One of our investors recently questioned the idea to invest in GemmaTech, a portfolio company of Neo Ventures, which set out to build devices for analysis of medical cannabis flowers. He made two valid points: Neo Ventures rules out pornography, tobacco, and alcohol and backing an Israeli startup, targeting North America, takes Neo out of emerging markets. As a professional investor with decades of global experience across asset classes, his question sent us on a mission.
We realized that the source of our confidence was based on data about VC trends and on our own experience. Entrepreneurship has potential to transform society and drive significant social change, yet vast majority of mainstream capital goes to a small number of entrepreneurs in a few places. Over a half of all VC deals globally go to companies located in the US. In 2017, VCs backed more companies in frontier startup markets than any year since 2014. In 2012, $3.7bn was invested in 664 deals and by 2016 these volumes had nearly tripled. By then, our experience included investing in four companies, based in emerging markets, which either (1) were acquired by listed US multinationals, at IRRs above their vintage and sector peers; (2) raised new capital at a significant premium to our original investment; (3) grew from $0 to $20m in annual recurring revenue in 4 years.
Super trends, as defined by a recent Credit Suisse research, include aging population in developed markets, rising spending power of the generation of millennials and increasing technology sophistication of health care, a traditionally change-resisting industry. We believe that CannabiTech addresses all of these trends.
Relatively insulated from economic cycles, innovation of biotech companies puts them in a position to deliver outsized returns, regardless of overall conditions. Medicinal cannabis, a key sector in this industry, is currently driving the largest returns, and it is expected to exceed US$50 billion in revenues by 2025. Backed by mounting scientific data on curative effects of CBDs, a growing number of specialty biotech companies have the opportunity to capitalize on the growth expected in the cannabis-derived pharmaceutical market. InMed (CSE:IN), GW Pharma (NASDAQ: GWPH) and Zynerba Pharmaceuticals (NASDAQ: ZYNE) are few examples of such companies. Technical analyst Clive Maund recently noted that the 25–30% growth in the legal cannabis industry per year for the next four years in the United States will make it the fastest growing industry in the world. Maund opined that “remaining Federal obstruction in the U.S. is likely to be swept away by practical considerations, like the tax revenue to be garnered from the industry, and popular opinion, similar to the end of the Prohibition era”. I write this in Peru, as the local government just joined Germany, Greece, Chile, Mexico, the autonomous region of Catalonia in Spain and Georgia, which either decriminalized or fully legalized cannabis in 2017.
Last but not least, our response to our investor said that Neo Ventures invests in people who display evidence they can build game-changing businesses. The odds of getting this right are not high and such strategy is likely to keep Neo as an active investor which goes at a great length to help a small number of companies. We expect to generate value for our investors by screening many and backing a very few companies, each of which can go public or generate solid dividend income. To that end, the founders of GemmaTech include a prominent science team, which has been working for decades on near-infrared spectrometry, remote sensing and machine learning of cannabis chemical composition and genetic markets. Its leader is someone whose integrity and expertise in health-related industry makes us confident the company will be successful. To date, GemmaTech is the only provider of a solution which is non-intrusive and non-destructive to the plant, removing significant operating challenges for mass scaling of the product, which will be launched during the next quarter in the US.
Merry Christmas to everyone.
December 30, 2017 at 4:04 pm
Without wanting to sound as a “Legalize it” NGO activist, but my first argument to address this investor`s issue with the ruling out pornography, tobacco, and alcohol, would be that, in fact, legalization of marihuana usage (whether medical or recreational) is the only meaningful alternative to get the pro-cannabi business “come out of the closet”, sort to say, and bring it out of the hands of Mafia. So there is no any moral issues to overcome with the investment in GemmaCert. In the opposite, I feel like we are taking the chance to contribute to this meaningful effort of society to repeal an absurd ban on a plant, simple creation of nature, that can possibly be of a very good use to the fellow humans.