Our model is deliberately different from most venture capital firms. There are two main differentiators: First, we are happy to build a company from scratch ourselves if the opportunity is there and we have the tools we need. We aren’t just backing other people’s companies and business ideas – we will back our own. Our most successful project to date was a company we founded and scaled up ourselves, bringing in third-party capital as we needed to accelerate the growth. Part of the attraction of the ‘build it’ model is that it means we can put in place the culture and values we want from the start. This can be particularly important in emerging markets, where corporate governance is a critical driver of sustainable success.
A second point of differentiation is our time horizon for the investment cycle. We took the view that we wish to do a fewer number of things really well rather than many things quite well. We deploy capital only when we are truly ready to take on a project, not because we have committed in advance to deploying a certain amount of capital over a set investment period – which is what happens with a typical venture fund. And once we’ve invested, we are more interested in long-term value creation than would be the norm for a typical venture fund, holding an investment for yield and capital appreciation rather than exiting against a set time frame. We don’t even use the concept of IRR (internal rate of return) to assess investments, as it tends to favour shorter-term thinking for value creation. All of this has led us to eschew the traditional fund structure and, aside from our own capital at the core of all of our projects, we only raise project-specific capital from third parties.
We don’t cover the entire healthcare sector, or even a material part of it. It is true that all of our projects address opportunities within the broader healthcare space, but we have a very specific concentration around four themes: life sciences with a focus on nutraceuticals; longevity; specialized care including eldercare, mental illness and end-of-life care; and emerging market healthcare solutions. The tight focus on these themes allows us to retain a high degree of specialism. For example, we have made consecutive investments in the nutraceutical sector, building off the experience gained in each.
The other important point here is that because we are not deploying capital from a traditional closed-end venture fund, we are not forced to invest within a particular timeline. We can be very patient until the right opportunity comes along. We prefer to do a few things really well, rather than many things quite well.
The fact that we are not bound by any specific geographical focus is not the same as saying we cover the globe. Far from it. What we are saying is that if we understand the market well enough, and we have the right project within it, we are happy to work in it. Some of the markets we know are our home markets in Canada and the UK. But equally, we’ve worked extensively in several markets in Latin America, Africa and Asia. Also, because we do not operate a traditional venture fund, we do not have a specific geographic fund mandate to define. We take each opportunity project by project. We are cherry-picking opportunities, not building a portfolio.
We have adopted a prescriptive investment mandate rather than an opportunistic one. We know the types of businesses we’d like to invest in. We know that we are interested in early stage businesses that address a very limited number of healthcare themes: life sciences including nutraceuticals; longevity; specialized care including eldercare, mental illness and end-of-life care; and emerging market healthcare solutions. For each theme, we have already determined our investment thesis and only then attempt to find a company that falls within that set of parameters. If we can’t find the company through a proactive search, that actually might be an indicator of a good opportunity to build the company ourselves. So, in summary, we are proactively looking around a very tight set of descriptors. We have networks across all of the markets that we are willing to invest in that facilitate the search process. In addition, we receive some reverse enquiries from entrepreneurs seeking a venture backer.
The projects we undertake have to create positive experiences for us. We are at a certain point in our lives where we want to enjoy what we do and the people we work with. We want to learn from new experience but also pass on what we have learned to others we work with. This is partly why we call our investments ‘projects’. We see each project as a journey that we can enjoy and ultimately look back on with pride. Generally, we believe that happiness deserves more prominence in the corporate world.
Each project that we undertake must create value across three dimensions: financial, experiential and benefit to humankind. We see projects benefitting humankind in three situations. First, a project might directly benefit a community or society at large by its very nature, for example, by providing access to an innovative medical product or service that was not previously available. A second type of benefit or value is created when we back a project that provides a social service at benchmark quality, but at a lower cost or to more people. Since all of our chosen sub-sectors are in the arenas of human care, by increasing the quality of such services or the accessibility or affordability of such services, without compromising on quality, our projects will generally create the value we are seeking. Thirdly, we can create value indirectly by channeling benefits back to the communities that are stakeholders in our projects. For example, in one of our early projects we created a foundation for the company that committed 10% of net profits into relevant community projects for a ten-year period. The first commitment was a large grant to the scientific community because we recognized that the scientific community was important to the success of the company in the first place. So, this was justified on business grounds too. The overriding point is that all of our investments must benefit communities or society at large. They must benefit humankind in addition to our firm and investors.
