When looking for a potential investment, the founders of Silverleaf Venture Partners know what they don’t like.
“We don’t like commodity businesses,” said Douglas Hannah, who started the company with Andre Haroche in 2017. Hannah defined commodity businesses as those whose products or services are easy to replicate.
“Products that are easy to copy lack moats; they are easy to commoditize and therefore unattractive. There’s going to be margin pressure, pricing pressure, oversupply, etc.,” said Hannah, who is a managing partner with Haroche.
Companies that Silverleaf finds especially vulnerable to commoditization include point-of-sale systems and certain types of growers.
“We just think it’s hypercompetitive. Andre and I don’t want to beat ourselves up trying to figure out who’s going to be among the three left standing. For that reason, we’ve stayed away from point of sale,” Hannah said. “The guy that’s farming 100 acres of hemp in southern Colorado or just doing cultivation, that’s probably not going to fit in our wheelhouse.”
That said, if companies “have figured out a way to differentiate themselves and not be commoditized … then we get more interested,” Hannah said. “We’re really looking for companies where there’s some sort of barrier to entry, some sort of moat around the company.”
Silverleaf has launched three funds and invested in more than 30 companies – both ancillary and plant-touching.
What are some good differentiators or barriers to entry? Patents, trademarks, proprietary genetics or formulas all make products “defensible” from being copied.
“If it’s a tech company that can obviously scale and has a unique technology, and maybe some patents around it, Andre and I are going to take a very, very careful look,” Hannah said.
Haroche added: “We like to understand companies that control their supply chain but don’t bite off more than they can chew. Maybe they have some sort of unique competitive advantage for distribution, for sales. It even could be as simple as a brand, just trademarking the branding … so that when people see it on the shelf in a dispensary and there’s 30 different pre-rolls to pick from, maybe they’re attracted because of the packaging and the uniqueness of the product.”
Letting go
When it comes to leadership of younger marijuana companies, Silverleaf seeks the usual traits of experience and ability to pivot. “We actually like seeing people who have experience outside cannabis working with cannabis insiders,” Haroche said.
But Hannah and Haroche specified other qualities as well, including being willing to cede control if it benefits the company. “We also have identified some guys that are great CEOs now, but their emotional intelligence isn’t going to get them to an IPO, and we try to have those conversations early on. … I think a lot of guys have an issue with stepping down or handing the reins over to somebody else.”
By the numbers
How companies are valued plays a critical role in Silverleaf’s assessments.
“We see a lot of companies trying to maximize our raise at a valuation; that just doesn’t make sense. We understand that they want as little dilution as possible; they want to justify their value. … But it’s up to us to kind of look at the revenues and look at their growth and how much cash they’ve been burning through,” Hannah said.
“We think a lot of CEOs and a lot of companies make the common mistake of trying to raise money at a higher valuation,” he said. “We’ve come across multiple deals that we really liked – this is a great team, it has great strategy – but we just didn’t want to overpay for it. We didn’t want to invest in a $100 million valuation where we felt it was only worth ($50 million).
“We have to understand: Where’s the growth from here? We’ve seen companies like that raise money, and then a year later, they’re raising money at the same valuation as they did before their last round.”
Follow the links on this page to learn what other investors look for when making funding decisions.
