How has Covid-19 changed the cannabis investing landscape? Cannabis investing and fundraising is different now than before or during the pandemic. Ross O'Brien the Founder and CEO of Bonaventure Equity joins Dan Humiston to talk about post-covid cannabis investing and fundraising opportunities. He shares valuable insight for companies that are wrestling with whether to accept a lower valuation to maintain momentum. He also discusses the investment opportunities in their newest Fund. Produce by PodCONX https://podconx.com/guests/ross-obrien https://www.bvequity.com/ https://www.rossobrienvc.com/
How has Covid-19 changed the cannabis investing landscape?
Cannabis investing and fundraising is different now than before or during the pandemic. Ross O'Brien the Founder and CEO of Bonaventure Equity joins Dan Humiston to talk about post-covid cannabis investing and fundraising opportunities. He shares valuable insight for companies that are wrestling with whether to accept a lower valuation to maintain momentum. He also discusses the investment opportunities in their newest Fund.
https://podconx.com/guests/ross-obrien
https://www.bvequity.com/
https://www.rossobrienvc.com/
Dan Humiston: [00:00:00] Today in raising cannabis capital, we are really excited to have back one of our favorite former guests. Raso Brian, the founder and CEO of Bonaventure equity. Ross. Welcome back to the show.
Ross O'Brien: Thanks, Dan. Great to be back.
Dan Humiston: It's good to have you back.
The last time we spoke was in the fall. And I guess you could say a couple things changed.
Ross O'Brien: Just a little bit. Yeah.
Dan Humiston: For those of you who haven't listened to any Eros previous episodes, first off, why Ross is one of the industry's leading authorities on raising capital. He's written a book called you guessed it cannabis capital, and he's.
A frequent judge on entrepreneur's elevator pitch. And he's the founder and CEO of Bonaventure equity.Last year, investment dollars dried up and valuations were plummeting Ross fast forward. How does today's cannabis investment environment compared to last year?
Ross O'Brien: Yeah, that's a great question. And I would say it's a pretty complicated answer, so let's break it apart in a [00:01:00] couple of elements. One is. Let's look at the macro, just the world as it has changed. So before we get into the nuances of cannabis, what's different. I don't think anybody would disagree that there's been a transformative change in how we do business, how we interact as people, how our society operates some very challenging negative things have happened.
But we're also seeing a lot of. Innovation and positive outcomes changes adaptations. So I would say at a macro level there's been things that have been forced to be addressed sooner and some things that were just inevitable and people are, adapting to that. And moving on, for example, we know statistically that there's just an explosion in entrepreneurship as there is coming out of any economic down cycle high velocity businesses as they're defined by the statistics Bureau is on the rise. Again, we look at what happened in Oh eight Oh nine.
There's great companies formed. And so what are the things that we're looking at as investors are the companies that are resilient, the companies that have been able to Adapt [00:02:00] move quickly, shore up balance sheets, make changes, go through the pivots. And so this is happening in every industry, in every category, not just in cannabis.
So I'd say that was the big thing in entrepreneurship that we're watching for. And I personally believe that there's just phenomenal companies that are being built right now that. Are really challenged with raising capital, because as you said, there's, money moves with market momentums and there's been a pullback and then there's been, more capital put to work.
And there continues to be this pendulum swing which is really difficult for entrepreneurs to manage through. I'm certainly staying at who's directly.
Dan Humiston: It's gotta be really challenging for. Entrepreneurs, but for investors, I know last year there's a lot of enthusiasm because the lower valuations created a buyer's market and investors were getting really good deals. Is it still a buyer's market?
Ross O'Brien: Yeah look, I think in venture capital, there's always a buyer's market because there's, it doesn't matter sector cycle. There's always a lack of capital for the amount of companies that are looking for capital or the amount of founders. So it's [00:03:00] always a buyer's market. , I'm seeing a lot more people go into distressed deals
it's not an area we plan, we stick to our knitting, which is venture, but I've certainly seen people, explore that. Yes. There's companies that have come under duress that I'm sure it could be a turnaround. Have value there that others could extract. So those things have to happen.
