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Bonaventure is a boutique venture capital firm focused on companies in the cannabis space
Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh, how times have changed! While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
O'Brien is a lifelong entrepreneur and, through venture investing, is on a mission to be personally responsible for co-creating 1,000 millionaires through entrepreneurship. He established his thought leadership in VC through authoring, “Cannabis Capital,” one of the preeminent books helping to educate entrepreneurs in cannabis on the capital raising process. He is a frequent contributor to the EMI media platform and is a judge on Entrepreneur’s Elevator Pitch web series program.
Prior to closing the first BVE Select Fund focused on cannabis companies, O'Brien served a group of family offices responsible for all of their self-directed venture capital, private equity and real estate investments and lead twenty-two (22) syndicated financings across a variety of sectors and industries with a focus on healthcare.
He has a broad spectrum of private company expertise ranging from starting and operating high growth businesses, numerous venture capital and private equity transactions, advising portfolio companies on mergers and acquisitions transactions, and capital introductions. He has taught entrepreneurship and finance at Florida Atlantic University, holds several board positions and has spent his career primarily working with family offices and early stage growth ready founders. He has been an advisor for programs on investing, entrepreneurship and impact investing at MIT (2011) and Harvard (2014) and was on the steering committee that launched TechRunway at Florida Atlantic University, where they still teach the Entrepreneurship Bootcamp program he initially designed and authored.
Prior to relocating to Florida, O'Brien worked on Wall Street with a boutique New York investment banking firm, was a Manager at Geller & Company and an Assistant Vice President at JPMorgan Chase. He was a founder of a digital technology company, which he and his partners exited in 2006. He began his career at Sony BMG and has international experience working in the UK, Europe, Hong Kong and Canada.
O'Brien earned an MBA from Fordham University and obtained a BS in Business Marketing & Management from Ferris State University. He lives with his dog, Gibson, in West Palm Beach Florida and enjoys motorcycling in his spare time.
VatorNews: What is your investment philosophy or methodology?
Ross O’Brien: I’m a lifelong entrepreneur; I opened a restaurant when I was 19 years old back home in Canada, and have been afflicted with the entrepreneurial disease ever since. I've been through a whole series of startups since then, some I started myself, some that I worked for, and had a whole string of spectacular failures along the way. I started businesses out of my studio apartment in Manhattan, ended up in New York with a really good network of other young entrepreneurs, and realized that I was most excited about the diversity and variety in the types of companies and the founders I met. The one thing that they all struggled with was raising capital, and I had actually successfully raised capital a few times previously and I looked at that and said, "That's something that I haven't struggled with, maybe that's the way that I can support these other entrepreneurs." I set about an investor in service of entrepreneurship career path from there.
That led me down the finance path. I was at JP Morgan for a period, ended up at an accounting firm in New York, got my MBA from Fordham, and ended up with a group of clients as a non-classically trained investment banker, really as a way to get into the transactional world, aligned with a boutique broker dealer. I started facilitating transactions as an intermediary between private investors and high growth, early stage companies, most of which were in healthcare. Then this market emerged called family offices, which I didn't really know that there was even a title for at the time, and I ended up building up this network of individuals, very wealthy and successful entrepreneurs in their own right, who liked investing in private companies and that became my sort of niche. I found, at that time, that one of the things that became a strength of mine was the ability to really relate to other entrepreneurs and founders and management teams and just go a little bit deeper operationally, having had a lot of operational experience along the way. That is something that we think largely informs how we invest today as well; we think we're very compatible with entrepreneurial teams since we understand what it means to have to make a payroll on a Friday and not having enough cash in the bank, and we can empathize with that. It allows us to just go deeper and be more collaborative on terms and that's something that, as an investment banker or as an intermediary, was something that I really built my career around. I have many of those relationships still to this day and a lot of them have turned into investors with us now as well.
Phase three of my career was moving to Florida: a local family office who I had done a number of transactions with, and had a long term relationship with here in Florida, brought me into their firm. I worked directly in the family office as, for lack of a better title, their Chief Investment Officer, and essentially I was responsible for all of their self directed venture capital private equity and real estate. I was deploying capital from the families’ balance sheets and bringing in co-investors and putting together syndicated transactions on a one off basis with a number of companies, again, the majority of which were in healthcare. That investment cycle always had an expiration date and I'm still very close with that group and we work with a lot of them who are investors with us now. We had a couple of nice liquidity events, and I decided to stay in South Florida and establish Bonaventure Equity which was first incepted as a fundless sponsor seven years ago. As we started putting together transactions with our investor relationships, we realized that not having a committed fund at that time, and being more transactional, we really needed to have a lot of ongoing engagement and connectivity with our investors, most of which spent part or all of the year in the Palm Beach area. So, we started putting together some really authentic programming, and we ended up, through no design, actually hosting a whole series of events for family offices. There's all kinds of groups out there that host family office events and it's all service providers, so we had those relationships. We didn't need to go through those pathways and that's germane to the story of where we are today because we did a lot of surveying, and a lot of talking with our investors, to find out where they're most interested in deploying their capital. Far and away, cannabis had become a sector that they were either deploying significant capital in, or a space where they intended to deploy significant capital.
