Lahl: CBC is always interested in bringing the ethics side of the equation into business. I remember the first time I met you John, was at a VC pitch dinner where I went to pitch ethics, specifically, bioethics. We at the CBC argue that ethics is a necessary part of making good business investments and that ignoring the ethics as part of the due diligence process can often make or break even a good investment. How would you respond to this assessment?
Garcia: I agree. The process of ethics is first dealt with in our prescreening process and then again one last time prior to core due diligence being done. Ethics related directly to the project as well as the management team is considered. It is easy to walk away from an unethical team and harder to walk away from a marginally unethical business plan.
Case in point: A few years back a very savvy team approached us asking for capital to expand their chain of payday loan stores. These stores by law are allowed to loan sums of capital to individuals while collateralizing their next week’s paycheck. The amount which usually looks small, $25.00 per day in fact is extremely high and in most cases is over 500% APR per year. The loophole is in the fact that a small amount of repayment is called interest while the other larger amount is called a transaction fee. In this case a company working within the legal system is in fact taking advantage of consumers and we passed on the investment on ethical grounds.
Lahl: Specifically looking at biotech, just how do you sift through the hype, manage your risk, and decide where your best funding options are?
Garcia: Our group sees over 3500 companies per year and about 20% are biotech or related companies. We have designed a system of questions which the entrepreneur answers on line and which are tailored by vertical, stage and in some cases geography. We have all applicants send us information about their company in the same format in order to avoid having to read business plans and can then judge all companies in the same manner against a common standard. This has allowed us to sift through the hype and find what the companies are lacking in talent and or technology. If our group feels we can make a sound decision to invest while providing great strategy, connections and support we believe we can truly become partners in the endeavor rather than just financiers. All of this helps minimize risk in what is a very risky business.
Lahl: John, when I first met you several years ago, you commented that your organization never funds gambling, porn or embryonic stem cell research. How/why did you come to make these guidelines?
Garcia: These guidelines and others were agreed to at the inception of the firm. All of the founding partners shared a common faith and today believe that although we may have missed great opportunities to make money we have created good jobs for folks in good ethical companies and that is a much more positive story we want to take homes to our families and associates.
Lahl: Looking specifically at what happened with Monsanto and their funding of genetically modified foods and also what happened with the European markets in this area, literally overnight this market slammed shut because the public confidence hadn’t been shored up as the public’s values were not taken into consideration prior to funding. Restaurants and grocery stores quickly put up signs announcing ‘no gm foods’ or ‘no frankenfoods’. Should the public’s value or ethical standards be taken seriously? And if so, how do you consider public values in your funding decision making?
Garcia: Public opinion, as you know can be very finicky. Ask any politician. We do indeed look for public opinion but cannot rely exclusively on this when we do make our decisions. Ultimately, the partners of the firm, along with our international group of advisors help us make these decisions. In the end we vote with our hearts and hope we continue to stay the course we outlined at the creation of our firm.
Lahl: Currently we are in a major international debate on embryonic stem cell research. The U.S. media and science community caution us that the U.S. is going to fall seriously behind the world in research if monies aren’t available to fund this research. There has been almost zero private money funding embryonic stem cell research which is why states like California passed proposition 71 and other states are drafting similar legislation, turning to the public for funding. As investors, how would you respond to this?
Garcia: Our belief may not be mainstream. We remain concerned about America’s ability to compete globally on the innovation front knowing that on the manufacturing side of things we have fallen behind to other countries. However, the stem cell arena is not the only place that the US can excel in. Biotech is a very large field and other areas like proteinomics will also allow us to create innovation. We are holding off making any investments in stem cells knowing that the ethical debate is nowhere near over. Practically speaking, however, capitalism has a way of winning in America and I can’t help but wonder what this debate will look like in just a short 10 years.
Lahl: Tell me about some biotech funding you are involved in now, or have been in the past. What are some success stories? And some failures?
Garcia: We have been investing in biotech for 8 years. Our firm has made investments in companies that use vitamins to stop allergy symptoms, Peruvian roots to alleviate symptoms of Hepatitis C as well as isolation of proteins to help make bones more dense or to help alleviate acne scarring. To date not a single company has fallen. Some are doing better than others and a few have exited but overall we have a great group of management teams which should be showing great returns for our group in the next two years. After over 20 years of investing in companies I have yet to be able to predict which ones exactly will succeed and at what level.
Lahl: I’ve participated in some of your deal pitch luncheon’s, which I find to be very fascinating and interesting. The players in the room are almost all funders and I note the ethics is typically a neglected part of the discussion after the various entrepreneurs pitch their product. Would you say there is a need for or room for ethical discussions in your process?
Garcia: We have enjoyed having you at our meetings and wish more non investors with great backgrounds would take the time to come to our meetings. The more minds the merrier.
During these pitch sessions we are just looking for “deal killers” and to gauge a sense about the management team’s ability to execute. Typically we will work with companies for over 90 days before we take them to the next level which might include a term sheet and very deep due diligence. In some cases we learn that the entrepreneur is just not mature enough or cannot handle the long process and we look to see how they respond. As we meet with them weekly during this process we get to look first hand at how they interact with their team and yes we do get in front of the spouse as we are not in the business of helping create divorces. Any unethical behavior that we are alerted to is a deal killer.
Ultimately, the e
thical considerations are dealt with quietly and usually by our senior team and board members.
Lahl: For example, I remember a deal pitch for a new beer. It seemed so obvious to me that no one was asking questions like, “is this good for the public?” “how will we get the public to buy into another alcoholic beverage?” “Do we have to worry that mother’s against drunk drivers will shut us down?”
Garcia: We had many discussions about this company. Is a beer company unethical in that it promotes to some alcoholism and to allow others then to become murderers behind steering wheels? We think not and looked in this case to general public polls which agreed with us. Even though we have had many opportunities to invest in alcoholic beverage companies we had never taken one seriously until the management team of this beer company approached us. The team had a clear vision of how to make money but in their plan they also a good percentage of profits going to educating their beer drinker and to set up scholarships and in fact to assist organizations like MADD in educating large groups. Although our group has yet to invest in this company we are in due diligence with them and can update you in the near future. Read the complete Interview.
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