VC Investment Thesis vs. Hypothesis: What's the Difference?

The Reality of Venture Capital Investment Theses

Venture capital firms frequently discuss their investment theses across various platforms, including Twitter, Medium, Clubhouse, and industry conferences.

However, a detailed examination often reveals that these stated theses can be lacking in substance or even potentially deceptive.

Introducing OpenVC: A New Approach

OpenVC is a novel, open-source project designed to gather and analyze all publicly accessible VC theses.

The goal is to assist founders in locating suitable investors more effectively, and to provide investors with a better understanding of the market.

We are now releasing our preliminary findings, and encourage investors to contribute their own theses for comparative analysis.

Data Sources for Our Analysis

Our research is grounded in two distinct data collections:

• 125 theses submitted by investors to the OpenVC database.
• 36 theses directly extracted from the websites of U.S. venture capital firms by David Teten and Sam Sabin of Hireblue.

Key Findings Regarding VC Theses

Our investigation has led to four core conclusions:

1. A disconnect often exists between publicly stated theses and actual investment patterns.
2. Many VC theses are overly broad and lack practical meaning.
3. We have identified seven distinct categories of VC theses, alongside an eighth – the absence of a defined thesis.
4. Investment theses should be viewed as testable hypotheses, with the portfolio serving as evidence of their validity.

Defining Investment Thesis and Criteria

For clarity, we will use the terms “investment thesis” and “investment criteria” interchangeably throughout this analysis.

It is our contention that a well-defined thesis should inform the development of specific investment criteria.

Discrepancies Between Stated Investment Strategies and Actual Capital Allocation

Many venture capital firms articulate investment theses that don't fully align with their real-world investment practices. A common example is a stated focus on “European tech startups at the early stage.”

However, analysis reveals that this often translates to investments concentrated in a limited number of nations, such as the U.K., France, and Germany. Furthermore, the definition of “tech” frequently narrows to specific sectors like B2B SaaS, fintech, and consumer mobile applications.

Within the OpenVC network, 34 firms identify as “early stage” investors. Interestingly, a significant 30% of these firms do not, in fact, provide funding to companies prior to generating revenue.

The term “early stage” is therefore open to interpretation. A more precise approach would be to clearly define investment amounts to better communicate fund preferences.

Nearly all VCs claim to prioritize investments in exceptional founders. Yet, data from PitchBook indicates a substantial disparity in funding allocation.

Since 2016, ventures led by women founders have secured only 4.4% of all venture capital deals. The capital received by these companies represents a mere 2% of the total venture funding deployed.

This contrasts with data suggesting that investments in women-led businesses often yield superior returns. This inconsistency highlights a lack of transparency within the industry.

This opaqueness leads to confusion among entrepreneurs who pursue funding from unsuitable investors. Consequently, investors find themselves inundated with applications from companies that don’t meet their criteria.

Venture Capital Theses Frequently Lack Specificity

Christoph Janz of Point Nine Capital recently observed on Twitter a common issue with venture capital investment strategies.

Specifically, analysis of a second dataset revealed a notable prevalence of theses centering on “technical” businesses – a broadly defined category – and those targeting “future-oriented problems” rather than current needs, expressed in various ways.

Frequently Observed Investment Criteria (among 36 U.S. VCs)	Frequency
Emphasis on “Technical” companies	26
Geographical Preference or Bias	10
Focus on Future Problems	9
Preference for Technical Founders	7

What accounts for the lack of precision in the investment guidelines published by venture capital firms? We propose three potential explanations, ranked by their perceived significance:

• Option value is a key consideration. Investors often avoid overly restrictive criteria to prevent overlooking potentially valuable opportunities. However, for many smaller firms lacking established brand recognition, specializing in a specific niche is often more beneficial than adopting a generalist approach. Feedback from limited partners generally supports this view.
• A motivation to present a “sexy” and politically acceptable image, rather than complete transparency, likely plays a significant role. For instance, a truthful statement like, “Our investments primarily target white/Asian men with Stanford educations,” while representative of many VC firms, would be considered inappropriate for public consumption.
• The concern that revealing investment criteria will expose a firm’s “secret sauce” is, in our opinion, less valid. Investment criteria can be shared without disclosing the complete underlying rationale. Many leading venture capital firms openly publish detailed investment theses.

