Ep 365 – How To Win VC Funding For Your Cannabis Startup

ross o'brien bonaventure

What types of businesses are cannabis venture capitalists willing to fund? Here to answer that question is Ross O’Brien of Bonaventure Equity.

Learn more at https://www.bvequity.com

Key Takeaways:

[00:57] An inside look at Bonaventure Equity, a boutique venture capital firm focused on early-stage investments in the cannabis space

[1:54] Ross’ background and how he came to start Bonaventure

[5:35] The two-step process Ross follows when choosing which companies to invest in

[9:22] Ross’ portfolio of investments in cannabis to date, from research and development to health tech

[11:55] Attributes that Ross looks for in a company founder

[13:43] Ross’ advice to entrepreneurs looking to raise capital

[23:13] Common mistakes people make when putting together a pitch deck and how to avoid them

[25:58] Exciting developments in the cannabis healthcare space and where Ross sees it heading over the next 3-5 years

Click Here to Read Full Transcript

Matthew Kind: Hi, I'm Matthew Kind. Every Monday look for a fresh new episode where I'll take you behind the scenes and interview insiders that are shaping the rapidly evolving cannabis industry. Learn more at cannainsider.com that's C-A-N-N-Ainsider dot com. Now here's your program. Today we're going to learn what type of businesses cannabis venture investors are willing to fund and why. I'm pleased to welcome Ross O'Brien from Bonaventure equity to the show. Ross, welcome to CannaInsider.

Ross O'Brien: Hey, Matt, great to be here. Thank you very much for having me.

Matthew: Give us a sense of geography. Where are you in the world today?

Ross: Well, interestingly enough, you've caught me on a road trip on my motorcycle four days in about 900 miles. I'm in Wilmington, North Carolina, but I currently make my home in West Palm Beach, Florida.

Matthew: Okay. What is Bonaventure Equity at a high level?

Ross: Bonaventure Equity, I founded the company about seven years ago really focusing on working with family offices, high net worth investors that I had been involved with, prior to starting the company myself. We started out really as a funnel sponsor putting together interesting transactions in a broad range of sectors, mostly focused on healthcare. Over the last few years that really transitioned to an exclusive focus on cannabis. A couple of years ago, we decided to start investing exclusively in cannabis businesses, we put our first venture fund together. We currently have eight portfolio companies in that first fund.

We are on to our second fund right now currently raising 50 million for some follow ons in the next set of companies that we're going to invest in.

Matthew: Great. Ross, can you share a bit about your background and journey and how you got into the cannabis space and started Bonaventure?

Ross: Sure. Cannabis had been something I've been intrigued with, and quite interested in for some time as an investment thesis, and also something that was a part of my personal life. For years had been looking at what is happening on the regulatory side, such that it seems to me that this was going to be just a massive business opportunity at some point, and I think that everybody would agree that's what's now happening. The challenge was, I worked at a family office, I was responsible for all their self-directed venture capital, private equity, real estate investing.

The challenge was, is every time we tried to look at the space, there were a couple of hurdles, one being, it was so early on from a legalization standpoint, that there just wasn't enough line of sight to what the markets will be looking like and how they'll be regulated. We were struggling with seeing complementary entrepreneurs in the cannabis spaces probably five years ago, that were the same level of sophistication that we find in other sectors that we're investing in, like I said, like healthcare, for example.

We kept taking a pass and then a couple of years ago, about to the end of 2018, the beginning of 2019, we were really seeing some interesting opportunities and put together a group of investors with myself, and we set about really trying to understand a strategy for cannabis that was best suited to us and how we invest. We are early-stage investors, meaning that we invest in a series C or series A typically. Typically investing one to three million at any first initial round. We looked at close to maybe 400 companies, or certainly over 300 to 400 companies, before we wrote our first check.

What we decided to do was a go slow to go fast strategy. One of the things Matt that really concerned us was this green rush mentality. Having invested in and been involved in entrepreneurship for my entire career, as an entrepreneur, as an investor, as an advisor, and having a whole string of failures along the way, this is a very difficult thing to do in any segment, let alone one that's as nascent as cannabis. What that means Matt, is we put together a platform before we started deploying capital. We were hosting a series of events that have been postponed after the pandemic happened in 2020. Those were really great.

We were hosting in the San Diego, New York, Dallas, Miami area, and really bringing together the best and brightest in the space and convening a lot of thought leadership. I wrote a book, the book is called Cannabis Capital. It's the first book on venture capital for cannabis and that actually took a very interesting turn as we were developing that, that I can speak to if you'd like about how it's actually formed our investment thesis. It's really a playbook for entrepreneurs, to help them be more successful and having the conversations with investors like us. Really helping them understand, the dynamics of raising capital and the fundamentals, et cetera.

