How To Invest in Misunderstood & Highly Regulated Markets with Helene Servillon from JourneyOne Ventures

0:00This episode is brought to you by Vobin from Carta. Vobin from Carta is the easiest way to launch and run your venture investing. They offer SPVs and fund vehicles for GPs at all stages of the journey, from your first syndicate to operating a multi-million dollar venture fund. If you're interested in investing in startups, stick around after the episode where I chat with Gabriel Shin from the Vobin from Carta team, who shares his perspective and tips about how to start investing and how Vobin from Carta can get you set up. The link to Vobin from Carta's website is in the show notes. Yeah, I mean, I think a lot about evolving consumer trends and Gen Z, Gen Alpha.

0:40I'm like the middle of millennial-ness. And we just have a lot more education about products and a whole flood of products constantly coming at us. And so I think it always goes back to, you know, how does this product make you feel from an external perspective and internal perspective? And how much do you love the brand to want to be associated by it? Because everything in the U.S. is very consumer capitalism driven. But, you know, I think that, you know, cannabis is already taking market share from alcohol. In a lot of states, cannabis taxes are superseding alcohol taxes. So from an economic impact standpoint, you know, the U.S.

1:35had$30 billion of sales last year, but the measurement of economic impact was$90 billion. So, you know, there's a growing kind of ripple effect of, if you're not drinking, you know, booze and you're going out and drinking something, what's it going to be? Hey, I'm your host, Mike Gelb, and this is the Consumer VC Podcast where we discuss the intersection of venture capital and consumer innovation. If you're enjoying the show, also subscribe to my newsletter at theconsumervc.com where you'll receive new episodes, straight to your inbox and a weekly recap of all the consumer deals that are happening.

2:17Please note that all content and episodes are for informational and entertainment purposes only and is not investment advice. This episode is brought to you by Vobin from Carta. Vobin from Carta is the easiest way to launch and run your venture investing. They offer SPVs and fun vehicles for GPs at all stages of the journey, from your first syndicate to offering a multi-million dollar venture fund. If you're interested in investing in startups, stick around after the episode where I chat with Gabriel Shin from the Vauban from Carta team, who shares his perspective and tips about how to start investing and how Vauban from Carta can get you set up.

2:54The link to Vauban from Carta's website is in the show notes. Our guest today is Helene Servilian, founder of Journey One Ventures. Journey One Ventures is a 100 % woman and minority-owned early-stage fund and invest in billion-dollar opportunities and misunderstood markets that are highly regulated and fragmented. We focus our conversation on investing in cannabis companies and the different regulations that are around cannabis and why the opportunity today is more on the infrastructure side rather than investing in cannabis brands. Without further ado, here's Helene.

3:30Helene, thank you so much for joining me here today. How are you? I'm great, Mike. Happy Friday. Happy Friday. Indeed. Happy Friday. So I want to start a little bit at the beginning. Why did you decide to go from B2B tech and telecom to the world of cannabis and VC? Well, that's a great question. I entered the cannabis industry late 2017, early 2018. Impactful year because that is when California turned from a medicinal market in 1996 to an adult use recreational market in 2018. and California was the first state in the U.S. to actually medically legalize cannabis and Colorado was the first state to legalize it on adult use level and I grew up in San Francisco which is a wonderful magical unique eclectic city that has a pretty big weed culture and actually the the the smartest kids in my high school we we called them uh well they were technically stoners, but they were like the wall kids.

4:46And I didn't grow up with the same stigma that a lot of people grew up with a plant. And so when I was working in enterprise tech, I really wanted to get my chops in the venture capital world. I spent my 20s working as an early stage operator in emerging industries. And when you're in startup landia, you always understand that VCs play important power in your company if you're raising capital, getting to that next level. So I really wanted to understand how the finance and business worked. And as I was trying to figure out where would I specialize, how would I brand myself and kind of start my career adventure, the timing of cannabis was really the best intersection for me.

5:38So that is a quick high-level view of where I started, but I would say that I specialize really in highly regulated and misunderstood markets in emerging industries. So even before I was in enterprise tech, I was in the light electric vehicle industry for five years before bike shares hit the ground in New York and San Francisco and started to get really into how do you reframe the way that people think about products and services and kind of get them in the mainstream. So it's a little bit of a against the grain thinking. How did you think about, because I would say like some of these categories, they're quote unquote labeled like vice categories, right?

