.

Cheryl

So that tells you that, like, while they want a potential large market, they don't so much look at, like, the TAM numbers on a slide.

Maxine

Yeah, I mean, that's not an uncommon one that we hear out there, and that's largely because of a view that you can't pick a market from its outset, right? Small niches can grow into huge companies, um, which I think there is some truth in that.

Maxine

I also think that like, It's tough to build 10 billion in enterprise value out of pink lipstick. Well, actually I ate my hat, but I don't know, it would be like, Ooh, I have, um, uh, but you know, the point that I'm making is there are certain niches that I think it would be really hard to believe you can grow them into certain kind of particular verticals.

Maxine

But I think to Blackboard bird's point and lots, there are many a small niche that have grown into enormous companies. So it's not a hard filter.

Cheryl

Um, another one that I'll call out is the like painful versus not painful. So like for me, I have to see a, a problem that the company is trying to solve as something that is very painful and that customers are going to be like willing to put down their credit card to solve this problem or work through a really challenging UI because this problem is so painful.

Cheryl

That being said, I probably would not have invested in Instagram because The problem of not having enough photos to scroll through on my phone simply wouldn't have felt Painful enough to me now, of course we can see where Instagram has gotten to now in terms of how businesses are using it. And it is solving very painful problems, but in the early days, it was literally just a photo sharing app.

Cheryl

And so there's an argument to be made there that like, if you. If you are choosing the thesis that I have chosen, which is I have to believe this is a very painful problem, then you're most likely going to miss out on more consumer stuff that is, uh, meeting an unmet desire versus solving a very painful problem.

Cheryl

Um, there's no right or wrong answer here. I'm just calling out that these are different ways that people think about, uh, how they build their, their investment thesis. Would you have invested in Instagram if you'd seen it, Maxine?

Cheryl and Maxine

I,

Maxine

who knows? Yes. Why not? Uh, I do think. No, to be intellectually honest, I wouldn't have because when it first came out, I was like, why I don't need filters.

Maxine

I don't take enough photos, let alone filters, but I am conscious that I think the need that they were solving was a very painful one, which was ego, the forever most painful one, a desire to feel good about oneself. Because remember, it was just at the beginning of selfies, it was just the beginning of the, when they put the camera on the other side.

Maxine

of iPhones. So I think it was like 2012, maybe. So suddenly we were taking a whole bunch of selfies and similar to the spike in, uh, makeup sales, when everyone was spending time on zoom and you could see your face all the time. I think what we were looking at was. A very, the very painful problem of feeling better about the way that we look by putting filters on our photos and then posting them into a social group where we could feel like other people could see how grand we looked or our ability to take good photos.

Maxine

I think that ultimately is the driver. It's rumored, and I don't know if this is true, but it's rumored that the reason that Peter Thiel got as excited about Facebook as he did is because of mimesis, right? The way that we choose what we like. And we don't like is in big part driven by who we think of as our reference group and essentially what Instagram and Facebook both did is meant a much wider group of people are our reference group.

Maxine

And then once you've changed what I want, you can then sell me stuff that I want. And so he guessed that that was the direction they were going to end up in, as opposed to just a photo and the kind of life update sharing that once you have done that, you have built sufficient. Painful demand of I must be Kim Kardashian.

Maxine

Otherwise, my life will end and then I will buy butt implants and I will buy whatever the shaper things are that wrap you into a certain shape and I will buy hair products and makeup products and I will just give you my credit card. Just shut up and take my money. Just take my money. Which, if that's true, is pretty prescient.

Cheryl and Maxine

Yeah, okay, fair. I feel you on that one. I wasn't around, I guess, when it very first started. Wasn't focused

Cheryl

on it. I accept that argument as a premise around the painful problem. I still, to me, like, it doesn't seem painful enough. Maybe I don't have a problem with my ego, so, now you're asking me why. You're a Zen monk.

Cheryl

Those are, those are a couple. They're, like, there's, there's so many others. There's things like true innovation versus fast follows, where is something brand new, or is somebody building a business that is following a successful model that we've seen in other markets or in other geographies? There's odd ones, like I know funds that only invest in founders who have previously failed a business, or funds that only invest in second-time exited founders.

Cheryl

Any, any odd ones you can call out?

Maxine

Oh, so many. There's so many. I mean, like, the US is such a large market. So niche strategies are quite common. So I wouldn't call them odd necessarily. They're just very niche. So one very niche one is they just invest behind graduates from certain schools. I know certain funds that just invest in second-time founders out of certain schools, right?

Maxine

Just gives you a sense of how many founders are graduating from these schools. So a whole kind of. 30 to 50 million strategy behind that. Um, well, I think one of them actually even has a referral requirement. So it's referred to them by a person that they know. Who is graduated from a certain school and is a second-time founder.

Maxine

You'd think that'd be a small pool, but yeah, yeah. It turns out no. So yeah, there's very niche strategies. Uh, there are also strategies of kind of theses that are the exact opposite of that, which is very data-driven, right? I believe we've had. One on this podcast, a belief that you can kind of algo invest or algorithmically invest in startups.

