There is a fallacy in investing – especially in cannabis investing – that we bet on a founder’s idea.
So, in cannabis, we bet on the number of acres cultivated, the list of licenses, the pounds sold, the THC content, etc.
Yet, the truth of it is, if we are investing in companies, there is only one bet we are making – and it’s on humans.
At my firm, we always invest in humans before ideas. That means we search for leaders, innovators and – above all else – teams who can thrive in this rapidly evolving, highly regulated industry.
Today I thought I’d break down how we at Cresco Capital analyze founding teams, what we look for and the red flags.
After all, when the regulations change, packaging rules are shredded or the industry morphs at light speed, would you rather bet on a static idea or on a human who can adapt just as quickly?
Rule #1: The capacity for greatness
It is not about marrying the perfect skills to the business that founding teams are building but, instead, finding that defiant spark that comes with a bit of a crazy streak.
We have passed on founders because we thought they were too textbook, meaning that when inevitable problems come their way, they don’t have the nonlinear thinking or contrarian psychology that would welcome creative solutions.
How to find them: How do you tell someone’s capacity for greatness? You ask them to explain how their decisionmaking process works.
When presented with a problem, how do they think through options? How detailed their responses are will show you their mental capacity.
Ask them to walk you through the biggest setback that they turned into a win. How did they do it? What happened? Listen.
Rule #2: Masochism required.
OK, well, not exactly, but we do look for people who have an incredibly high pain tolerance.
If there is one correlation between those who win in business, it is that they had a stubborn resolve to continue preserving failure after failure.
Angela Duckworth at the University of Pennsylvania calls this grit, and it turns out to be the largest indicator of the likelihood to succeed.
I’ve always liked to use Astro Teller’s failure resume as a guideline. (If you haven’t watched the TED Talk by Teller, the head of Google’s Moonshot Factory, you should). Essentially, he lists all his failures on a resume outside his door – a reminder that failing is the only path to moonshot.
How to find them: When it comes to founders, the question is the same: Tell me your failures, and I’ll tell you your resolve.
I ask them to list their biggest failures, then their most intimate failures, then their most recent failures.
Then you ask the magic question: What keeps you going? You are looking for a deep profound reason and a lot of reflection after each failure.
Rule #3: Do YOU want to work for them?
If you invest, you will be working for that company.
That is why we look for founders who are absolutely magnetic to top talent, venture firms and providers in the space. This charisma is critical for attracting and retaining talent as well as locking in cohesion of culture as they rocket through rapid growth.
Charisma has many forms. It can be a brilliance that shines through, a track record of winning or an ability to get buy in.
How to find them: Talk to their team. Why did they come to work for the company? What were they doing before? What are their greatest strengths? A lunch with the COO, CFO and/or CMO will quickly show you how they see their fearless leader.
Now, imagine that all the above aligns with a company you are analyzing. The next question becomes: What should we look out for?
Red Flags and How to Find Them
Get out of the office, have a beer.
Since there are too many red flags to note, let’s start with how to discover almost any of them.
One of my favorite ways to get to know founders is by breaking bread. There is nothing that lets two peoples guards down like getting out of the office and having an adult beverage together.
Since investing in private companies is a 5- to 10-year relationship, some might call it a marriage, I’d rather they know me up front and I know them.
You will also be amazed what happens when you shut up, listen and share a drink. I’ve passed on many deals because I couldn’t get comfortable with a founder in these settings, and I’ve invested in many as well.
Look for longtime partners.
One man alone can do little. That is why it’s imperative that a founder is this delicate mix of a benevolent, charismatic dictator that others want to be around for the long haul.
Founders who seem to have a revolving door of people and no longstanding partners, colleagues or C-suite execs are a huge red flag. Ask about the length of their relationship with all the key members of their team.
Avoid the victim mentality.
I remember intimately one deal I invested in where the founder was genius, the idea/product incredible – and, yet, the company failed.
Why? The founder just couldn’t get out of her own way. Everything was always someone else’s fault, and that lack of taking ownership pushed away talent and stalled her company.
One of the best ways to determine if you are dealing with a perpetual victim is to talk about their personal life. How are their personal relationships? Do they take ownership of hardships therein? Or, do they think others are always at fault?
The book “The Elephant in the Brain” does an incredible job of breaking down these mental beliefs in ourselves and others. Give it a read.
If I leave you with one thing let it be this: We are not in the investing business; we are in the people business. Your real job is not to read a crystal ball on the markets, but instead to read the insides of minds on a search for greatness.
