Module 2: How to Craft an Investment Thesis, Source Deals, and Understand Investment Securities

By being a Member of The Helm Investor Community, we will source and diligence opportunities for you, but we want you to have the tools necessary to be able to do this on your own as well.

By Megan Ananian

Design by Perri Tomkiewicz

Your Investment Thesis

In Module 1, we introduced you to the most common angel investing terms and explained where you fit into the startup landscape. So, now what? Where should you start? First, you’ll need an investment thesis. This is important for a few reasons:

  1. Focus: There are a lot of startups out there, and you will need to focus on an area (or areas) that you feel most passionately about. You also want to be able to say “no” to things outside your focus.
  2. Sourcing Opportunities: Whether we like it or not, people use categories and labels to store information. If you say you’re open to anything, it might be hard for others to remember to send you opportunities. If you’re interested in investing in productivity tools led by a female founder in the U.S., that’s much more specific. As you make more investments, you can zoom out, but in the beginning, it can be helpful to be as specific as possible.

To develop an investment thesis, you should consider the following questions:

  1. What are your personal and professional interests? What do you care about? 
  2. Do you have an area of expertise? What are you uniquely positioned to talk about? Where can you add value? (Note: studies show women rarely identify as experts, even in their professional area of expertise. Some call this the “confidence gap”. We believe awareness and understanding of this will help women begin investing.)
  3. What is your vision for the future? What’s next? Where do you predict technology creating change? 
  4. What is a problem you’re looking to solve? Who else is trying to solve it?

Let me give you an example: Sylvia identifies as a third-generation U.S. immigrant who has 10 years of professional experience in finance and is personally interested in improving K-12 educational inequality. For her investment thesis, she’s interested in investing in U.S. companies with an immigrant founder in the finance or education fields. Another example: Christina works in community-driven consumer technology and in her free time, loves independent films. She’s excited to find the next Instagram or TikTok, but she would also like to fund more women filmmakers in the industry. 

The Helm’s investment thesis is investing early in game-changing companies founded by women. By joining our Membership, you’ve already aligned with our investment thesis, but you may want to narrow your focus even more and choose a few industries that are of particular interest to you. For example: agriculture, AI or machine learning, arts and culture, consumer products, e-commerce, education, fashion, femtech, film, fintech, food and beverage, healthcare, future of work, SaaS, sustainability, transportation, or travel and entertainment.

Sourcing Deals

Now that you have some goalposts for your investment thesis, how do you begin sourcing opportunities like a pro? As a member of The Helm Investor Community, you won’t have to worry about finding companies to invest in—we’ll do that for you. But it’s good practice to follow the five steps we have outlined below:

  1. Start listening. Subscribe to industry newsletters (TechCrunch, Crunchbase, Pitchbook, CB Insights, Sifted, Inside Venture Capital) and follow a few investors you admire on Twitter. Here are a few to get you started: The Helm, Elizabeth Yin, Chris Sacca, Mac Conwell, and Julia Lipton.
  2. Build community. Talk to your friends in the startup ecosystems and ask what they are building and what they would be interested in investing in.
  3. Paint a picture of the future. Develop a market map of your industry of interest. What are the sub-sectors? Who are the incumbents? Who or what do you think is ripe for disruption? 
  4. Get exposure. Go to demo days and pitch nights. Start to get a grasp of what exists and how founders pitch. A few worth noting: Techstars, YCombinator, ERA, Betaworks, NVP.
  5. Join an angel syndicate. You’re one step ahead here. Syndicates like The Helm curate investment opportunities (a.k.a deal flow) for you.

Different Types of Investment Securities

Founders have a variety of options to finance their business. Some may take on debt or give away ownership stakes. When an investment is made for financial returns and is fungible (read: tradeable), it is called a security. There are three main investment securities that you will see as an angel investor. Take a sip of coffee (or wine) and sit back because this might get a bit technical.