Maxine

And so you should be investing only if a company has certain features, um, certain people around it, certain kinds of CVs, and then it's just kind of automatically executed behind that. I would put that in a bit of an odd strategy because of the nature of this asset class. Um, I've seen a bunch of those trying to think, is there any other quirky folks that I've seen around there?

Maxine

And then there's a whole bunch of alumni

Maxine

So you worked at a certain company in a certain period of time that that is where the value lies.

Cheryl

There's also, I mean, this one kind of fits under stage, but like traction there, there's also a whole bunch of these surround, like I only invest once you've hit a, you know, 50 K and MRR, or I only invest in B2C companies once you've got a thousand daily active users or countless others.

Cheryl

So that one kind of fits. It's under stage a little bit, but I think it is one of those like company criteria things that you could determine. Now, I'm not an advocate for things like that because I think that personally, I think that you're likely to miss some really good opportunities if you are too strict.

Cheryl

And my thought here is like, for example, I've got three things on my list of like company criteria. I also filter by the, those four buckets that we mentioned above, but in my like company criteria, there's. three things that I really need to see. Um, so I would encourage people to keep it simple because a longer list is, is going to be difficult to evaluate and get to, um, on, and especially get to all buckets.

Maxine

Right. Yeah. And I think anecdotally I've heard people say their outliers are driven by the time that they broke their rules.

Cheryl and Maxine

Maybe reevaluate your rules then?

Maxine

Yeah. Every single operator I know and every single investor I know has broken their rule at least once or twice or kind of stretched in one direction or the other.

Maxine

And so, you know. Again, anchoring on the fundamentals here. The reason you develop a thesis is to form a view. Where do you think you have better information against the market? Where do you think is the opportunity that isn't fully maximized yet? Where do you think you can access deals that no one else can?

Maxine

We're really starting to drive towards where are the places that you can drive a better return, i. e. alpha, then. Just the average of the market, because if you think you can't outperform the market, you should not individually stock pick. It is a learning that we all took from the advent of EFTs and we should apply it here.

Maxine

We should be thinking about, okay, if I don't think I can outperform the market, then I should just invest in. A fund that will give me broad spread or a collection of funds that will give me broad spread across the startup ecosystem, um, as opposed to try to individually stockpick, i. e. individually invest in companies.

Cheryl

Yeah, and that kind of brings us to our next bucket, which is. How do you actually get access to these deals and maintain great access? So this one is more about like your value prop and thinking about how do I attract the best deals and the question? I ask investors who want to get access and this is more for investing directly if you're going to invest via syndicates or funds This isn't as relevant because you are leveraging someone else's access to get into those But if you want to invest directly ie You give the founder money, you wire them money, and they give you a piece of paper that says you may or may not own some shares now or sometime in the future.

Cheryl

Um, if you've listened to our recent, uh, Structures episode, that's a throwback to that. But in this scenario, it is important for you to invest in places where you know you can build a solid value prop. So thinking about, what space do I have, uh, better access? What space do I have better connections or, uh, unique

Cheryl

Like experience or understanding. So it's basically, how are you bringing value to the startup so that they will want to take your money over someone else's. Exactly right.

Maxine

Cause at the end of the day, money is the ultimate commodity. Yeah, they can get money from anywhere. Why should they take yours and why will they refer you to other people?

Maxine

And so the best way, again, outlier is everything. We worship at the church of the outlier. So you need to make sure that if you are going directly, you have a reasonable view on why do you think you will see the outlier for your thesis. Right. For your demographic or for your, uh, stage or for your et cetera, et cetera.

Maxine

So thinking about how do I meet them and then once I do meet them, how do they refer me to the next great founder and then the one after that and the one after that. And that happens most likely if you're able to meaningfully add value. In those interactions. So that can be anything, you know, I have seen, don't get kind of too tight around your definition here.

Maxine

I've seen, uh, investors add value by just simply being a thought partner, being available to riff ideas with. I've seen, uh, investors be valuable on a single thing, like their equivalent of the Hulk smash.

Cheryl

Like I opened one door

Cheryl and Maxine

and my, what a door. It

Maxine

was a whole oasis behind there. Yeah, exactly. So if you, if there is just one thing that you do and you do it really well, and there are certain kinds of businesses that are really served by that thing, then investing behind that thing can be really, really valuable, right?

Maxine

A certain intro, a certain piece of access, right? Serena Ventures. That is essentially the whole thesis behind Serena Ventures, Hulk smash of, I can accelerate you into the sporting.

Cheryl and Maxine

Yeah. I am Serena Williams and you get me,

Maxine

Hulk smash. It's worth it. Yeah. And she gets into some amazing deals. So, you know, as you're thinking about developing your thesis and thinking about your thesis fit for where you can be valuable, think about what is.

Maxine

It's the places that you can add value so that you can get companies referred back to you over and over

Cheryl

again. And that's not even factoring in the extra value that you, your connections or value brings that actually helps the company grow, which like, if you're thinking about, well, if I'm going to deploy my money here, wouldn't I want to deploy it somewhere where I can actually have a small Influence on the outcome, even if it is just a tiny little thing, like that helps them get that extra 10%, whatever, then like, why wouldn't you want to deploy your money in that space?

