5 Things I Need to See Before Making a VC Investment, With Micah Tapman, of Canopy
“All VC investments must be placed in companies with great potential. This can be one of the hardest points in a conversation with a great entrepreneur with a great idea because sometimes the environment just doesn’t fit my investment model. At the end of the day if I can’t project the company providing at least a 10x return of capital, then it’s very unlikely I’ll make an investment regardless of the team’s strength, the uniqueness of the idea, or other positive factors.”
I had the pleasure of interviewing Micah Tapman, managing director of Canopy, the nation’s leading venture fund and business accelerator for the cannabis space. With a focus on marijuana tech startups, Micah and his team invest exclusively in ancillary companies, as he believes this methodology is more lucrative and successful in the long term.
What is your “backstory?”
I’m a techie by training with a range of experience from the Marine Corps to Fortune 500 to cybersecurity startup to cannabis. There’s no one way to get into VC, but I think being widely versed in technology, business, and finance is extremely helpful. I earned my MBA from The George Washington University to augment my undergrad degree in computer networking. This turned out to be a good move as I’m now able to both, for example, review financials and pose challenging questions about system architectures.
Can you share a story of your most successful Angel or VC investment? What was its lesson?
Canopy invested in a company called BDS Analytics in 2015. Crafting that investment required a lot of relationship building, which is my number one job. We had to find the right team to tackle the problem (in this case, market data and analytics) at the right time in the right place. My partner, Patrick Rea, and I were able to help put together a winning team that’s gone on to become the leader in cannabis market data and analytics.
Not only is that investment on track to pay off very well for our fund, it’s also been a source of terrific relationships and valuable partnerships for us over the years. Those individuals involved — entrepreneurs, investors, strategic partners, and even employees — are all crucial members of the Canopy ecosystem. We regularly turn to one or more of them for help understanding a market, raising additional capital, or otherwise solving a hard problem.
Can you share a story of an Angel or VC funding failure of yours? What was its lesson?
Where to start? Failure is normal for a VC where investments are generally either complete losses or return so little we would have been better off putting the money in T-bills! One harsh lesson was investing in a company with the wrong founding team. To be honest, I’ve made this mistake more than once, but the basic gist is that the team, and the individuals on the team, are the single most important aspect of a business. In this case, the company leadership wasn’t fully committed to a unified vision. The company ended up splitting because the founders wanted to focus on different areas, and even though either path would have worked, neither person was able to make it work as a sole founder.
Team, team, team…that’s the lesson. I look now for confidence, humility, and mental agility in every founder. Give me people with those characteristics and I’ll bet on them over and over again.
Is there a company that you turned down, but now regret? Can you share the story? What lesson did you learn?
I’ve missed some investment opportunities that ended up being good because I didn’t like the team or the valuation. In hindsight, I’ve found I’m overly cynical about a team’s ability to operate despite some conflict, and this can lead to missed opportunities.
One example was a company doing micro-lending. The business model was strong, the opportunity was good, but the team had some very serious conflicts between two of the founders. I walked away from the deal after seeing them break into an argument halfway through a presentation. The jury is still out on whether that company will exit well, but so far, they are killing it despite those tensions. Perhaps some people just thrive with creative tension?
Despite some regrets, I still think my decision was correct because I didn’t want to be involved in that type of relationship. As an investor, I not only consider return on capital but also opportunity costs, and wasting my time dealing with entrepreneurs I don’t want to do repeat business with is a bad investment. Another way of thinking about this is that every initial investment I make with an entrepreneur is, in part, setting up a future investment in their next venture.
Which person or which company do you most admire and why?
I’m a big fan of Costco on the big business side because they’ve built a strong business while keeping a strong culture. On the VC side, I’ve been very impressed with Full Contact, a contact management system on steroids. Bart, the CEO, has always struck me as a quality person and the app provides tremendous value. My individual mentors for VC are some other Boulder-based VCs, Kyle Lefkoff and Seth Levine, as well as Ryan McIntrye. Kyle’s been in the investment industry for a long time and his wisdom has already saved me from several big mistakes. Seth and Ryan are both invaluable members of the Boulder VC community and I can’t say enough about how much they’ve contributed to what is now one of the most successful startup communities in the world.
How have you used your success to bring goodness to the world?
Honesty and transparency are probably my best qualities, and I try to instill those principles in every relationship. Being a VC means I’m often in a position of power and that allows me to push entrepreneurs to be honest and transparent.
I think I’ve helped bring some additional diversity to the cannabis VC community by being assertive in looking for different types of founders and by being receptive to pitches focused on minority communities. We continue to struggle to find entrepreneurs from and/or focusing on minority groups, but we are making progress.
What are you “5 things I need to see before making a VC investment” and why. Please share a story or example for each.
1) An outstanding team — The team is the single most important investment criteria. A great team combines skill, talent, experience, and grit.
2) Confidence — I want to feel confidence from the team about their idea and their ability to execute on that idea. Our investment in Wurk was driven largely by the confidence that Keegan Peterson, the CEO, showed when I met him. He was able to navigate that narrow route between confidence and arrogance to convince me of his ability to execute.
3) Humility — Contrasting with the confidence necessary to be successful is the need to recognize that the road to success is very, very challenging. Like a great athlete, an entrepreneur needs to internalize and fully embrace competition.
4) Scalability — All VC investments must be placed in companies with great potential. This can be one of the hardest points in a conversation with a great entrepreneur with a great idea because sometimes the environment just doesn’t fit my investment model. At the end of the day if I can’t project the company providing at least a 10x return of capital, then it’s very unlikely I’ll make an investment regardless of the team’s strength, the uniqueness of the idea, or other positive factors.
5) Enjoyment — At the end of the day, an investment in a company means I’m going to be in a relationship with that team for a long time, and that means I filter based on whether I want to work with them. It’s not quite a marriage, but it’s close, and my personal enjoyment of these relationships is crucial to my ability to fully engage and provide strong value.
Is there a person in the world, or in the US, whom you would love to have a private meal with, and why?
I’m a baseball fan, and in particular a Red Sox fan, so dinner with Theo Epstein would be at the top of my list. Theo was instrumental in Boston’s 2004 World Series victory (the first since 1918) and then he turned around and did it again with the Chicago Cubs in 2016, both times as the general manager of the team. Combined with the fun of baseball, Theo’s obviously a master strategist with the ability to make better investments than other general managers. In many ways, his job is similar to a VC; investing in startups (young players) and then hoping they’ll develop into players with direct value (i.e., contributions on the field) or as bargaining chips in trades for other players. I would ask him about how he thinks about value versus price. Is there a difference in his approach that provides extra room to make deals that other people miss? Or is there a different tactic he uses to identify opportunities a bit ahead of his competitors?
Additionally, I think Theo’s built fun teams. Teams the fans enjoyed watching and, at least it seemed, the players liked playing for. How did he think about building that culture of enjoyment? How did he attract great talent that was also fun talent? And at the end of dinner, how good did it feel to crush the Yankees in the 2004 ALCS? ;-)