6:23That like a lot of kind of VCs don't invest in. How did you think when you were raising Fund One for Journey One Ventures, how do you think about building your LP network? Was there a lot of block just because due to the categories that you were interested in investing in? Or what was that like just the whole fundraise? That's a great question. So technically speaking, a lot of institutional capital allocators like endowments, pension funds, anything that is like federal touching money, they just don't invest in cannabis because most LPAs like limited partnership agreements, which is the agreements that, you know, investors sign to invest in venture funds there, they have vice clauses, which is what cannabis sits under.

7:16But so, so most funds are actually backed by family offices and high net worth individuals. And in states where cannabis is legal, there are circumstances where institutional capital allocators invest in the industry. So it's a big challenge, but it's also a massive opportunity. And so that's where I saw kind of a window to beat the traditional investors. I'm not competing against Andreessen Horowitz, Sequoia Capital, you know, USV, they can't touch the industry right now. So it does create a big advantage for fund managers that are willing to take, you know, early risk in the sector. Yeah, no, that's fair.

8:04And I'd imagine then on like the supply side of capital, there's then since there is, you know, as you say, like these vice clauses that that exists with a lot of, I'd imagine like the majority of venture capital funds that on the supply side that, you know, you're going to have demand when it comes to cannabis companies that need money. But on the supply side of capital, it's not as much, it's not there or it's limited due to like the vice clause and what have you. And so there is like a bit of a mismatch there as well, which I'm sure that actually you can, that falls into your favor. Yeah, I mean, it makes it an investor's market, right?

8:47If there's fewer investors and limited capital in the sector, you also have to have like a really sharp eye for how to look at companies. And we can go into how we develop our thesis. But I think on the topic of vice, it's important because I know you cover so many different consumer related industries, CPG, whatnot, to reframe how people think about cannabis. I think it's a it's a high value crop. It's a plant that has medicinal wellness and recreational applications. When you think about vices like alcohol, people don't, you know, they don't heal. Well, I think people can drink alcohol to kind of take the edge off the day, but it's not good for your body.

9:33And so I always tell investors like you don't have to be a cannabis consumer to to understand and love what it does for other people. So from a medical application, you know, there's use cases for epilepsy, Parkinson's, early research on dementia. Pfizer, for example, has acquired a clinical stage company that uses cannabis compounds for gastrointestinal disorders. And GW Pharma, you know, they were the first to develop epilepsy with cannabinoids. And so, you know, there's a whole history that I don't know if we'll have time to go into the podcast around, you know, how this plant has been demonized for a lot of racial kind of perspectives from politics back in the day during Reagan time.

10:28I mean, certainly. I mean, you even look at tobacco. Tobacco isn't good for you either, right? Comparing it to alcohol, and it's also legalized. And yet, cannabis is the one that kind of gets a lot of flack about how it's different. So no, I mean, 100 % agree with you there. And I think a lot of people are probably wondering, you know, what makes cannabis a unique market to invest into? And I think that highly regulated and fragmented markets are ripe for a lot of venture opportunity. So our industry can't use Visa, MasterCard, Amex, PayPal for payments. We can't use FedEx or USPS for shipping product.

11:17we can't advertise on Facebook or Google now that Twitter is private actually Twitter is allowing cannabis advertisements and we'd have no access to federal banks most banks that bank cannabis companies are state credit unions and so because of all of that we actually need customized software and infrastructure for this double-digit billion-dollar industry to operate. And so that is a sector which we specialize in, is really investing in the infrastructure and technology and IP that powers the plant-based wellness industries. So our fund one is really focused on cannabis. We see it as a great go-to-market that's disrupting the alcohol industry, consumer packaged goods, pharma.

12:10and we're kind of starting to ideate how do we evolve into fun too, but we've really built a team that knows the industry inside and out. Cannabis also isn't legal in all states, as you say. How do you think about regulation when it comes to cannabis and maybe paying attention in terms of the legal side, in terms of when the laws actually change? Yeah. So, I mean, what's going to make this market boom even further is federal legalization. And there's a lot to unpack in there. I'll start from the basis of where we're at today. So we have 41 states in the U.S. that have legalized medical use cannabis.

12:57And how the rollout of regulation works is that a state goes medical. And then afterwards, you know, they vote to push it to go into adult use, which is, you know, 21 plus. And so 80 percent of the U.S. population has access to cannabis. and there's a handful of big legislations, which is the Safe Banking Act. It's actually, there's a bill going to the Senate right now. There's bipartisan support from Chuck Schumer. And what that would enable is, you know, federal access to federal banking and small business loans to cannabis companies. And so right now it's really challenging to be, you know, a mom and pop shop in cannabis when capital is restricted and you have no assets loan against, um, and you don't have access to typical small business loans.