We do raise third-party capital but not through a typical fund structure. We raise funds on a project by project basis alongside our own capital, which sits at the core of each investment. This reflects our approach of doing a fewer number of things really well rather than many things quite well. We are not under pressure to deploy capital at a particular pace, as is the case with typical time-limited fund structures. And if we do not find a suitable new project for a period, that’s fine – we are happy to wait for a perfect match. Moreover, our approach to value creation is inherently longer term than a typical fund, which necessitates realizations within relatively short time frames. The issue is not so much that substantial value cannot be created over those timelines, it certainly can, but that we do not wish to be constrained by the need to create liquidity events over a period of three, four or five years. We prefer investments that generate distributable profits and capital growth and which we can hold for much longer periods.
Unlike traditional fund managers, we do not even use IRR (internal rate of return) as a metric for assessing a potential investment or our performance. We find that IRR calculations do not always reflect true value creation and can engender a short-term approach. And as a performance measure, IRR is often inconsistently applied or qualified. We prefer to use a multiple of capital invested (MOC) as a performance benchmark along with annual yield potential.
Absolutely. We were founded on the principle that we can invest for profit whilst creating benefits for communities or society at large. There has always been something of an ideological struggle over this question, particularly within the mainstream North American fund management industry. For many participants, return maximization requires the rejection of strategies that do not add financial value or potentially reduce it.
We come at this question from a different perspective. We are not seeking to build a portfolio with the greatest risk-adjusted financial return possible. We do expect all of our projects to produce attractive returns but that alone is not enough to attract us to the project. There must be an added benefit to humankind that is both measurable and reportable. And, to reiterate, it must not compromise the market return we seek for all of our projects. This is possible because our focus is exclusively on businesses that address issues of human care. Our projects all have the potential to fulfill the needs of communities or society at large. What we try and do is either provide a product or service that was not previously available, or we provide a product or service at a higher quality without material price increases, or we provide a product or service at the benchmark quality but a lower cost or to more people. We believe fundamentally that any product or service that reduces cost or increases access for consumers without compromising quality can outcompete its peers in an open market environment. And in doing so, the product company or service provider not only becomes the market leader but also delivers a net benefit to society by freeing up resources for savings or expenditure on other essential items. Thus, we do not believe that financial trade-offs are a necessary outcome of creating societal benefit; if anything, a “trade-on” is achievable.
In addition, we may also channel benefits from our investment directly back to a relevant community. For example, with an early life science investment, we made a ten-year grant to the local scientific community together with providing supplies of our product pro bono for clinical trials. Ultimately, it’s all a question of priorities for our capital and for our time.
Our founding partners have known each other for nearly 20 years and worked with each other in their earlier careers. Their connectivity was always based on mutual respect and common thinking in terms of how to approach business dealings. So far, all of the SX2 team has been personally and professionally known to one or more of the founders. Our culture of collaboration and mutual respect is very important to us.
We believe there is a major shift in thinking in North America and Europe towards acceptance of what have traditionally been known as “alternative medicines”. As more companies in this space adopt a scientific method to support health benefit claims, the more mainstream it will become. We are witnessing this right now with the gradual acceptance of cannabis as a medicine in countries across the world, increasingly supported by detailed studies documenting its medicinal properties and beneficial effects. Beyond cannabis, the broader nutraceutical industry is undergoing significant annual growth and presents some very exciting investment opportunities.
We are also currently exploring new models for delivery of certain healthcare services at a low enough cost that it can be affordable in the poorest communities across the developing world. We have some very exciting work underway on this theme.
Closer to home in the UK we are looking at innovative technology leveraged solutions in the provision of dementia care services.
