Since launching in 2016, Illinois-based Salveo Capital has invested in more than a dozen companies across cannabis sectors, from biotech and tech startups to multistate operators.
The firm’s 15-company portfolio comprises a number of rapidly growing cannabis firms, including:
- Denver-based Würk, a tech firm focused on regulatory solutions for cannabis operators.
- Harborside, one of the oldest and largest cannabis retailers in California.
- Massachusetts-based Ascend Wellness, a multistate operator with licenses and operations in Illinois, Massachusetts, Michigan and Ohio.
By the third quarter, the Salveo team expects to launch its second fund, targeted at $100 million, and build off the investment focus and strategies set in motion with fund one, say the managing partners Jeffrey Howard and Michael Gruber.
They shared their investment insights and top strategies with Marijuana Business Magazine.
What attracted you to the companies in your portfolio?
Gruber: For technology and services companies that we had invested in—which includes Treez, Würk, Headset, Baker, PathogenDX, Front Range Biosciences, etc.—we were attracted to these companies because they were providing a capability that directly addressed a lack of similar services for the cannabis industry. These companies were specifically focused on addressing pain points for cannabis companies as it related to regulations, workflow and production efficiencies in their businesses.
We saw the ability to build robust and scalable companies with sticky relationships that would not be readily copied, and with a very plausible road map for a potential acquisition by either consolidators within this industry or by traditional industry providers that would want to add a cannabis offering in the future.
What about plant-touching companies in your portfolio?
Gruber: For brands (Tokyo Smoke and others not yet disclosed) and operators that were touching the plant such as Harborside, Ascend and Grassroots, we saw the trend toward brands making a big difference in purchasing behavior—but also that the producer and the retail experience made a difference to consumers. We are big believers in the need for a product to resonate with a consumer based on their demographic and psychographics, and cannabis companies are in the early days of optimizing this. In addition, consistency in quality and effects is important, and building a relationship between the brand and the consumer will take time through multiple interactions.
What sectors are you focused on as you prepare to launch your next fund?
Howard: Salveo is actively investing across the entire cannabis ecosystem, from growing, processing, retail, technology and services that enable industry operators to operate their businesses more efficiently.
What are some of the common red flags that cause you to pass on an investment?
Howard: Team is critically important in our companies, and we like to see not only competence in the individuals but also passion. It will be the persistence and drive and the belief in the company’s mission that will enable a company to pivot and adjust to the never-ending challenges that a fast-growing company will experience. The quality of the team, the chemistry among the members and the culture that has developed will be easy to sense, and so the absence of these factors will be a big red flag.
Tied to team is the understanding of the business and a grounding in reality. So, a big red flag would be the lack of understanding of the key drivers of their business, lack of knowledge of key players as well as absurd projections for the company that have no basis.
What products or sector are you most excited about?
Gruber: The market is constantly evolving, and so we continually have a changing set of priorities. That being said, a few areas that are of strong interest include brands, CBD and drug-delivery platforms.
What are your top three key investment criteria?
Howard: 1) Team. Successful business takes a lot more than an idea, and it is the people through a combination of intellect, passion and raw determination who will be able to execute a business. The original business model may not always be the right one, but a good team will be able to weave and pivot as necessary to work through challenges and adversity and find a way to be successful.
2) Market opportunity. We want to see a big-enough total available market and a company’s ability to compete with other players attacking same problem.
3) Investment return potential. Our investments are looking for both a significant cash-on-cash return as well as IRR (internal rate of return). Not only do we want the exit to reach a specific size, we are very cognizant about the timeline in order to get to an exit. For each investment, we are looking to achieve at least 4X-10X returns and with IRRs that exceed 35%. Businesses that are capital efficient and can grow to scale with more limited amounts of capital are more attractive.