So, when we launched our first cannabis fund, it was because our investors were directing us towards that; I went back to a group of my partners and said, "We're going to start looking at cannabis deals," they said, "No, we're not, you're going to be a fund, we're going to invest in the fund, go put together a portfolio and figure out the optimal strategy for venture capital in cannabis." That's really important to our story: we believe that we are differentiated and almost alone in the space in our focus on pure venture investing and the institutional approach to venture capital investing, in particular in cannabis. And so what that means is we're looking at series seed, Series A and we want to stick to that; that's where we've been successful in the past in other sectors. What you're going to find in cannabis is there are a lot of neophytes that are joining the investment game just because cannabis is becoming accessible. At Bonaventure Equity, we have a platform, we're not just deploying capital; we realize that it's important that, when you invest in early stage companies, they require a lot of care and feeding. We have a finance and operations team that our companies can leverage to scale up with them to provide really sophisticated operational support. We have a ton of access from a regulatory standpoint, not only in our ability to diligence companies, but our ability to have a seat at the table as regulations are being informed, which is important for our investing strategy.
We're focused on the overlay of cannabis and healthcare; we think healthcare is now going into this transformation as a result of positive cannabis legislation and we also really studied the space before we made any investments. We looked at over 300 companies before we wrote our first check and during that process I actually wrote a book called Cannabis Capital, which is the first book on venture capital for cannabis.
VN: What's happening in the heathcare space when it comes to cannabis?
RO: The way we think about cannabis as an investment strategy is that, with the access to cannabis and legalization, there's all kinds of blue sky in creating the science around the plants and the opportunity for the plant to transition into pharmaceuticals and healthcare applications and for novel therapies, etc. We just see that as being a completely new opportunity.
We start with the pharmaceutical perspective; pharmaceuticals all originate in some capacity before they become synthesized and replicated in a factory, whether it's as a fungus or bacteria or a plant. And, at this point, we're most interested in companies that are pioneering new, novel therapies for certain indications that are going after FDA approval. We see that as being a wide open space; the case study for that is Epidiolex, the first and only drug that's been approved by the FDA derived from cannabis. They were just recently sold for $7.2 billion to GW Pharmaceutical. That's somewhere where we're very interested in focusing on.
We think of cannabis as the cannabis economy, not just an industry, which was something that we wrote about in the book and that means we think cannabis has reached every boardroom of every company, period. So, when you look at healthcare, whether it's telemedicine or even just pharmaceuticals or pharmacy itself, all of these incumbent businesses are having to adapt in some fashion to what is going to end up being the medical application of cannabis. The science is coming back that it's not a question about whether or not cannabis has applications for sleep management, pain management, inflammation, and PTSD. It's broad in scope, and so now, as that science is being developed, we want to be in the economies that are being built around that. That can also be innovative technology companies that are delivering health care outcomes to patients by way of having access to cannabis.
VN: There's obviously a lot happening in cannabis politically. So how does that factor into your investment strategy? The Senate just introduced legislation to make it nationally legalized, and that's probably not going anywhere, but I'm just wondering how that affects your investing strategy.
RO: One of the core tenets of our investment thesis is that the government is largely going to play the role of market maker in this space and, as legislation becomes enacted, you're going to see markets open up in different states in different ways, whether it's medical or recreational. We're very excited about that because it's progressively opening up all these micro economies within the broader US and global economy that are going to benefit from that.
We're most focused on tracking the Safe Banking Act right now; we're not particularly focused on federal legalization because there's an explosion of entrepreneurship in this space that doesn't have the traditional access to institutional capital. So, we want to be able to track the regulatory momentum, both from a diligence standpoint but also operate in the markets that are going to be defining the regulations going forward. For example, California has the most robust testing lab requirements in the country right now. Well, we see other states just following suit in that, but those requirements had to be designed at some point to start with and the earlier we can go in the design of the legislation, the more effective we can be, and founders can be, in delivering on the business opportunity.
