Investor Insight: Brian Sheng, New York, NY
If you’re the kid in class getting all the A’s, you quickly realize you have something to offer to those who aren’t. This is where entrepreneurship began for Brian Sheng of Fresh VC. From there, he experimented with an array of businesses and eventually came to find his strengths being utilized best in the art of venture capitalism! He has an eye for success and now dedicates his time to finding that in the growing companies of the cannabis industry. You won’t find one generic answer in our interview with him, he’s here to give it to us straight.
How did your entrepreneurial journey begin?
I dabbled in a lot of different businesses when I was younger. In high school, I started a small tutoring company just like any other kid who had good grades. I tried to play the import/export price arbitrage game and find popular products through niche subsidized sales channels and then sell them elsewhere for a huge markup. I also completed a few contracts advising international clients and came to find that my knowledge of both the Asian and U.S markets were very valuable.
What was the motivating factor for you to invest in the cannabis industry?
Market timing is a very important part of our investment decisions. If you asked someone a year ago: If they thought marijuana would become federally legal, their answer would’ve been very different from the answer they would have given 6 months ago versus the answer they’d give today; that’s because the cannabis industry is rapidly evolving and I think it will become federally legal (both medically and recreationally) in the U.S much faster than people think. In fact, the spending plan that was just passed last month includes a section that prohibits federal resource from being spent to crack down on state-legal dispensaries.
At our core, Fresh VC is still a technology venture firm, so we saw a great opportunity in Eaze as it sat at the intersection of technology-enabled service and cannabis. Aptible is another great company we invested in that’s a technology-enabled service and is also in the healthcare industry. Eaze does not actually touch the product, so it is definitely less risky than a direct cannabis investment. Finally, Keith McCarty (Eaze CEO) is a rock star and has a great understanding of the business.
One thing many first-time entrepreneurs struggle with is raising money. How would you suggest someone to overcome this problem?
This is a problem that all entrepreneurs face, but even more so with an upstart industry like cannabis. I would say, do your research and figure out which professional investors are actively investing in this industry. This includes investors who specifically say they invest in the cannabis industry, as well as investors who have made a cannabis-related investment in the past 6-12 months. The other way is to raise money from friends and family for the first round and focus on having great early traction to convince opportunistic investors in the future.
This is a problem that all entrepreneurs face, but even more so with an upstart industry like cannabis.
What is your best advice to cannabis entrepreneurs when they pitch their project to you?
My advice is to establish legitimacy and pitch professionally. I have received many emails and messages in the past couple of months regarding cannabis-related companies. The majority of pitches aren’t well thought out and use too many buzzwords. Many investors already have a negative bias towards cannabis-related startups so it definitely doesn’t help to have poorly written messages. It is also important to demonstrate a strong understanding of the legal risks involved and be open to talking about those. Investors will be impressed with founders who are thinking about the legal risks in the right way, especially with the cannabis industry.
Lastly, there are a lot of interesting lifestyle opportunities available in the cannabis industry. As venture capitalists, we are much more excited by a company that can display explosive growth potential rather than a company that can steadily generate $10M a year in revenue. There’s nothing wrong with creating a great lifestyle business, but venture capital isn’t the right source of funding for that kind of business.
Can you share your thinking on how to identify a company as a great opportunity?
Most investors would give a generic answer and say it’s a combination of market size, team, traction, and product. It’s generic because identifying a great early-stage opportunity is incredibly difficult. The founders are supposed to be way more knowledgeable in their field than myself, so I try to focus on the qualities of the team that stands out. I love to understand why founders are working on a problem, what their motivations are, and how they think my role as an investor can help them .
While most startup companies begin with a round table of partners discussing many good ideas, how the founder make those ideas happen is exponentially more important. When an executed idea flourishes, the founder gets the credit. Of course, this may sound unfair to the other partners, but when that idea fails, the founder is criticized for executing the directives. I personally determine my investment decision from my observation and facts I explore about the founder.
What are the key ingredients in building a successful start-up?
Lots of people smarter than me have written extensively about this topic. I’m actually a huge fan of Peter Thiel’s book ‘Zero to One.’ Having an extremely driven team, the right skill set, a good team dynamic, and a unique view of the problem they are solving are always good key ingredients.
How does the role of the founder evolve as a company goes from seed to early growth to later-stage scaling?
At the early stages, a founder’s resources are constrained and has to manage every part of the company. They are at once fundraisers, product developers, recruiters, salesman, and more. As the company grow, founders will need to manage more employees and make sure people in the company are aligned with the company vision. At later stages, it’s no longer time-efficient for founders to do everything.
Good traits in startup founders are often fatal to a later-stage company if they don’t adapt. The founders need to realize their roles will evolve and specialize. The larger a company gets, the more the founder will need to learn to manage and delegate and become a leader and not just a do-er.
What is your new knowledge in regards to investing in the cannabis industry?
I think it’s surprising that there are so few investors in the cannabis industry. When I talk to entrepreneurs in the space, it’s clear how excited they are about the new opportunities.
As an investor, what are some of the key things you wish cannabis entrepreneurs knew?
We are looking for entrepreneurs looking to build a lasting successful enterprise. We are not looking for people simply following the herd and trying to make easy money. There’s nothing wrong with building successful lifestyle businesses, but we are looking for companies that have explosive growth potential.
We are looking for entrepreneurs looking to build a lasting successful enterprise.
What needs to happen in order to create a billion-dollar company in the cannabis industry?
I think even keeping things the way they are, a billion dollar company in the cannabis industry can be created. It obviously becomes a lot easier as medical and recreational marijuana becomes legal in more states and it will also help out related industries.
How do you decide between shutting down, keep funding, or selling your start-up?
I think this is usually dictated by factors outside of a founder’s control (macro conditions, out of cash, threats from bigger competition, etc.) However, it could also be dependent on the team behind the startup. There are many examples of entrepreneurs who were on the brink of failure and they could’ve sold or shut down, but instead persevered and created lasting enterprises!