Chance or deep observation: Our approach to thesis articulation

We start with ideas rather than companies, articulating a thesis for each investment area long before we consider writing any cheques.

Chance or deep observation: Our approach to thesis articulation
Credit: Greg Rakozy

When an investor decides to back a company, what are they really investing in? At the pre-seed and seed stages, when a start-up may be little more than a big idea, there is rarely the luxury of a robust financial record to guide decisions. Instead, investors must assess a range of considerations, from the capabilities of the founders to the breadth of the market opportunity, the nature of the competition, the scalability of the business plan and the degree of future optionality.

All of these must prove favourable for an embryonic business to succeed, and any one of them might result in its failure. So how does an investor really decide: what do they look for, and which factors do they judge most important? Do those vary according to the maturity of the business, the geography, and the sector it is operating in?

The concept of the prepared mind is not one that is new, dating back to Louis Pasteur’s belief that “chance favours the prepared mind”, but the way investors reach this state of knowledge (via deep observation and analysis) varies greatly. At Moonfire, we believe in the power of the investment thesis to guide that process. Additionally, we believe that during a downturn like the one we are facing right now, deep thesis research and articulation enable us to outperform and not get swayed. Every investor has a thesis of some description, whether unconscious or elaborated in detail. Some will prefer to back founders with a track record of success or who have overcome adversity. Others might be attracted to particular sectors, to outstanding technical founders, or start-ups operating in complete greenfield spaces.

Our bias is to be as systematic and proactive as possible with the dogma that new technology can be commercialised to unlock greater access, efficiency and/or product quality. We start with ideas rather than companies, articulating a thesis for each investment area long before we consider writing any cheques. Every week, on what we call Thesis Thursday, a member of the investment team will present their case for a sector, sub-sector or theme that we should be considering within our four investment categories: Work & Knowledge, Capital & Finance, Health & Wellbeing and Gaming, Community & Leisure. A thesis might, for example, cover the broad category of the modern data stack, a strand within that such as open source solutions, or a particular trend such as the rise of Reverse ETL or dbt. Our Thesis Thursday meetings are useful in a unique way, as we have both engineers and investors around the table at Moonfire, meaning we can deep dive into a thesis both technically and commercially.

In both the initial presentation and subsequent debate, we are trying to understand how an industry is changing due to technology-related undercurrents, the headwinds and tailwinds involved, and the opportunities that are arising as a result. We study the technological advancements closely to understand how platform shifts are improving how things can be done and also our society at large. We analyse companies – right from established giants to unknown start-ups – to understand how greenfield the space is and what strategies have worked well. We even brainstorm potential risk factors and steps to mitigate them to try and get a holistic understanding of how this space will evolve. Ultimately, a good thesis will combine these conceptual threads into something actionable, concluding with a distillation of the traits that we think a successful company within a certain sector, or leveraging a particular theme, will possess. Those might include founder characteristics, particular business models, and metrics we believe will be most important to measure success. And, we meticulously go back to our existing theses over time to identify how things have transpired since our original articulation and what new opportunities can arise. We hope to see these theses survive for years to come as they identify broader shifts that can sometimes take decades to fully form.

Simultaneously, our thesis articulation and focus on building a prepared mind has an impact on founder relationships and company-specific due diligence as well. A well-researched and recent thesis provides a cross-check for our deal analysis as we can quickly grasp whether the young startup has a unique opportunity to utilise technology to create and capture value in an industry. This empowers us as investors to have deeper, more meaningful, and better-informed discussions with emerging founders and to build (or not build) conviction early in our mutual quest to ascertain if we are the right partners.

And to top it all off, Moonfire’s technology-first deal flow process benefits from the thesis-driven investing process as well. The theses feed into the large language models that our engineers use to source leads for our pipeline, helping surface companies likely to exhibit strong thesis fit. Therefore, it helps us uniquely amalgamate our focus on investing and technology.

We invest what others might consider a disproportionate amount of time in thesis development, because it allows us to be proactive. A good thesis will preempt the arrival of a cluster of new companies in a given area, ensuring that we are ready for what we encounter in the market. A good thesis will also empower us to rationalise and understand whatever is the “hottest VC/tech bubble” (it’s Generative AI right now) rather than following the herd. Consequently, no matter the business environment, being prepared and able to envision an opportunity by identifying a fundamental market transformation are two of the most important disciplines driving outsize returns. Thesis articulation is our way of ensuring we bring both to the table in every investment we make.