How We VC
Venture Capital “VC” is a concept common to entrepreneurship. Yet it astonishes me how simplistically entrepreneurs and investors alike perceive VC investing to be. Just think about how many people you know who have made personal investments in early stage private companies with the hope of striking a major return. It seems so simple, just invest early and sell when the company is worth billions. Then think about how many of those people lost their money.
In reality almost all of those risky investments fail. This is because early stage investing is highly risky, and VC investing is a discipline developed to understand how to succeed in the face of extraordinary risk. It requires deep domain experience, operational and entrepreneurial experience, financial experience, transactional experience, and investing experience. In summary, experience matters.
Research suggests that entrepreneurial experience separates top VCs from other investors; however, barely 27% of active general partners at VC firms have operational experience prior to investing. It was this disconnect that inspired Ben Horwoitz and Marc Andressen to found Andreessen Horowitz, one of the most prolific and successful VC firms in existence. It is still shocking that experience operating the very companies that VCs invest in, is still predominantly lacking. This is no more clearly playing out than in the cannabis venture capital market.
Writing a check is a privilege, not a skill in its own right. Having access to the cash to make an investment is only one part of the puzzle. What you do after you write the check has more impact on the success or failure of an investment than the value of the money at the time of the investment. When an investor brings more than just capital to the equation, they are considered “value added” and are the most attractive sources of capital for founders. In a word they can “engineer” success in the investments they make.
Every VC fund pitch deck says the same things: they have proprietary deal-flow, they manage an institutional quality process for evaluating investments with deep due diligence and rigorous processes and research, and that they will oversee the investment on behalf of the fund investors. We think of these as critical key components to venture capital, but these are merely table stakes that just get you into the game, and alone don’t guarantee success.
We believe that a track record of operational experience and a focused investment strategy is the key to building value. Making good investments comes down to the quality of the investment team’s judgement. It was evident to us early on that our background as entrepreneurs and operators gave us a distinct advantage in understanding the needs of entrepreneurs. We understand the myriad of challenges they face. Our approach to venture capital investing relies on instinct about the people we partner with after we have all the available quantitative information.
Over time we have developed 10 core foundations we adhere to as a firm. This allows us to specifically align how we deliver as a value added investor critical to making an investment decision.
1) We are Veteran Operators
We have experience building companies before managing capital and have been actively involved in all aspects of managing private companies. This also means that we tend to have the most success investing in veteran operators as well. We know what it feels like to have to make payroll on Friday without having the cash in the bank, and so do the founders we back.
2) Everything we do is in Service of the Entrepreneurs
We are driven by a passion for entrepreneurship and our mission is to be a catalyst for founders in all of our communities to find success through entrepreneurship. Our entire team is involved in entrepreneurship beyond just the investments we make from writing and publishing, to teaching and podcasting. We are students of entrepreneurship and look for every opportunity to give value back to our communities.
3) Flirt with Failure (Ours)
The relationship between experience and decision making matters and as veterans we have taken on all kinds of risk in entrepreneurial ventures, many of which failed. When I was young and starting my own business, I never contemplated the risk of people operating unethically and ultimately having to sue. I could not have forecast the cost and effort involved in litigation. It is the extent to which we have experienced situations such as this that allows us to quickly foresee obstacles ahead for founders and counsel our entrepreneurs on how to navigate an ever changing landscape.
4) Luck Matters
My favorite quote is from Sociologist and Author Bertice Berry: “When you walk with purpose, you collide with destiny”. Every successful founder will tell you that they got lucky along the way. That something unexpected happened and they were at the right place at the right time. But it’s more than that. When you commit to the hard work over the long term, you put yourself in a position to capitalize on some of that luck. Cannabis is a great example of a groundswell of momentum and we aren’t reacting and chasing this opportunity, the founders we back have been preparing for this moment and are right at the front of a parade that’s coming down Main Street.
5) Focus Facilitates Creativity
We are early stage investors and operators focused on series seed and series A investments. This has been the focus throughout my career with an emphasis on healthcare. So our investment thesis is specific to early stage healthcare in the cannabis economy. There is always something new and shiny, but we made a strategic decision to put on blinders and stick to our knitting. As with the companies we invest in “scope creep” is more often than not fatal to small organizations. With this kind of focus, over the long term, allows you to expand your aperture and think dynamically to find creative solutions.
6) Be Accessible (and your network too)
Ultimately the validation we get most excited about is when founders refer other founders to us. If we are good at what we do, founders notice. We ensure that we are always available to work with them to navigate challenges. When the pandemic changed everything in 2020, we spent countless hours, late nights and weekends working with our founders and everyone in our network to find the best possible solutions in an unprecedented time. When things happen at the pace of business we need to be available to our founders and boards on a moment's notice.
7) Founder / Firm Compatibility
We focus a lot on evaluating the people we back. Every VC agrees with the cliche that you bet the jockey (team), not the horse. We think about this as a two way street in that we want to invest in the founders who are most compatible with our team, culture, and values. These are long term relationships and to win you need collaboration and alignment of objectives.
8) Continual Learning
Intellectual curiosity is a key driver in everything we do. From self improvement and emotional regulation, to dynamic thinking we seek for long term knowledge over short term enthusiasm. The only constant is change and with that comes new opportunities to reshape our thinking and will never stop learning together.
9) Look For “No”, To Get To “Yes”
We can’t ever fall in love with one specific deal. We must test our enthusiasm and temper a belief in any single opportunity such that we are willing to pass and move on to the next deal. This may come across as cold but the harsh reality is that we have to run our processes such that we look for every reason to say no. If we can’t find a good reason to say no, then we want to make the investment and will find a path to yes.
10) Think and Plan for the Long Term
What I mean by this is that we have a multiple decade growth plan for our firm. It is building the platform to scale, resources and focus we have on mentoring and educating early entrepreneurs and working with universities and accelerator programs in addition to capital. Our plan for each vintage fund we manage calls for exiting our investments within 5 years and providing a return to our limited partners in that timeframe. More broadly, to achieve this everything we do as the investment manager must reconcile these timelines with building a durable investment firm that will outlast any short term cycle.
Talented teams are at the core of everything we do but we know that every experienced investor has a track record, and none are perfect. Situations will always change and every company will invariably face unforeseen crises. Those challenges may turn out to be fatal, and in every bet there is a non-zero chance you can pull a joker from the deck and lose. Therefore you have to separate outcomes from the process, and reward good processes even when an outcome is negative. Luck goes both ways and sometimes the unlikely low probability outcome of failure happens. As long as your decision making and processes are sound, you can accept those unfortunate and unwanted outcomes and move on.
In Summary
We often get asked why we are so transparent with what would appear to be our “secret sauce”. We do this for three reasons.
we are in service of entrepreneurship and we look at everything as a resource that can be made publicly available to help entrepreneurs be more successful in their endeavors, even if we don’t invest with them;
We think of our playbook as one specific recipe unique to us. As with all recipes a trained chef can orchestrate a magical outcome; and
We want to be held publicly accountable for operating in alignment with our guiding principles. It’s what we ask of the founders we invest in so we hold ourselves to these same standards.
As with any endeavor in business, having a personal affinity to what you are doing makes all the difference. Just wanting to create wealth is insufficient to drive you to do the hard work, and put in the years’ of experience, to develop the decision making intuition needed to accept risk and produce returns. We start with being in service of entrepreneurship and believe that our mission is too important to fail. This is what gets us out of bed every day.