Building A Thesis

I spend a decent chunk of my free time thinking about what makes a good investor - specifically, what makes a good venture capital investor. You only have to go as far as this blog as to see evidence of these efforts. And while I don’t really have a good, solid, definitive answer to this question, I have started to notice a couple of patterns among investors that I respect.

One pattern I have noticed among good investors is that they all have their own, moderately effective, frequently ingenious investment theses that drives them. Some VC firms are very open about what their theses are (for example, check out USV’s), while others are particularly opaque. There’s nothing wrong with sharing or not sharing your secret sauce with the rest of the world - it’s all a matter of preference. I have even noticed that my own personal investment theses have started to develop. I have written about some of them on this website as well. They are fairly straightforward: product-market fit is important, diversity of thought is important on a founding team, effective cash-flow management is a harbinger of future startup success, etc. etc. But it’s important to note that I am not citing my own grasp of an investment thesis as a mark of a good investor - you have to have more than a thesis to be good at this job.

All a thesis really is is recognition of a pattern out there in the world in which you invest. As a human, it is perfectly normal to start looking for patterns. Some suggest that pattern recognition is one of the first things that separated humans from animals a long time ago. And investors do it all of the time. Fitting things into a patterns simplifies the endlessly difficult job of trying to predict the future.

But the thing is, humans desire to fit things into patterns so much, we sometimes over-fit or under-fit a pattern to match the facts that exist in the world. Instead of creating a thesis based around the facts that exist, we sometimes create facts to fit into the thesis we find most convenient. This is not just something that investors do - everybody is guilty. Confirmation bias runs rampant in every person - it’s a cornerstone of the human condition.

So what do the good investors do with their theses that separates them from the pack? I am not really sure, but I have a couple of guesses that I am going to try and incorporate into my own thesis-development process. First, it’s important that I refresh even my most deeply held investment beliefs every couple of months. I know this can sound like an exhausting exercise, but even if this doesn’t result in me changing the way I look at anything at all, at the very least I will provide myself with an added level of conviction. Increased conviction around how I do things will help me do those things more effectively and efficiently. And when I do find something to change, hopefully it will be evidenced-based and actionable.

If I know that my thesis is likely to be changed, then it’s probably smart that I am not married to my thesis. This doesn’t mean don’t have any ownership over it or don’t believe in it at all. But I don’t want to become so attached to it that when something occurs that flies in the face of it I immediately find a way to rationalize / dismiss that occurrence. I consider myself a moderately intelligent person, but I realize that even the smartest folks get things wrong. And they don’t just get things wrong occasionally, they get things wrong all of the time and eventually. So why should I be surprised when my thesis eventually has holes in it. I need to accept those failures and move on.

The trick then becomes recognizing when your thesis is wrong and when something weird occurs beyond any reason or control. I am going to take a concerted effort to try and recognize the difference between randomness and pattern matching. Random actions happen all of the time - you shouldn’t try and fit your whole world around them. But developing the skill to be able to discern between a random event and an ongoing trend can be a massive advantage for any investor. Collecting data points and plotting them along your metaphorical thesis chart can be a critical effort. And when something does not make any sense, even after you have removed your own bias from it, don’t be afraid to throw that data point out of the window.

So if I do those three things - reassess, change, and discern important data points from unimportant ones - then I should hopefully be well on my way. But all of this requires that I get appropriate reps. So the most important thing I can do is just go out and do something - literally anything. Gaining experience and learning from it is paramount in knowing yourself and your abilities.

Peter G Schmidt