Then we have an operational piece to our platform as well, where our companies can leverage our back office and finance team to scale up with them. It wasn't just putting together capital, it was really understanding the landscape and where we wanted to invest to achieve the venture returns that we're seeking.

Matthew: Now that you have a sketch of the landscape you've made, I think you said eight investments, how do you go about it? You've described a little bit of your organizational procedure and process. If you were to just to give us another just a quick sketch of how you do that, how do you actually say these are the ones that are going to get a yes and these are ones going to get a no, and here's why?

Ross: Sure. I'll take it in two steps. First is what is our investment thesis and what do we look for then secondarily, then how do we focus in on a specific business and the founder, so I'll take it in those two chunks. The first being the investment thesis, as we invest, as I said, early stage, meaning that we are looking for companies that will generate venture returns. One of the things that I certainly noticed in this space is there's a lot of new investors putting together funds, and that haven't had historical investment in venture prior to the space. They tend to be all over the map. We really focused in and said, 'No, this is, this is venture."

What I mean by that is, we need to get a 10x cash on cash return on any investment that we make, meaning that if we put a million dollars in a company, we have to have a line of sight to getting 10 out through some an exit. We are not particularly enthusiastic about the public markets. We're really looking for companies that will be ideal acquisition targets. What that means is many of the investment strategies that we see in cannabis don't fit that profile, for example, cultivation. You need way more than a million to 2 million to put together a cultivation business to start with.

Secondly, it's agriculture, it's a commodity, and you can see as we're seeing in the market, now, there's a lot of price compression, and that will continue to go that direction. A lot of these companies, when they reach a certain size and certain scale, they have a lot of the upside value baked into the valuation today. This is what we see in a lot of the public markets, that the companies are being valued on the future potential of the business today, as opposed to valuing what the company is worth today and then benefiting from that arbitrage for that upside. Does that make sense, Matt?

Because we're looking for where that value curve is going to occur from an early stage to a later stage as opposed to pricing in now, that later stage state.

Matthew: Yes, that makes total sense. You mentioned a little bit earlier working with family offices and so forth in the past, what is the posture towards cannabis investing right now with family offices?

Ross: The family offices have largely been filling the gap where you don't have a lot of incumbents venture being able to participate yet. A lot of the existing venture funds are prohibited from investing in the space because it's still federally illegal and their agreements with their limited partners prohibit them from certain sectors, meaning that there's a gap in accessible capital, being cannabis first and sector second, in terms of our strategy allows us to be in a position to fill that gap.

The family offices have been incredibly active, there's still a lot of stigma in certain groups and certain categories, but they have a ton of capital, very sophisticated investors, and have largely stepped in to where in a more established market, you would have a lot more venture players or funds that are driving certain elements of the sector.

Matthew: Okay. You mentioned you had made eight investments. Can you talk about those a little bit, your portfolio [crosstalk] and any highlights you want to make?

Ross: Yes, absolutely. Maybe what I'll do is go back to the second part of the question on what we look for in entrepreneurs, because I think that'll paint the brush for some of the companies that a couple of companies that we're working with, first and foremost. Now, so, really what we're looking for are dynamic founders. We'd like to have some veteran entrepreneurial experience, whereby we tend to have the most success with entrepreneurs who have gone through a couple of business cycles prior to the business that they're working on. Really look for great culture builders, innovators. We don't really see disruption as being one of the-- which is a more traditional venture characteristic, because we think that legalization is the disruption that's happening. For us, we really want to see collaborative founders that are going to be able to build something for the long term. Within our portfolio right now, there are a few really interesting highlights. We're really focusing in now in the second fund of the overlap of healthcare and cannabis. We think that's the single greatest opportunity from an investment, an early-stage investment standpoint. We think a lot of the other spaces, whether it's brands, or retail, or dispensaries, and things are getting pretty mature very quickly.

For us, this is the most exciting, and I think, New Frontier, which is because of legalization that healthcare is going to be entirely transformed. With that, we have a company in our portfolio, that was the first to map the genome of the cannabis plant with two PhD female founders that are just fantastic. We have a company that's doing a handheld spectrometer potency testing device with a really experienced engineering background founder. We have a company that's developing the first synthetic CBD compound with a female founder who has built and sold biotech companies before. Those are some highlights of the things that we get really excited about.