And that's just the general cycle of business. As far as valuations are concerned. It's always a negotiation we're at the early stage. We're, looking at series seed series a investments, and, I'm less sensitive to what's happening in the market. And I would say as a general matter I've been consistent with this from day one that valuations have been excessively inflated.
Certainly valuation expectations have been inflamed in cannabis because of retail investor exuberance. We're not going to get caught up in that. There's plenty of opportunities out there. There's plenty of deal flow. We don't have to stretch if we're not comfortable with the valuation expectation of the founders.
And it's really a symptom of negotiation.
Dan Humiston: you mentioned investors trying to. Cherry [00:04:00] pick the distressed. That's just I think they're way out of their range. I know we talked about how challenging it is for casual investors to pick winners. And I got to believe it's even more challenging. Now, do any of your LPs even still try to invest on their own or are they pretty much let you manage their cannabis investing?
Ross O'Brien: Yeah. So we play a part in the cannabis investing and we have co-investment rights with everybody that's partners with us. Generally, the limited partners that we have are going to have very. Expansive portfolios. And they'll probably have some direct investing in that. And, tech companies, startups, not just cannabis, but things like that as well, but you've hit the nail on the head.
Dan is, I think, as you look at mature markets that we compare to healthcare or, software, et cetera, at a certain point at an early stage, the pooled portfolio strategy is. Risk averse compared to just trying to pick a winner yourself. And in particular with cannabis, these are high risk [00:05:00] investments, obviously, because you're looking for venture returns, but we certainly see in cannabis, it is an incredibly choppy, marketplace out there.
It's very difficult to navigate. And so this is what we do every day. So yes, our investors are certainly, working with us because we play. Key part in their allocation to early stage high growth, private companies in cannabis.
Dan Humiston: Yeah. Yeah. I just think , it's gotta be really challenging right now to be able to pick winners. You talked a little bit about your portfolio let's talk about how challenging that must have been to try to guide those guys. One of the benefits of working with a team like yours is that.
These companies that you invest in, get your guidance. And especially when it comes to the next round of fundraising, that's one of the key advantages to having investors is they can walk them through that minefield, it had to be tough with valuations going down and a lot of companies saying, ah, geez, I want, I don't want to take a lower valuation.
But sometimes you need to take a lower valuation just to keep the [00:06:00] momentum going. I know it's gotta be on a case by case basis, but how did your companies, when to take a haircut and when not to.
Ross O'Brien: Yeah, So look there's always a healthy tension. Once you are an investor in a company and there's follow on rounds of saying, okay, we obviously all want the valuation to reflect the value that's being built in the company, but then there's, the risk of the capital versus, the illiquidity of the investment and when it plays out.
So I think. We've certainly been very hands-on with the companies that we've invested in that we've done follow-ons on and are doing so followings in and look it's about being collaborative and it's about doing the right thing for the company. Valuations, tendons to be inoculated with structure at that point, , are we doing convertibles?
Is there a, discount to that? Is there a cap to it? Is there a way to just address both parties issues and, make structure? W we tend to gravitate towards what we call asymmetrical terms in our term sheets, meaning that.
We try to bake in some mechanisms that bridge any gaps that we have. So for [00:07:00] example, if we want to buy 20% of the company and the company wants to sell 10, can we bridge that 5% and say, you know what, if these milestones are met, Then, the management team got it right.
And the valuations increased and they can, claim that 50% or 5% rather, or two and a half of it or whatever. And if the company doesn't hit their projections, that is far more complicated than that with a plan and things. But I'm trying to give a. Override to where look, you pick some destinations in the future and your Delta of hitting those targets or not will influence, resets of the cap table along the way.
That tends to be a really great way to be collaborative around designing a business plan together too. And at the end of the day, that's what it's all about. We don't really get too hung up on valuation. In the seed and series A's that we plan simply because at the end of the day, it's about extracting that value.
So also as investors,we're not going to stay with a company through, 20 years of life cycles, going through to sure. We'd be happy to. Participate in an IPO, but we're not going to help run public companies and things like that. [00:08:00] So the point is at some point, somebody else in the future has to come in and explicitly define what they perceive the value and it's, negotiated then.