VN: Are you saying you're going after the states or the markets, like California that are leading in this space?
RO: We're looking at the legislation on a state by state basis; we're agnostic to where the companies are located that we're investing in. Depending on whether or not they touch the plant, and a lot of them don't, we're happy to invest in companies in any state. So, it's less about where the science is being developed, or the entrepreneurs are being cultivated, but rather just tracking to the more robust or more advanced regulatory regimes on a state by state basis that we think will, ultimately, translate to other states as they look to enact their own legislation.
VN: What is the size of your current fund and how many investments do you typically make in a year? How much is that in dollar amount for you?
RO: Our fund one has eight active investments in it. We're currently starting to invest out of our Fund II, which is a target of $50 million, where we will be making 12 to 15 investments. Our investment sizes is $1 to $3 million de novo investment, with the ability to make follow-ons as well.
VN: What traction does a startup need for you to invest? Do you have any specific numbers in terms of revenue or users?
RO: We're less concerned about revenue inflection points. We look at it more in terms of having a line of sight to the next milestone for the business, and each business is going to be different. We have some businesses that are building intellectual property and actually developing science; one of our companies is the first to map the genome of the cannabis plant. There's a whole scientific momentum behind that and so that is not a revenue targeted type investment.
Where we get most comfortable is when a company has made some significant investment, historically through friends and family and their own resources, to get to at least having a plan that shows what the commercialization strategy is. So, we're not the right fit to go invest in a pitch deck that is an idea and now they have to go build something around it, but we think we're a great fit for a company that's just starting to bring venture funds onto their cap table.
We now have some investments where we're currently the only fund investor, but have a number of angels and capital partners along the way as well. So, that's more of our sweet spot. We don't have a specific filter of certain revenue traction; we'd like to see that there's an inflection point for revenue and we really want to understand what the valuation curve is and, as we get into a lot of the pharma and biotech companies, that may never achieve revenue but still hit some significant valuation metrics along the way.
VN: You're not doing an idea on a napkin, so I would assume that you want to see some product at that point.
RO: Yeah, definitely. The product is important to understand and it's not necessarily a product that has massive traction but, particularly in the scientific-based companies, we want to be able to show that they're proven commercialization. If you go build a bunch of IP and put it in a fridge somewhere, does somebody really want access to that? What is the case in point and what is the case study? When somebody opens up their checkbook and pays for your science to use it in their business, that's a really exciting position for a company to be in. We have a whole operations team and resources that we bring to bear, so we're looking to scale. That means being on the back of the napkin is too early for us, but to still have to figure out some of the commercialization or business development strategy is okay with us.
VN: What do you look for in the team?
RO: We're obviously team focused, people focused, first. But, for us, there's some nuance to that and some very specific things that we look for. One is experience and the context of, not necessarily having an exit in the past, but having some track record of experience, either in other companies or having people on the team that have some of the muscle memory of what it takes to be an entrepreneur. The reason I wrote the book was to be basically a handbook for entrepreneurs; we had so many entrepreneurs coming to us in cannabis that didn't even have the language. They were like, "We need some money," and we’d say, "What's your valuation?" and they’d say, "What's a valuation?" So, just those baseline things are really important to understand. We want to see experience but experience can be part of the team, not all the team.
And then in the personalities, there are characteristics that are a best fit for us; I'm not saying this is the optimal archetype for every entrepreneur but where we've been really successful, because it fits the personality of our team, are founders that are very transparent and very collaborative when things don't go well. There's always going to be problems in every company and the founders we’ve been most successful with are the ones that are willing to say, "we didn't understand this," or, "we didn't get it right." So, one of the ways that we tease that out in looking at a lot of the pitch decks is just really testing the business thesis behind the business model that they're presenting to us. It's not to say that there's a right or wrong answer, we just want to understand the acumen that went into making these decisions because quick decisions have to be made with imperfect information and without enough resources and without enough time. That is the dynamic of entrepreneurship. When an entrepreneur gets very resistant to that feedback, that's a big red flag for us.
VN: What about experience in the cannabis industry, is that something that you look for
RO: Not necessarily. Look, I started looking at cannabis transactions with the family office probably six or eight years ago. We just didn't see a maturation yet in the management teams that was equivalent to management teams that we saw in other, more incumbent industries, like healthcare. So, we're very cautious to not go too far in the direction of a ton of cannabis experience because most cannabis experience is built around advocacy. I mean, the cannabis sector has been getting it on ballots and we have gratitude and thankfulness for everybody that has done that, and that's hard work, but we invest in business acumen not advocacy acumen. We've seen some great combinations in our management teams of people that bring people from other sectors into the cannabis space with a specific experience that now translates to the business models that are emerging. And, yes, you have to have that authenticity and that muscle memory of understanding how things operate, but we're not as focused on it as somebody who's investing in retail or cultivators. That's outside of our investments scope.
