Adventures in Venture capitalism

Well we now have a nice overview of American Venture Capitalism, which has been fun over the last few weeks.

For those who don’t understand Venture Capitalism, it takes a number of forms. Cliff Richards is actually a super-scale VC in the UK.  If you want three million or so for a few days to double it, he is your man.

Venture Capitalists are a little bit like high end backgammon players, which naturally takes my fancy, having been around a bit.  High end backgammon players, however, are usually a bit better at statistics.

Taking the Cannabis industry as an example, I have managed to get the views of three VCs on it. They are significantly different.

VC1 is an investor.  He/she thinks that the progressive legalisation for recreational use is a sign that the world is becoming tolerant of the industry in general, and has invested over half of the current financial holdings in one of the main three players.

VC2 is taking a more cautious view, and is anxiously watching to see how many states are planning to allow it for medicinal use, presumably hoping that big pharma takes it on.  It is doubtful that this is going to happen all that soon, since unlike most pharmaceuticals CBD actually helps.

VC3 is my favourite.  VC3 sees the vastly overvalued stocks and goes and has a look at the ‘big’ players in Canada.  VC3 notices that a $45 million dollar company is, in fact, a medium sized shed in a country with poor weather, and realises that investing in Canadian pot is the most crazy investment strategy since the dot com boom. He also notes that the market for medicinal and recreational cannabis is about a tenth of the investments made, and so there is an enormous bubble which is likely to burst.  I rather like VC3.

I am aware of at least two of the ‘big’ Canadian players, and whilst they are very nice chaps, they are unlikely to be creating a vast operation in Canada, given that it is far cheaper to grow pot elsewhere.  It is also unlikely that recreational cannabis is likely to become widespread due to problems with monitoring blood levels of THC. Unlike alcohol, you cannot simply look at a blood test and tell whether someone is high or not.

Also, there were significant interests in banning all hemp products from other industries, since it is very useful.  Thus we can see some parallels with the oil industry and electric cars.  We aren’t going to see a lot of progress with moving on from using oil when oil is still plentiful and in the hands of people who are already very rich.

So, basically when you see a nice clean-cut venture capitalist telling you about their mammoth successes, bear in mind that they are probably investing in literally hundreds of companies on the basis that maybe three of them pay off.  It is a high risk, and sporadically high reward business.

A good VC will tell you that investing ten million in a guy that makes great toast, for example, is self-fulfilling because that ten million will get the guy sufficient exposure and resources to scale his toast making to the point where his business pays off, at least until he pays the interest on the ten million.  If your VC tells you this upfront, however, it is still a good idea to make sure you have evaluated the toast.


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