Maxine

So yeah, think about like, what do you have access to that others don't? What unique experience or insights do you have? What expertise, like skills, sometimes it is literally just like, I am a master coder and I can review your code and make sure that it's amazing. or something that is very skills-driven, or what are you really good at and what can you teach others?

Cheryl

One of the things that I think gets overlooked a lot is the HR piece. Like that's something that I am not particularly good at. And it is consistently the thing that my portfolio companies come to me. And I'm just like, I'm sorry, I can't be helpful in that. I, when I went to invest, I gave you the list of things that I can be helpful in.

Cheryl

And that was not on the list. I will like share your job ad, but I like. I, I'm not the one that's helping with hiring. So if you have that skill of like finding and cultivating a great team, that is a really valuable one. And I think that one is undervalued.

Maxine

100

Cheryl

percent

Maxine

hiring. I think it's one of the reasons that you saw A16 build hiring support as one of their core pillars of their platform.

Cheryl and Maxine

Yeah.

Maxine

It's one of the most common requests you get as an investor and as an angel, you know, it's pretty much in every second investor update I've ever read.

Cheryl

Yeah. Okay. Last bucket. I promise this is the last bucket. The last bucket is your risk return and timeline profile. So thinking about under what time horizon are you looking for returns and what level of risk are you willing to take in this time horizon?

Cheryl

If you are on the older range of things, I'm not going to say any numbers here, then you may be looking at a shorter time horizon until you may want to retire and stop dealing with You know, start up people in t-shirts, uh, sprouting a bunch of jargon. And if you are on the younger end of things, then you may be looking at really long term, highly risky, huge plays.

Cheryl

So, my call out here, I guess, is like, think about What's your time horizon? Think about what types of returns you might want to be looking at and exits. I initially started with very, very long term risky things. And I think I'm probably not alone in recently looking at more like, all right, well, let's see if I can add a

Cheryl and Maxine

couple, like three to five year return things to my list.

Maxine

Absolutely. Yeah. Oh, I mean, I think the entire ecosystem is looking for shorter term time horizons. The old liquidity crunch will do that. But I think, yeah, this is a really important thing to call out for anyone who's listening, who's running a family office, maybe taking over that part of their family's wealth, or maybe looking for family offices who are kind of putting together a strategy for a family office.

Maxine

This is a really important one to be thinking about because, but also for everyone is kind of thinking about liquidity time horizons and cashflow time horizons to make sure that you can continue to keep investing. Do not. Don't run out of money. Run out of money.

Cheryl and Maxine

Don't run out of money. Oh, I hope Adam makes a song out of Don't Run Out of Money.

Cheryl and Maxine

That would be amazing. Don't run out of money. Don't run out of money. Don't run out of money. Incredible. I really hope that happens. I'm going to regret doing that. I know I'm

Maxine

going to regret doing that. That is the kind of thing that TikTok loves. I wish you all the best in the wild channels of TikTok and your Don't Run Out of Money song.

Maxine

Oh dear. I, but I think it's a really important thing to call out as an investor to think about, okay, liquidity construction over time. In startups, that's especially thinking about the maturity of the company that you're investing in. If you invest in a pre-seed company, you should be expecting to lock up your capital between 10 and 12 years.

Maxine

If you invest in a series B company, you should be thinking about, you know, closer to the five to seven years, maybe even less. Pre-IPO, you want to see liquidity in kind of two to three. And so thinking about how do you construct your portfolio to make sure you get exposure kind of across that portfolio.

Cheryl

Or go all in on the like 10 to 12 year.

Maxine

Yeah. On pre-seed, just pre-seed, no liquidity, and just strap in. I don't need no liquidity. Sure, if that, if that works for you. If you have a liquidity profile from something else, then that can work. But it can be helpful to be thinking about timeline and risk profile as a result.

Cheryl

Yes. Okay. That is all of the buckets. And I think we've given everyone some great basics to get started thinking about your own investment thesis. But if you do want to go deeper and really build out your investment thesis or just expand your learning from here, uh, we highly recommend jumping into the angel Academy course.

Cheryl

There's a whole module on developing your own investment thesis, including a questionnaire and form and much more. Um, so jump onto www.venture. academy.

Maxine

Fabulous. Well, hopefully you've learned a lot here about how to develop your thesis and we'd love to hear your theses because this, as I said, is the funnest part of investing for me, you know, where people see opportunities, uh, where they feel fit to those opportunities.

Maxine

And so please hit me up, tell me your investment theses.

Cheryl

Yes, please email us your investment thesis. That would be excellent.

Cheryl and Maxine

Thanks everyone. Good luck investing. We'll see you out there. Oh, I hope Adam makes a song out of don't run out of money.

Maxine

Do not under any

Cheryl and Maxine

circumstances. Don't run out of money.

Cheryl and Maxine

Don't run out of money. Ha ha ha, incredible. I really hope that happens. I'm going to regret doing that. Don't run out of money. Don't run out of money. Don't run out of money. Ha ha ha,

Maxine

incredible.

Cheryl and Maxine

Oh dear.