Understanding Venture Capital Investment Theses: A Categorization

Determining what constitutes a successful, or at least well-defined, investment thesis is a key consideration for venture capitalists.

Investment strategies generally fall on a spectrum, ranging from broadly opportunistic to highly focused. These represent opposing approaches to identifying promising ventures:

• Founder Collective adopts a deliberately non-thematic approach, believing that innovative founders often pioneer unexpected applications that evolve into significant trends.
• Conversely, Right Side Capital maintains a highly specific thesis, outlined as follows:
  • Check Size: $50,000 to $200,000, with the majority ranging from $100,000 to $150,000.
  • Total Round Size: $50,000 to $500,000, with occasional exceptions up to $1 million.
  • Valuation: $1 million to $3 million, rarely exceeding $6 million with substantial demonstrated traction.
  • Traction/Progress: Typically, $5,000 to $30,000 per month in gross profit is expected; pre-idea or prototype-stage ventures are generally not considered.
  • Sector: Investments are limited to technology companies actively engaged in genuine engineering work.
  • Team: A minimum of two full-time founders is usually required, often supplemented by additional full- or part-time personnel.

This illustrates a lack of universal agreement regarding the necessity of a thesis-driven investment strategy. Even firms that profess to follow a thesis frequently deviate from it when making investment decisions.

Among those firms that do articulate a defined thesis, the majority align with one of seven primary categories, or a combination thereof:

(1) Industry-Focused Funds. Warren Buffett’s assertion that “diversification is protection against ignorance” resonates in venture capital, where industry-specific funds intentionally avoid broad diversification:

• Andreessen Horowitz, while generally a broad investor, has established dedicated funds concentrating on crypto, biotechnology, and financial technology.
• AgFunder concentrates on the food and agricultural sectors, aiming to address challenges related to climate change, soil degradation, and population growth.
• Foundry Group primarily invests in “software and internet” companies, guided by six core themes, including human-computer interaction (HCI) and distribution strategies.
• USV focuses on companies that enhance “access to knowledge, capital and well-being” through the utilization of networks, platforms, and protocols.

Analysis of OpenVC data reveals that software is the most favored technology class, attracting investment from 94% of VCs. Deep tech follows as a distant second at 57%, with hardware and therapeutics receiving considerably less attention.

Of the 125 funds analyzed, 33 concentrate on a single technology type (e.g., “software”), while 43 invest in two (e.g., “software” and “deep tech”), and so on.

(2) Business Model-Specific Funds. These firms often target startups serving a particular customer base, such as B2B versus B2C, within their preferred business model. Point Nine Capital, for instance, concentrates on B2B SaaS and marketplace businesses at the seed stage across diverse industries.

(3) Geography-Defined Funds. Beyond traditional country-specific investors and international offices of U.S.-based VCs, two key dynamics are observed:

• VCs specializing in specific geographic regions. Avataar Ventures exclusively invests in companies meeting these criteria: $15 million in annual recurring revenue; tech-led B2B and SaaS businesses; core operations in India/Southeast Asia; and a collaborative partnership approach. In 2019, Real Ventures invested in 42 rounds, representing the same total value as the next three most active Canadian VC firms combined, and sees 80% of all seed deals in Canada.
• VCs investing in companies with technology originating in secondary or tertiary markets, coupled with sales and marketing efforts in primary markets. OpenVC data indicates that 75% of funds invest in multiple countries, a trend consistent across both U.S. and European-based VCs.

(4) Founder-Focused Funds. This category is frequently exemplified by funds prioritizing underrepresented founders, though other focused communities also exist.