Matthew: Okay. You mentioned when you looked at a founding team that you'd like to see some success in the past. Is there any other kind of things you'd look for, or say, hey, this makes me more interested because the founder has these attributes?

Ross: Yes. It's an interesting question because I think one of the characteristics that tend to be highlighted the most in our process, so we do a lot of work with the founders in understanding personality profiles, and personality traits, and qualitative, quantitative, cognitive abilities. We do the same with ourselves. We look for compatibility between us and the founders because it is typically a long-term relationship. One of those key examples during the early stages of getting to establish, getting to know somebody in their team is really looking for a collaborative personality or collaborative approach to challenges.

It's not necessarily that I'm looking for founders that have all the answers, or even the right answers. I'm looking more for what thinking went into those answers and if the answers need to be challenged, or otherwise changed directionally. Is there enough rapport between us and the founder that we can have the hard conversations and make adjustments and be open to that kind of feedback? That usually shows up if somebody is very defensive, or reluctant to hear constructive criticism, even early on in the presentations, that'll be a red flag for us.

Matthew: Okay. There's a lot of listeners that are either now raising capital, or they're planning on starting a business, and they're going to raise capital, how do you think they should kind of orient their thinking, so they put their best foot forward and have success in that endeavor?

Ross: Yes. This was actually the impetus for writing the book. Canvas Capital started as really a textbook to help entrepreneurs have a little more sophistication around their fundraising, how to have conversations around valuation, to understand what due diligence is, and how to develop term sheets and corporate governance, and just all these sort of blocking and tackling elements that you see with a lot more experience in sort of other sectors. That was one of the things that we really wanted to focus on because there was such a lack of fidelity in the conversation I found between founders and investors in the space.

One of the big challenges, Matt, is that I think we're doing ourselves a disservice to talk about cannabis as if it's an industry. Everybody talks about the cannabis industry. As we're doing the research for the book, it really became apparent to us and this was one of the things that we established in the book is that cannabis is not an industry, it's an economy. It's a global macroeconomy. It's here to stay. It's not a trend. As with any macroeconomy, it has sub-sectors and industries within that are being developed. This broad stroke cannabis industry, I don't think is robust enough to really give people the comprehension of what legalization really means.

We have a challenge, that if anybody can identify a sector that otherwise hasn't been impacted by cannabis, please let me know. It's my belief, and so far, I'm batting 1000 that every industry and every incumbent industry, and every company boardroom, cannabis has reached at this point. What that means is that is this ubiquitous landscape. Now, when we get into the cannabis economy, and the sectors that we focus on, it really occurred that there was a lot of tension between investors and founders out there. There tended to be the sort of legacy advocacy-based cannabis insiders that had been in the space for some time saying, the finance, people don't understand us, or the business people don't understand us.

Then on the other side, and when I was interviewing investors for the book and talking to other people in the space, you'd get the inverse of that, right, where people would say, these cannabis people don't understand business. I was trying to find a way to take some tension out of that wedge really that was between the two parties. Where does this translate to advice to entrepreneurs, as you asked is have some humility about going into the process, and recognize that just because it's a cannabis business doesn't mean that the rules of business don't apply.

I see a lot of companies and founders try to be overly creative in trying to put structures together and wanting to do funky sort of debt structures, instead of raising equity, and all this kind of stuff, where it's really about building a great business for the long-term. If you have a plan, and a team in place, and the resources to do that, it shouldn't matter that it's cannabis. It shouldn't matter that it's a great organization that happens to be able to benefit from cannabis legalization in this new economy that's developing. I think it's just having that perspective. When you're reaching out to investors understand that it's not about convincing them that your view of the world is right. It's about understanding what their view of the world is, and helping them understand why your business fits that, right. We get a lot of-- one of the things that, like I said, is a big turnoff is entrepreneurs who get very defensive, well, you just don't understand it, or this is cannabis, you don't get it.

Well, most investors in the space have a lot of experience. Certainly, when you're talking about family offices earlier, and most of the families that I've worked with over the years have generated their wealth through entrepreneurship. You've got to give them some benefit of having some rationale for exploring the opportunities in the way that so that they do.

Everything's a negotiation. Right from the beginning, you're starting to develop a relationship, and building rapport, and understanding how to interact with those people through the process. It can be a very long process for finding fund investors like ourselves, or it can be a very quick process with angel investors if you've got the right people that are looking for the opportunity that you're presenting,

Matthew: Let's jump into one of your investments, Revolutionary clinics. Can you talk about that? What attracted you to them and what they do?