13:55Um, so we're seeing like a really big discrepancy being created between enterprise companies in the industry. And you're like mom and pop shops because it's hard for them to raise early stage capital. Majority of that capital is equity. Um, It's hard to get debt. And so that's the Safe Banking Act. And, you know, Biden came out last November with support to decriminalize cannabis on a federal level, which is something that Vice President Harris really supported when she was going through her debates. it's very tricky I think everyone in the industry is always optimistic people who work in cannabis are extremely resilient it's not an easy industry to work in and it could be a curveball you know I think with elections coming up and enterprise cannabis companies having more lobbying dollars things shift really fast.

14:58Some super conservative politicians like Mitch McConnell and John Boehner are both cannabis boys now. And, you know, you track the dollars where they come from, they have a lot of friends in the cotton and tobacco industries. And so it is, you know, I think the stronger cannabis companies get, the bigger our lobbying dollars get and influence. But to address when will federal legalization happen is a big question mark. I mean, earliest, maybe two years, longest TBD. I think everyone's hoping for it. And that's, you know, that's what I'm playing for from a fund investment side, because I look at cannabis as an M &A market rather than an IPO market.

15:44And the intersection of that consolidation and those mergers are going to come from alcohol, tobacco, big pharma, you know, Johnson and Johnson. People talk about cannabis nowadays, and we'll get even nerdier and talk about cannabinoids, which is, you know, the future of what this plant can unlock from a product standpoint. No, that's really helpful from a timing perspective. And when you think about your thesis because you said it could happen, federal legalization of cannabis in the next, let's say, two years if we're thinking optimistically. But from a timing perspective, how does what's happening legislation-wise, and not just the US, maybe on a global scale, how does that in different countries, as different countries are also legalizing cannabis, how does that impact where you should kind of spend your time and what you should spend your time on?

16:47Sure. So our fund is primarily focused on North America investments. So Canada and US. Canada's market is smaller than California's market. We have the same population. California probably did roughly around 10 bill last year or maybe just under it. And I'm not sure what latest Canada numbers are, but they're definitely not clipsing that. And so with figuring out where do we geographically focus, it's really hard to keep up with 41 states and their different regulatory bodies. You open up that to the world and it's like, you know, your brain can go sideways. But I'm actually spending time in Europe this summer, specifically in Germany and Switzerland, because Germany is a medical country.

17:44And the way that they've rolled out cannabis is actually super interesting because very different than the United States. But they are, you know, around the edge of legalizing cannabis recreationally. And I think that will influence what the U.S. does. You know, people respect Germans in business. I used to work with a ton. I'm very curious to figure out what's going to happen on the ground there and how it's going to create a domino effect for other markets, specifically in Europe, as well as the US. That's really interesting about how you're thinking about it in terms of when a country opens up, maybe when it comes to cannabis has become legalized, then you actually spend your time that you that actually can can dictate part of the time in terms of where to actually spend your time, as we might see a bit of a boom when it comes to cannabis companies?

18:38Yeah, no, I was just going to say, I mean, if you think about how certain continents and influences work, Germany is a strong GDP power in Europe. And because I've pretty early on in the US market, we have a lot of data points of how markets roll out. Every country is fundamentally different, but there's infrastructure and a lot of technology and software that needs to power these industries. And so we kind of look for what are the building blocks for this market to get off the ground and what do we see as potential venture scalable investments within that ecosystem. Can we talk a little bit about what venture scalable as well kind of means to you?

19:29I know that when you say you see this more so as an M &A market over a IPO market, I presume you mean on the actual cannabis brand, so to speak, like the CPG side to cannabis, right? Or do you also think of that in terms of the technology side too and the infrastructure? I think of it on both sides. Like I mentioned before, right, like what makes cannabis a unique market is that we are handcuffed from using other software systems like Shopify, Block, and payment processors. And so, you know, there's a handful of companies that will go global, both CPG and software. And then there's a handful of companies that, you know, will just be like country specific.