No, it's up to us to build a company that has the strongest position to have that conversation in the future and to do it, arm-in-arm with the entrepreneurs and you're right during this last year and a half since the pandemic started, for sure, we've had to really demonstrate to the founders that we worked with, that what we told them about.
Our approach to entrepreneurship is that we are going to show up when the times are tough and we are going to show up and help make decisions. And we're going to get on zoom calls and two o'clock in the morning, one o'clock in the morning, if it's West coast, whatever for me, and we're not all going to make perfect decisions.
But one of the number one indicators of entrepreneurial success in an early stage company is historical successes and having a track record of building businesses before even unsuccessfully and, that's what I've been doing for my entire career. So I think we're in a position where we can actually bring some perspectives, especially the first time founders and say
we've lived some of this movie before, and here's where some of the pitfalls might be to help guide the decisions.
Dan Humiston: Yeah, [00:09:00] I've always said you learned so much more. In the difficult times than you do in the easy times, , you're riding shotgun with these guys and you've been through it before. I know in my life, it would have been great. They have somebody that I could lean on and say, Hey, I don't know what the hell is going on right now. I don't know what to do. It'd be great to have somebody there say last time we were in a situation like this worked
Ross O'Brien: I lovehow you framed that because really it comes down to communication, right? And the entrepreneurs historically that I've tend to have the longest runs of successes with, or progression with are typically wired , to be upfront about these things and to reach out and say, Hey, I don't have the answers.
That's how I leverage my board. Everybody's got, responsibilities up and down chain just because we invest capital doesn't mean we're not accountable to, partners and boards ourselves.
And it's really about leveraging the value that you get from those individuals and being able to have an open. Conversation in particular, like you said, Dan, when things get tough because you know what I can guarantee you [00:10:00] something's going to happen again. And there's going to be some challenge.
Dan Humiston: Yep. For sure. For sure. Well, you're obviously doing things right, because your portfolio seems to be doing really well.
So well, in fact that you're launching a new fund. Can you tell us about that?
Ross O'Brien: Yeah.
So we're really excited about the direction of the companies in the portfolio. One of the things that I saw Dan is a lot of funds would just quickly raise, follow on funds in cannabis. And we certainly didn't want to be in a rush to do that until we. Demonstrated that the platform that we've built and the companies that we're working with is the model to be, scaled going forward.
And we're seeing proof of that now, candidly, sooner than I thought. So it gives us an opportunity now to really. Look at where we're going to continue to put capital as partners into this space. We're really excited about the reframing of the investment thesis. So for us, Stan, we're really focusing in on healthcare applications in cannabis.
Psilocybin is included in that as well. We think that plant-based, medicine and [00:11:00] healthcare applications more broadly as alternative health. We're just scratching the surface of the opportunities there. Just the developments we're seeing on the companies that are more scientific in our portfolio are hugely compelling, great founders, really, dynamic opportunities.
And, we look at things like the opening up of FDA pathways and we're not seeing a lot of funds just really focus on that. It's an area that I've invested in personally and with partners for years. So it seems like a natural way for us to really continue to lean into this space.
And look, we're seeing all of the right, smoke signals from a regulatory standpoint happening out of pandemic. I personally believe that we're going to continue to see. Some pretty significant positive regulatory momentum continue for at least the next cycle, because, w we need to bring in more tax revenue at the state level.
And that experiment's over. It works. So we're excited to really continue to invest in this space. And we're very quickly now looking at some new companies, like soon invest in as well.
Dan Humiston: Wow. That's super [00:12:00] exciting. It's super exciting. And we're going to have all of Ross's information and amount of venture equities. Information in the show notes. So if you're interested in learning more about fun too, or if you're a cannabis company that's raising money that maybe falls into that sector.
I'm sure Ross, his team would be happy to talk to you more Ross. We have to do this more often. We have a lot of stuff that I wanted to ask you today, but I didn't get a chance. Thanks for being on the show today.
Ross O'Brien: Yeah. And it's always a pleasure to be continued. And if I can leave your audience with some continued words of encouragement the entrepreneurs that I'm seeing out there, are really building great companies right now. I'm more excited than ever to see these these emerging leaders and founders building great businesses, and the time is now.
And I hope we can be supportive.