Ross: Yes. I don't know if you saw this but Revolutionary has made the Inc 5000 list this year. It's the number four fastest-growing company in America.

Matthew: Wow.

Ross: They're just very impressive operationally, very impressive in the way in which they establish themselves in their community. Great team, great leadership. I happen to know the founder and have a personal relationship there, which was how we got involved. We're not actively involved like we are with some of the other earlier companies. As far as their business model goes, we just really thought they were the gold standard space and would be an important so relationship to work with and we couldn't be happier about how things are going.

Matthew: Great. Is there another portfolio investment you want to talk about at all?

Ross: Yes. The three I talked about earlier would be the ones that were-- which is Leaf. I don't know if I should mention by name, but LeafWorks and the two PhD founders, which is mapping the genome. The other company is tCheck. tCheck is the handheld spectrometer device for potency testing. Great story. Peichen Chang, the founder is an engineer by background and he had a personal relationship with somebody that was managing their Parkinson's symptoms by baking edibles for themselves and couldn't find the right tools in order to get the dosages right. It was a real problem and the company's doing great. The product is very well-recognized.

We look at that as something that is going to be just an essential tool for people that are developing their own dosages for themselves in home and then the other company that I mentioned as well that's building this and they're developing rather the synthetic compound for CBD is [unintelligible [00:21:08] a very exciting company out of California team of biotech entrepreneurs that have been there before. The thesis there is that as with aspirin that originated from naturally occurring plant-based compounds, the way to actually scale and have consistent quality and produce that scale is to create it synthetically and then scale it up.

Matthew: For your book, Cannabis Capital, you wrote it. Everything you put in there, you feel like is valuable, but is there any feedback you get that's like, "Hey, this was really helpful to me," this aspect where you hear that feedback consistently about any certain areas of the book?

Ross: One of the best compliments, and if anybody finds any grammatical errors in there, I'll blame the publisher on that, but one of the most interesting compliments and I don't think it was intended to be a compliment when I got this feedback was that it was that the advice on building a business, managing a business, and raising capital could have been applicable to any business and it wasn't specific to cannabis. That's entirely the point. The cannabis economy is the thought leadership that was developed in there and it is the first place to publish on this concept. When we get into the term sheets and structuring transactions, there's a lot of nuance for cannabis businesses there. Then the case studies that run throughout the book are all cannabis-based businesses. The whole point is that the fundamentals of business don't change and the fundamentals of understanding how to manage a balance sheet should be applicable to any type of business. I think this individual was looking for something that was more nuanced or specific to cannabis and said all this could apply to any business and that's exactly the point, is those best practices exist in the world and we should carry them forward into this sector as well.

Matthew: Interesting. You mentioned before it's a real turnoff when someone's a founder is just not flexible at all, but what else can they make sure they steer clear of like in terms of maybe their slide deck having a problem? What's a good slide deck look like when they come to you and how is it clear and digestible versus one that's just not digestible?

Ross: I think that's a great question. It is something obviously that we see day in and day out is going through decks. My advice to your listeners out there would be the strategy for creating a slide deck should be based on putting big foundational items in place first and then moving the narrative forward from there. For example, I always like to see the team and the people in the backgrounds very early on in the first one or two slides because the credibility of those individuals and the people that we're speaking to will inform the whole rest of the presentation. I also tend to see an overemphasis on market and market numbers and addressable market.

If we're having a conversation about whether or not cannabis is going to be a large marketplace, you're not having the right conversation. We believe in that completely such that we're on our second fund now to invest in that strategy. We don't necessarily need to be convinced of the big numbers multiplied by other big numbers. What we really want to see is, is there a thoughtful go-to-market strategy that identifies clearly what the channel to market are and how to go manage those channels to market successfully? An overemphasis on market and market sizing and ideas is generally something we want to move on quickly, pass quickly.

I would say that if you can't explain your business in 20 minutes, you probably don't have a clear understanding of your business. We sometimes get into these presentations that an hour, an hour and a half later people are saying, "Oh, well, I haven't told you about this yet or I haven't told you about that yet." That to me is indicative of we just want to do everything and do everything great and we're going to do a million different things at once. We really just want to see a lot more focus and discipline around the hypothesis with business.

Matthew: What trend in the cannabis space do you feel like is underappreciated but you believe is going to be huge in the next three to five years?

Ross: It's healthcare for sure for us and our focus is they're--

Matthew: Dig in there. Tell us why.