20:28But when I, you know, Uber, for example, has launched in Canada and they are absolutely looking for how do they play in the U.S. market upon federal legalization. But they're not going to move until that happens. And so I think the best opportunities are going to be mergers and acquisitions. And, you know, there are publicly traded cannabis companies, mainly listed on the Canadian Exchange, a few listed on the NASDAQ. And my bet is that there will probably be around like five to six tech giants in cannabis at most. And then the rest will be consolidation. So if I start there, then if I say, you know, I'm not really shooting for the potential billion dollar exits, that would be really nice.

21:21I think that's every fund manager's dream. I won't complain about a unicorn or a decacorn. But then that drives kind of where we start. So that's why we're very focused on seed stage investments. If I can get in on that$5 million valuation or sub 10 and I'm underwriting for a quarter billion, half a billion dollar exit, those are good multiples for a fund. And so we do a handful of growth stage investments outside of the fund. But because I see the market being an M &A market, playing early is key. How then do you think about how a cannabis company or any one of your company should be capitalized?

22:07Because, you know, if you're going for a quarter of a billion, half a billion type outcome, then if you go on like the normal kind of venture, venture wheel, I mean, you keep raising and raising and raising, then eventually like that actually probably like you're, you're, you're probably not going to get like generate like that. that great return because it's because you're trying to market as as a as a potential unicorn, as we say. So how do you think about like capitalization when you actually talk to founders? I think it depends on the business model. So to back it up even further, what kind of cannabis companies are out there, right?

22:46So we have brands, cultivation, licensed distributors who move product from cultivators to, you know, manufacturers, then package product, and then bring it to retailers. And then, you know, there are brands that are vertically integrated. So they own their entire infrastructure and then have their brand or they're just like asset light brands that just, you know, in traditional CPG, they use a co-manufacturer and whatnot. So there's, you know, real estate side of cannabis. And then we have software, which is the entire sack. So we have seed to sale providers. We have B2B wholesale marketplaces, B2B to B2C marketplaces, similar to Amazon and such.

23:36It depends on capital efficiency of the business. For a plant-touching business, for example, we have a law called 280E, and you can't do federal expenses. It makes it challenging for cannabis companies to be more profitable. Um, so that's one challenge, you know, cultivation can be a cash cow business. Um, if there are limited number of cultivators in the market, you can really control price. Once the market starts to issue more licenses, supply and demand dynamics start to evolve. Right. So your question is a really good one, but it really is dependent upon the business model and what type of cash is needed.

24:27So I think kind of going into our thesis in the market, on our prep call, I talked about every quarter we have to evolve with the market. It's moving so fast. Each state creates a different ripple effect. And so capital efficiency is super important for net new investments that we're making because capital is hard to raise in the holistic venture environment right now. So we want to make sure that we're not funding businesses that are five years from first check revenue, which would be more of like biotech deals and life science deals and cannabis. And that all of our current portfolio companies, the ones who haven't hit profitability, we're you know controlling costs and then trying to optimize of how do we get to break even profitable um so you know i think it also depends on just like the capital markets in general like you know cash was pretty easy to raise two years ago post pandemic and now we're in a crunch and so a lot of companies are going back to let's stay lean low burn um and survive this dynamic because, you know, a few years ago, everyone had this thesis of like, let's grow at all costs.

25:55But, and let's grow at all costs in preparation for federal legalization. Now that's kicked out a bit. The strategy has to change to the market dynamics. No, that's a fair point. That's a fair point. And I appreciate you mentioning how, obviously, how like the federal regulation ties into all of this and it being, okay, maybe we thought that federal regulation was going to come quicker. Let's try to rev up. And maybe that wasn't the case. So then we have to actually kind of think about how do we think about profitability and not like a growth at all cost mentality. And of course, as you say, we saw a bit of a growth at all cost mentality over the past few years in what seemed like every kind of venture backable or what presumed to be venture backable category.

26:46And so, of course, the market now has changed across that landscape, as we've seen a lot of companies having to deal with that and making a lot of tough decisions. You mentioned how, I remember we talked about this before, about how your thesis, you kind of have to check in on your thesis every quarter because it could constantly evolve. Can you give a couple examples of different, it could be regulation or just different things happening that really had to maybe change your thesis or what you thought about cannabis? Yeah. So when I became an investor in the industry in 2018, probably around like 20 states were medically legalized then, at least half.