• Female Founders Fund, AmplifyHer Ventures, Halogen Ventures, and numerous others exclusively invest in businesses founded by women.
• a16z’s Cultural Leadership Fund aims to “increase the participation of young African Americans in the technology sector.”
• J-Angels is “a community and a VC fund comprised of leading American investors (Jewish American and Israeli-born) in Silicon Valley and San Francisco.”
• Diaspora Ventures is a “pre-seed fund… seeking to support the next generation of French entrepreneurs establishing tech companies in the U.S.”

A related subset focuses on mission-driven founders and incorporates explicit ESG (Environmental, Social, and Governance) criteria. For example, City Light VC invests solely in “companies where a direct correlation exists between financial performance and measurable social impact.”

(5) Structure-Defined Funds. Versatile Venture Capital, Indie.VC, and other revenue-based finance and flexible VC investors prioritize companies demonstrating a short-term focus on profitability. These firms typically employ a non-traditional “flexible VC” structure, enabling founders to repay their financial obligations through a combination of revenue-sharing and/or equity payback.

(6)Situation-Defined Funds. Certain firms capitalize on specific investment scenarios. Alpha Partners and Proof provide capital when existing investors lack pro rata rights, sharing in the investment’s economics. Correlation Ventures invests within two weeks when “at least one other venture capital firm is also making a first-time investment in the company.”

(7) Stage-Defined Funds. These funds concentrate their investments on startups at a particular stage of development or seeking a specific funding amount. First Round Capital invests in rounds up to Series A, often providing the “first money in” to entrepreneurs at the earliest stages of company formation.

Investment theses function as testable hypotheses, with portfolio performance indicating accuracy

Determining the inherent superiority of one investment thesis over another is not formally possible beforehand. These theses operate as guiding principles, yet ultimately, the quality of available investment opportunities is paramount. Exceptional prospects will typically attract investment, even if they deviate from a firm’s stated thesis.

Investment theses serve as crucial communication tools for both Limited Partners (LPs) and potential startup founders. Consequently, their development necessitates consideration of three key stakeholders: the investing partners themselves, the LPs providing capital, and the founders seeking funding.

As illustrated previously, a thesis rarely represents a purely internal viewpoint of the General Partner (GP). It inherently incorporates perspectives from LPs and, increasingly, from the founders being evaluated.

When confronted with a consistent stream of potential deals, an investment thesis can feel like “a collection of guidelines applied with flexibility.” However, this does not imply that the thesis is an inconsequential practice to be disregarded or misused.

In the competitive landscape for securing promising deals, the thesis forms the core of a fund’s unique value proposition. It is an integral component of a VC firm’s brand and identity, establishing its distinctiveness.

For many smaller firms, specializing within a specific niche is often more advantageous than adopting a generalist approach. A fund should strive to be recognized as the leading specialist in one or a combination of established areas. As startup mentor Alexander Jarvis noted, “Being known for something is preferable to being unknown, even at a later stage.” Further diversification can be communicated as needed.

Crucially, demonstrate your fund’s performance data: the volume of investments made at each stage; the distribution of investment sizes ($500,000-$1 million, $1 million-$5 million, etc.); and the rate of follow-on investments. While most investors readily highlight successful portfolio companies, few share comprehensive analytical data. Notable examples include First Round Capital’s 10 Year Project and FJ Labs’ 2020 Year in Review.

Jarvis aptly observed that “VCs tend to remain silent about unsuccessful investments, while readily publicizing positive outcomes.” We encourage greater transparency within the industry, with more firms openly sharing data that reveals the alignment between their investment thesis, initial hypotheses, and actual portfolio performance.

David Teten has provided counsel to Real Ventures and Right Side Capital. Appreciation is extended to Paulina Symala and Prabhat Gusain for their research and analytical contributions, and to Alexander Jarvis for his insightful and detailed feedback.

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