Ross: A few things. One, we're only just at the front end of the research and discovery that's happening now around getting access to this plant legally. It's really exciting what is being developed and look, nobody's debating whether or not cannabis is good for treating the symptoms of Parkinson's. We had the FDA-approved Epidiolex which have a huge $7-plus billion exit which is for treating epilepsy and people have known for generations that cannabis can be applicable for sleep aid or for inflammation or for anxiety or depression, and glaucoma and all these.

The application that the plant can have for all these different pain management and different symptoms and underlying morbidities is to my mind, we're just scratching the surface on that and barely started that cycle. We also see I think the FDA is going to be more malleable and the government institutions are going to be more malleable than ever going forward. We're seeing government now trying to move at the pace of business as opposed to the pace of policy. I think that will open up for a lot more rapid comparatively processes to get FDA approvals and things like that, which we think are necessary.

We believe more regulation is required. We don't think that the objective should be to have zero regulation. We think the objective should be to have sensible regulation that can help bring the highest quality products to the market. With that, we definitely see this transformation on the healthcare side. It's difficult to find these things out, but we estimate there's somewhere around 40 or 50 applications or in-process to the FDA applications being developed for new therapies based on cannabis, and to our reservation, that should be more like 400 to 500 at a minimum at this stage. We think that's just wide open space.

Matthew: There's a lot of investors, entrepreneurs, and others moving from the West Coast to Texas and Florida. You mentioned you're in West Palm Beach. Are you a native there or did you relocate from somewhere else?

Ross: Yes. I'm a bit of a nomad. I'm from Canada originally. Calgary, Alberta is where I was born. First moved to Michigan in the US, then did a dozen or so years in Manhattan, and then just spent the last 10 years in Florida. We're actually moving our headquarters to Raleigh, North Carolina in the coming months as well. For us, it's less about being in a legal state. Recreational use is not really something that is driving our investment activity. We're looking for where are the centers of highly scientific innovation going to be happening. We don't think that the individual state regulations play into that that much. We invest all over the country. Most of our companies are on the west coast now, but yes, there is a huge migration right now to some of these areas and we see certainly in the sub-Florida area, the Miami region up to West Palm, but we will continue to have a presence there. There's a lot of uptick and venture activity, which is just exciting for everyone.

Matthew: Ross, I want to turn to some personal development questions. Is there a book that's had a big impact on your life or way of thinking that you'd like to share?

Ross: Well, I'm a voracious reader, so there's a lot of them. I actually just wrote a blog article on the five books that I recommend for entrepreneurs to read, and then re-read. There's a lot of great books, business books, obviously, and self-development books. One of the things that occurred to me was after decades of experience, the context can take on new meaning, and depth, and color, and those are really really great books. For example, the book The Hard Thing About Hard Things by Horowitz, that book took on a much more powerful narrative for me after I had gone through some cycles of being on boards, and managing boards, and having boards, for example, at the board level, senior C-suite level. Also, one of my all-time favorites is Good to Great, which is a lot of people's all-time favorites. Some of the concepts in that really became applicable only in the last few years of my career versus when I first was exposed to that book. On the personal development side, I'm a really big fan of Tim Ferriss. I like Tools of Titans and his anthologies are really, really terrific. I love his expression that success leaves clues. I'm always going back and re-reading even just short anecdotes that he's collected from other successful people. One of the personal development people that I didn't really acknowledge until later in my career, I just ignored, was Tony Robbins and Awaken the Giant Within was actually a really transformative book for me when I visited it a few years ago in the later stages of my career.

Matthew: What is your favorite unhealthy comfort food?

Ross: [laughs] I love food, I love to eat. I would say I probably eat more high-end steak than any normal person should. I enjoy a lot of the good steakhouses, but to take that even a step further, I'd say my favorite meal of all time would probably be Beef Wellington. How can you get anything more delicious than steak wrapped in pastry?

Matthew: Nice. Well, Ross, as we close, how can listeners find out more about Bonaventure Equity, and the work you're doing, and connect online with you?

Ross: Great. Well, thanks very much, this is great. Anybody can find us at bvequity.com, B as in boy, V as in Victor, equity.com. We also have the Cannabis Capital podcast, which is cannabiscapitalpodcast.com. The Book Cannabis Capital is available on Amazon and wherever fine books are sold. My personal blog and website is rossobrienbc.com.

Matthew: Ross, well, thanks so much for coming on, really appreciate it. Good luck with all of your investments in 2021 and beyond.

Ross: Great, would love to come back and give you some updates. It's going to be an exciting few years ahead.

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