  1. Equity: This is the most straightforward way to invest. It is most common in Series A rounds and later. A solo founder owns 100 percent of their business and they choose to give up X percent in exchange for $X. Think Shark Tank. In pre-seed and seed rounds, it is common for a founder to give up 20 percent of their business for investment. For example, if you give up 20 percent ownership for a $1M investment then you believe your company is valued at $5M. There are two types of equity:
    • Common Equity: This is what founders and employees have (though in Europe, it is not uncommon for an investor to also have common equity). As a common shareholder, you have the right to vote on matters of corporate policy, including decisions on the makeup of the board of directors, issuing new securities, initiating corporate actions like mergers or acquisitions, approving dividends, and making substantial changes in the corporation’s operations. On the downside, common stock has the lowest priority in the event of a liquidity distribution, meaning you get paid back last.
    • Preferred Equity (“Priced Round”): This is what you want as an investor. There are typically no shareholder voting rights (as mentioned above), but you get paid out before common equity holders in a liquidity event. TLDR; you have a higher claim on assets by holding this class of equity. 
      • Pre-Money Valuation: This is the value of the company before the cash investment. 
      • Post-Money Valuation: This is the value of the company after investment. For a simple example, you raise $1M at a $5M pre-money, then the post-money is $6M.
  2. Debt: Debt is financing that is expected to be repaid. Debt is always paid out first in the event of liquidation. Traditional loans (“notes”) lend money that a person or business pays back in principal plus interest. You have likely been exposed to debt through credit cards, car loans, student loans, or a mortgage.
    • Convertible notes: This is the most common investment we see at the pre-seed and seed stages. Convertible notes are typically used when it’s too early to determine a valuation of the company (because it’s pre-product or pre-revenue), or when founders want the option to pay back the investment, or because they are generally less expensive than equity to set up (re: legal costs). Convertible notes are debt (with an interest rate, maturity date, and repayment terms) with the option to convert to equity at a predetermined date. Investors like convertible notes because they usually receive a discount to the future equity valuation and, in the event of bankruptcy, they are repaid before equity holders. For example, let’s take a convertible note with a $5M valuation cap at a 20 percent discount. At either (1) the maturity date of the loan or (2) the next financing round (whichever comes first), the investor will either (1) be paid back according to the terms of the loan or (2) convert the debt to equity priced at no more than $5M (the cap is the upper limit) or a 20 percent discount to the price at that time (whichever valuation is more beneficial to the investor). So, if the next fundraise is at a $10M valuation, you would choose between the 20 percent discount (an $8M valuation) or the cap ($5M valuation). In this case, your investment would be priced at the valuation cap of $5M because the lower valuation is more beneficial to the investor. Remember, investors want to buy at the lowest price possible. If you invest in year 1 when the company is pre-product, you deserve to get a better price than the investors who invest in year two and there is more traction.
        • Valuation cap: A ceiling or maximum price which protects investors in case the value of the company increases before the next funding round.
        • Discount: Usually 20 percent. If the next fundraise is at a $10M valuation and you have a 20 percent discount, your convertible note will convert to equity at an $8M valuation (or the valuation cap if lower). Essentially, a founder is saying, if you take this risk and invest in me now, I’ll give you 20 percent off when I get to the next round of fundraising.
        • Interest rate: We typically see interest rates around 4 percent. If you see 1 percent or 8 percent interest rates, ask how they came up with that number. Interest is not paid in cash during the time of the loan, but accrues and is added to the overall loan amount until maturity. At maturity, the total loan amount would then convert into shares of preferred equity. For example, if the interest rate was 5% in a $500,000 convertible note seed round and the Series A closing occurred on the one-year anniversary of the convertible note closing, the investors would convert an additional $25,000 ($500,000 x .05)—a sweetener for taking on the risk.
        • Maturity date: Usually 12-24 months. This is theoretically enough time for the founder to use the investment to create traction and plan for their next fundraise.
        • Conversion mechanics: Typically, notes convert at maturity or at the next financing that meets the Qualified Equity Financing threshold (“QEF”). Usually, the threshold is $1M-$2M of equity which triggers the convertible notes to automatically convert (meaning the founder doesn’t have a choice). Watch out for higher QEF thresholds—it could mean your debt is outstanding for a long time without conversion to equity. Also, make sure you look out for optional vs. automatic conversion provisions.
        • Red flags: Watch out if companies have $2M+ in convertible notes at different valuation caps and maturity dates. Some investors won’t invest on convertible notes because it is harder for a founder to track how much ownership they are giving up.
  3. SAFE (Simple Agreement for Future Equity): The SAFE was invented by Y Combinator in 2013 to make it easier for founders to put together quick, cheap financing documents. This is an unpriced round like a convertible note except it is not debt and does not have an obligation to pay interest. SAFEs aren’t very investor-friendly because they don’t have the same investor protections as convertible note. Investor protections typically include repayment provisions, conversion mechanics, and a valuation cap. The Helm doesn’t recommend we invest in a SAFE without modernized updates (i.e. a valuation cap, discount, maturity date, conversion mechanics).

In upcoming modules, we’ll touch on pitch deck review, due diligence, term sheets, valuation, and much more. If you have any questions or would like to dive deeper, set up a time to connect with Megan Ananian, Head of Membership, during office hours by booking here.

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