27:35It's doubled now. So we have, I mentioned 41 states legalized, including DC and then 22 rec states. and there's now we have a mix of mature and nascent markets when I first got started everything was pretty nascent and and in cannabis there is no interstate commerce in the U.S. what that means is that if you make product in California it must be sold in California you cannot sell that product in Nevada and so and then infrastructure for example in California wasn't really built out in full yet. What I mean by that is if you wanted to create a brand back in like, you know, 2017, 2019 days, you had to vertically integrate because you didn't necessarily have a cultivator, a distributor, a manufacturer, or a retailer to sell your brand, to even sell your brand.

28:35You had to build that infrastructure. And so, you know, a lot of early investors in cannabis made bets on those companies. And it's great because you can control a lot of profit margin because you're, you know, you're, you're in the entire supply chain. The challenge is that it's super expensive, a lot of CapEx, right? And so those early, it was really expensive to build the infrastructure of the industry. And now it's cheaper, much cheaper to launch a brand where it can be asset light. And so if I make Helene's brownies, I can just sell packaging, manage the sales and marketing, and then have a manufacturer buy all of my bill of materials and package that.

29:26And I just run sales, field sales, retail sales, and they handle that supply chain. If I want to be in all 41 states across the US, I need to manage 41 concurrent supply chains. It's a lot of work. If you're, you know, healthy kombucha, you probably have one co-man in the US, maybe two distributors, East Coast, West. So, you know, it is really challenging to manage a multi-state we call them multi-state cannabis brands and then multi-state operators are what we call like the enterprise companies in the cannabis industry most of which are vertically integrated and then sometimes asset light in some states is it more challenging now to pinpoint which are the brands you want to invest in because um it is easier it's not it's you don't you don't need to vertically integrate, right?

30:26You can just control like the marketing and sales side. Yeah, it was a great question. It's like, I think we talked about like, how many more water companies do we need? I mean, massive TAM and water, but like, come on, like, I get it different form factor of packaging. I love the Tetra Pak, love box water. That's a cool company. But that's the same of how some cannabis companies are differentiating is really packaging customer, you know, customer alignment. And so, you know, we have two consumer investments in the fund. We are still bullish on beverage. The timeline for that, you know, is questionable of when it's going to pop.

31:12But I think from a consumer level, I love beverage. And then we also invested in Plant People, which is a non-THC touching, more like supplemental wellness brand. They started at hemp, but they've grown into functional mushrooms and distributed through Whole Foods, Target. So that was when we first launched the fund in 2021 was our first deployment of October. And then we have seven portfolio companies. At that point, consumer was still appetizing. but right now like cpg products are not part of our thesis because one it's a saturated you know sector of the market like you said way easier to build a brand hard to differentiate why um and so we've leaned more on to uh you know ancillary investments in the cannabis industry so software tech you know more ip infrastructure correct infrastructure and everything okay got it Got it.

32:15And that makes sense just because you say like, um, it's maybe easier now to start a cannabis brand than it used to be really much, maybe harder to, um, differentiate. And so, and there's still, as you see it, like a ton of opportunity when it comes to on the technology side, because the main, because major players, I mean, like even just like payments, for example, like no one wants to get involved or, or can't get involved at, at this point. Yeah. And if you if you think about so from a numbers perspective, there are 66 ,000 plant touching businesses across the US and roughly around 100 ,000 ancillary.

32:52Ancillary could be like service providers, technology, consultants, lawyers. So as the number of like brands and companies go up, there's a growing TAM for ancillary, you know, companies to service that growing TAM. So right now we probably have close to 8 ,000 retailers across the U.S. And we have 70 point of sale systems in the industry. It's a ton. Yeah. And you have different point of sale systems just because it varies per state. Is that right? Some states will say, you know, some of the bigger point of sale systems is Dutchie and Trees and Blaze. like I think Pennsylvania voted to have like one point of sale system and so they encourage people to you know use that point of sale system but for example when enterprise companies in the industry start to consolidate and you know say they're in 20 states they might be managing like 15 different point of sale systems, which is a lot of fragmented data and maybe like, you know, six to eight different accounting systems.

34:09And so as the industry evolves and mature, we try to track, okay, what friction is this creating like in its data? So there's a lot of data fragmentation. You know, as tech investors, we like to make data driven decisions and helping companies, you know, utilize their data and figure out, you know, what's our pricing strategy, you know, what is our customer success and like loyalty strategy is super important. So as part of our growth within the market, we recently launched JCS, which is Journey One consulting services, pretty cool name. And we're focused on, we're focused on building, developing and solving CRM and data problems and tech problems for cannabis enterprises, because we see that need.