VN: As you said, cannabis is a fairly new and nascent space, so that gets me to my next question, which is about valuations. Since cannabis is something that’s only been around for less than a decade, how do you see valuations in the space? Are they relatively low compared to other spaces because people aren't as familiar? And do you see them growing?
RO: Our perspective is that valuations were overheated in cannabis, certainly in 2018 and 2019, and what we saw happening was this excitement and investor exuberance to participate because now cannabis is legal. So, we saw lot of premature IPOs, companies going IPO in Canada and hitting these big valuations because the retail investor needed and wanted an appetite for cannabis businesses, and almost turned a blind eye to the underlying fundamentals of businesses that shouldn't be public. We saw companies going public with very little revenue and not really public management teams; we just wanted to stay away from that. We sort of looked at that as like a Klondike mentality that was not in our DNA. So, we went slow to go fast.
There was a reset in October 2019 in the public markets in cannabis, which certainly helped, and now that we're seeing things stabilize. A lot of the companies that we see that are in what you would think of as cannabis, like cultivation and retail and supply chain and brands, they've priced a lot of the future value, or the future growth opportunity, into their current valuations, particularly in the public markets. We're far more focused on M&A exits, private equity exits down the line, and those valuation curves which are going to be more exciting, meaning that we do see valuations coming back to Earth on the earlier stage. The reality is that there's so many opportunities to invest in that if valuation becomes a sticking point, we can move on to the next transaction, so we don't have to overpay for anything at this stage.
VN: How were valuation affected over the last 18 months valuations by COVID? When COVID first hit there was a lot of fear in venture capital that they were not going to be able to deploy their capital, but 2020 became a record year. And 2021 has almost matched that already, so that definitely did not happen. So, how did COVID affect valuations in the cannabis industry?
RO: A lot of companies did extremely well. As with any correction, there's a lot of attrition but that's just natural; it's not unique to cannabis, it happens in every industry and in every economy. And, yes, the strongest survive in terms of being a Darwinian business thesis. So, we did see some attrition but that's probably healthy in the long run. And then a lot of the incumbent companies, the pioneering companies that have been in their different sectors, saw significant increases in business over the pandemic.
Look, it all stems from two things: one, retail cannabis was deemed an essential business in a lot of states and so you saw just this massive holiday-level type sales trends. The pandemic accelerated a lot of things in our world, but in cannabis it accelerated the velocity of pro-cannabis legislation. So, with those two things you get a lot of economic growth within the private company sector within cannabis
VN: Was that due to increased mental health issues that arose from the pandemic? Is that part of why that legislation was fast tracked? What were some of the other reasons for that?
RO: That's interesting, we haven't really unpacked the mental health perspective, although that's certainly something that we are focused on philosophically, and also because Psilocybe is in our investment thesis as well. We didn't really look at the correlation of regulatory velocity to mental health awareness, but it's an interesting point and I'd like to think more about that. But, largely what's driving it is that the experiment’s over. If you want to create tax revenue, you legalize cannabis, and a lot of states and communities are looking for ways to create more sources of income. If you legalize cannabis and are able to tax it, that's a symptom of that.
VN: There are many venture funds out there today, how do you differentiate yourself to limited partners?
RO: A couple of things. One, we have a track record and have some performance now in the space that's, candidly, tracking faster than we thought it would and is happening faster than more incumbent venture strategies. Two, we've built a platform, not just not just a pass through of capital; we have operational resources, we get hands-on with the companies that we invest in, we have regulatory access that will ultimately help inform regulations, which gives us, we think, an unfair advantage in the regulatory arbitrage. And we are the only venture fund that is cannabis-centric, to our knowledge, that has remained consistent with a venture investing strategy. You’re not going to see the venture type returns in the more established spaces, like cultivation, for example, which had their moments in time. So, for us, we think that the venture returns are sticking in the earlier stage, while a lot of the funds in our space have either gone upstream, and call themselves private equity now, or started SPACs or whatever it might be. We stick to our knitting and there is a lack of institutional capital for the highest quality entrepreneurs that we've ever seen. As a result of of the book, and our platform, we get off market, really high quality, incredible management teams coming to us to partner with us.
