In the last unit, we covered the topic, ‘Investing Instruments’ under which we studied various investing options available to investors that were divided into 3 categories Equity, Hybrid & Debt.

In this unit, we aim to cover the topic of ‘How to Source Deals?’, under which we plan to cover concepts related to Thesis Investing, Opportunistic Investing, moving towards Understanding Angel Investment platforms, and finally Syndicate investing.

The first topic we plan to cover is ‘Thesis-based Investing’. Understanding thesis-based investing is crucial because it provides a strategic framework for making investment decisions, helping investors focus on areas where they have deep knowledge and conviction. This targeted approach reduces the risk of spreading resources too thin and ensures that investments are aligned with the investor’s expertise and market insights. By concentrating on specific sectors or trends, investors can perform more effective due diligence, make informed decisions, and ultimately achieve better returns. Thesis-based investing also helps in building a coherent portfolio and maintaining discipline amidst numerous opportunities.

As always, we’ll try to explain the concept in the form of a story. Let’s begin!

It was a bright Saturday morning, and a group of enthusiastic investors gathered at Planify’s headquarters for a special session that was to be held over the weekend on deal-sourcing strategies. Among the attendees was Meera, a software engineer turned investor, eager to learn how to navigate the complex world of angel investing. The session was led by Rajesh, a seasoned investor with an impressive track record of successful investments. Rajesh had a knack for breaking down intricate concepts into digestible pieces, making him the perfect mentor for the day.

The Challenge of Deal Sourcing:

Rajesh began the session by addressing the challenge of deal sourcing. “As angel investors, our primary goal is to find promising startups to invest in. But the question is, how do we identify the right opportunities in a sea of possibilities?” He explained that deal sourcing is often compared to “boiling the ocean,” an idiom that means attempting something overwhelmingly large or impossible. However, with a focused approach, it can be made manageable and even rewarding.

Thesis-Based Investing:

Rajesh introduced the concept of thesis-based investing as a strategic solution to the deal-sourcing challenge. “Instead of trying to evaluate every startup that comes your way, develop a clear investment thesis. This thesis should be based on your interests, expertise, and market trends. It will guide your investment decisions and help you filter opportunities effectively,” he advised.
He further explained that an investment thesis is a set of criteria that defines the types of companies an investor is interested in. This could include specific industries, business models, geographic locations, or stages of development. By narrowing their focus, investors can allocate their time and resources more efficiently and increase their chances of finding high-potential startups.

Example: The Rise of EdTech

To illustrate thesis-based investing, Rajesh shared an example from his own experience. A few years ago, he noticed a growing trend in educational technology (EdTech). With the increasing adoption of digital learning platforms and a surge in demand for online education, he developed a thesis centered around investing in innovative EdTech startups. This focused approach led him to invest in Byju’s, one of India’s leading EdTech companies. His early investment paid off significantly as Byju’s scaled rapidly and became a household name.

The Process of Developing an Investment Thesis:

Rajesh walked towards the Whiteboard and outlined a step-by-step process for developing an investment thesis:
Identify Your Interests and Expertise: The first step was related to identifying your interests. Start by reflecting on your own interests and areas of expertise. This will not only make the research process more enjoyable but also give you an edge in evaluating potential investments.

1. Research Market Trends: Post identifying, the next step involved researching the new market trends. Stay updated with the latest trends and developments in your chosen sectors. Identify emerging industries or technologies that have the potential for growth.
Define Criteria: Based on your interests and market research, define specific criteria for your investments. This could include factors like market size, competitive landscape, business model, and team quality.

2. Validate Your Thesis: Once you have defined a criteria, start to test your investment thesis by evaluating a few startups that meet your criteria. Analyze their business models, market potential, and competitive positioning to see if they align with your thesis.
Refine and Adapt: Continuously refine and adapt your investment thesis based on new insights and market dynamics. Flexibility is key to staying relevant and making informed investment decisions.

Example: The FinTech Boom

Rajesh shared another example to emphasize the importance of adapting an investment thesis. Initially, he had a broad interest in technology startups. However, after observing the rapid growth of financial technology (FinTech) companies in India, he narrowed his focus to FinTech. His thesis led him to invest in Razorpay, a digital payments platform that has since become a major player in the Indian FinTech ecosystem. This strategic shift allowed Rajesh to capitalize on the FinTech boom and achieve impressive returns.

Sourcing Deals:

With a solid investment thesis in place, Rajesh discussed various strategies for sourcing deals:

1. Networking: Build a strong network within your chosen industry. Attend conferences, join industry groups, and connect with founders, other investors, and industry experts. Your network can be a valuable source of high-quality deal flow.

2. Online Platforms: Utilize online platforms like AngelList, SeedInvest, and Planify to discover startups that align with your thesis. These platforms provide access to a wide range of investment opportunities and facilitate the due diligence process.

3. Incubators and Accelerators: Partner with incubators and accelerators that support startups in your target sectors. These programs often work with high-potential startups and can provide early access to investment opportunities.

4. Referrals: Encourage referrals from your network. Founders, other investors, and industry professionals can refer promising startups that match your investment criteria.

5. Proactive Outreach: Don’t wait for opportunities to come to you. Actively reach out to startups that fit your thesis. Introduce yourself, express your interest, and establish a relationship. Proactive outreach can help you discover hidden gems before they become widely known.

Example: Swiggy’s Success
Rajesh shared a story about Swiggy, India’s leading food delivery platform. By leveraging his network, he was introduced to the Swiggy founders at an early stage. His investment thesis focused on the booming food delivery market, aligned perfectly with Swiggy’s business model. Through proactive engagement and due diligence, he identified Swiggy as a high-potential startup and made an early investment. Swiggy’s subsequent success validated his thesis and yielded substantial returns.

Conclusion:
As the session drew to a close, Vikram summarized the key points. Debt instruments, though less glamorous than equity, offer a stable and predictable return, making them a crucial component of a balanced investment portfolio.