Link
Background
- Though I don’t consider myself a “finance guy”, I’m undeniably interested in money. For my own financial gain, as an instrument of change (re; money flows), and potentially as a career switch.
- So I’m genuinely pursuing a job at variant and want to learn how to write an investment case. Best case scenario: I get the job. Worst case scenario: I learn how to write up an investment deep dive for my own investments.
- And note: this article is definitely coming from more of a hedge fund perspective, so I should definitely take it with a grain of salt for working towards my Variant app
Notes
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Building a successful thesis begins with (1) rigorous due diligence at the Micro level, (2) aligning that view with the Macro environment, and (3) understanding the overall trade setup.
Micro
Good Company Qualities
- High return on capital: the better the potential ROI, the better investment it is (obvious)
- Barriers to entry: though these may make it difficult for the folks at the company itself, it’s actually an attractive quality from an investment perspective since it disincentivizes future competition
- some broad examples/concepts to highlight on this front: economies of scale, network effects, high setup/R&D costs, high switching costs, etc.
- Growing Industry: already-established industry’s have fewer potential upside, and industries that are too young involve too much risk. Best to find the “goldilocks” company — not only are they better from a risk-return perspective, but it also means they’d probably benefit the most from
- High margins relative to competition: more profit than others?
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Good Management
- High insider ownership: those builders are autonomous owners
- side note: this is definitely one of those factors that just takes on a different meaning in the context of web3
- Well respected: (Self explanatory)
- Clean accounting: (lol I mean I hope they don’t do shady shit)
- Infrequent restating of earnings: (this is interesting… but again one of those things that is a little different in the context of web3)
- Not overly promotional: Goes along with “well respected”, overly promotional content hurts brand image and generally makes me think they spend too much money on marketing over R&D
- Good allocators of capital: Meta financial sense — do they make good use of the money they already have? If not, why give them more?
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Target Price = Your Earnings Estimate × Multiple
- Not an exactly useful formula for crypto tokens that don’t exactly rely on the same company fundamentals, cash flow models, etc. But this would be an interest concept to try modifying / applying for token-incentivized projects. How can we estimate the value of a token and/or entire community of contributors? see Technical Due Diligence
- Factors to Consider In Token Price Estimate: token utility flywheel (asset <> core contributor <> community member), vesting schedule (if other investors), supply mechanics (are tokens burned on transactions?)