VN: Venture is a two-way street, where investors also have to pitch themselves. How do you differentiate your fund to entrepreneurs?
RO: This is something we talked about with a lot of our founders, because we have many other capital partners; we're not the sole investor in any company that we're in. We always say that the first thing that you want to look for in a venture investor is operational experience. There are a lot of investment funds that are traditional finance career paths and that's great and that works in some respects; we're not trying to financially engineer success, but we're trying to build success as entrepreneurs. We've done that and, as I said earlier, we know what it means to not be able to make a payroll on Friday, and that brings empathy for the entrepreneur perspective that we find is a great fit for the entrepreneurs that that resonates with. We're not the right fit for everyone, and nor is everyone the right fit for us.
Secondly, our Rolodex is extremely valuable for companies that have ambition to be global players. We have the former president of Mexico, Vicente Fox, he's on our advisory board, and we have a lot of international relationships. While we don't invest in companies internationally in this fund, we invest in companies that have the ability to look to scale at that sort of level. We've got the resources, whether it's finance, operations, regulatory, and/or advisory board and our capital partners, that want to participate in taking companies from the seed and Series A up until up to the $100 million, $200 million, half a billion dollar in revenue type inflection point.
VN: What are some of the investments you’ve made that you're super excited about? Why did you want to invest in those companies?
RO: As I said, we went through a ton of deals and it was very disciplined to say that we didn't want to rush into any investments before we started writing checks. Obviously, as a general partner, I'm invested in everything that we do. And so, the teams that really rose to the top, and that we are continuing to support, are companies like Leafworks, which has two PhD female founders based out of California. It was one of the first groups to map the genome of the cannabis plant and they're now developing commercialization of that IP, and all kinds of applications for agricultural technology, which is really what it is; it just happens to be the cannabis plant. We love the diversity of founders in cannabis: out of our eight companies, we have six female founders, we have three African American founders, we have an Asian American founder. We've just seen this broader scope of access to entrepreneurship, which really excites us and that's a differentiator for our LPs as well.
There's another company Nalu-Bio, they are one of the first leading companies to create a synthetic CBD compound, and this goes back to what I was talking about earlier about pharmaceuticals originating in nature and they’re now able to replicate a synthetic CBD compound. The way to think about it is like aspirin came from plants, now it's created in a lab and it's put in bottles and big pharma can roll it out. We have another company, tcheck, that’s a handheld spectrometer device. That the company's doing extremely well.
VN: You mentioned the diversity that you invest in. Is cannabis a more diverse space and, if so, why is that?
RO: We've just seen, anecdotally, more diversity in the founder set than we've that I've personally seen in other sectors in the past.
Part of that is because there are a lot of social equity programs that are built around cannabis legislation. So, it's been part of the DNA of the cannabis sector from the get go to make these business opportunities accessible to everyone in our communities and, in particular, those that have been most negatively impacted by prohibition prior to that. Also, because it's an exciting, new and innovative space you're just getting a lot of talent looking for their ways to participate.
VN: What are some lessons you learned?
RO: Don't fall in love with a deal. Somebody said to me at one point, I wish I could find out who it was, that deals are like trains: there's a new one every seven minutes. And, yes, you want to fall in love with the right founders and the right opportunity but the times that it hurt to pass on transactions have never come back to bite us.
It's also understanding the patience or calmness that comes with entrepreneurs who have been through enough storms, have weathered enough storms along the way, that things will always go wrong and every set of projections we've ever done have always been wrong; nobody has a crystal ball. It's really about building the right partnerships with people that you want to go to endure the struggle with and find ways to go in, even when all the odds are against you.
VN: What excites you the most about your position as VC?
RO: I have a personal mission to create 1,000 millionaires in my career and, as a non-classically trained finance person, I view venture capital, and the ability to be a venture capitalist, as a platform by which to provide pathways for entrepreneurial success, which was something that had been mostly elusive for me in my career as well. So, I get excited about the founders we work with. I get excited about being able to be a significant contributor to other people's success and other company's success.
We have a mission to create a billion dollars in value and positively impact a billion lives as a firm, and we have a team that comes in every day to fight for that; we believe it's too important to fail at. With that focus, we see this as something that is going to be transformative in our communities if we're successful at it. I couldn't think of anything else I could have a greater amount of impact.
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Joined Vator onFounder & CEO of Bonaventure Equity, LLC (“BVE”), a boutique venture capital firm, Ross O'Brien is a lifelong entrepreneur and through venture investing is on a mission to co-create 1000 millionaires through entrepreneurship.