By Juliyen Davis

What image comes to your mind when you think of the word “vice?”

Friends passing around a joint in a dimly lit living room? The Vegas Strip with its high rollers in fancy suits? Maybe the reality of browsing the internet for sex toys because stepping into a brick and mortar sex shop feels too awkward? Needless to say, vices can sometimes be complicated to interact with. Many turn their heads while stepping into sex shops and dispensaries to make sure no one they know is behind them. Why?

We don’t always acknowledge it, openly at least, but we’re all human: excitable, horny, susceptible to temptation. It’s because of this human nature that vice industries — including cannabis, gambling, and sex-tech — are among the most lucrative. The porn industry, for example, is valued at $97 billion, according to some estimates. But this figure, among similar figures for other vice industries, usually goes unspoken.

Vice industries are nothing new; these markets have existed for as long as humans have had desires. But, for just as long, a narrative has separated bad or unspoken vices from good or acceptable ones. This same narrative has separated cannabis from alcohol, gambling from gaming, Pornhub from Netflix. All of these things are similarly addictive, yet only some of them are regulated, punishable, and generally regarded as being “bad for us.” The others are simply seen as normal activities; and — from a VC’s perspective — spaces worth investing in.

Startups in the vice space have historically been underfunded and overlooked by Silicon Valley, largely because of vice clauses: agreements that bar institutional funds from investing in them. The investment, as a result, has generally come from sidecar funds, set up under the radar by fund managers, which are not subject to the disallowance of such clauses. However, as recent investment in the cannabis industry has shown (accounting for nearly $900 million of VC dollars last year), opportunities in vice industries are being reexamined by individuals, governments and venture capitalists alike.

One leader in the conversation on vice industries is Catharine Dockery, the Founding Partner of Vice Ventures, a fund that’s recently closed $25 million from big names like Marc Andreesen and Bradley Tusk. The fund’s investments currently include Bev, Recess, Players’ Lounge, and Ten to One Rum. Supermaker spoke with Dockery about Vice Ventures and some of the present challenges in this space.

Catharine Dockery, Vice Ventures

What is a “vice” industry?

A vice industry is an industry facing funding and/or regulatory challenges because of social disapproval. Vice verticals that I commonly see potential investments in are alcohol, nicotine, sex-tech, cannabis, CBD, psychedelics, gambling, esports. We try to keep the definition relatively broad while still holding true to the thesis that these challenges are often temporary phenomena and can create compelling investment opportunities.

Vice is something that people associate with stigma and it often goes undiscussed in professional circles. But recently it’s been an emerging investment area for VCs. Is this a new area? Where do you see the areas of growth for conversations around vice industries?

One of the most compelling parts of vice is that it isn’t an entirely new area. This is an existing market, with proven profits and revenues, which is being opened up for innovation and legitimization by social change. In terms of conversations around vice industries, we see a consistent pattern of social change towards tolerance, personal responsibility, secularization, and transparency.

There are a number of brands in this space that are being restricted from advertising on social media (Unbound, for example). What other barriers do startups in the vice space face and how are they getting around them?

Answering this is probably simplest with the example of cannabis. Financially, any product which is federally illegal has massive problems. These cannabis companies are frequently isolated from major elements of the financial system such as credit card processing despite being legalized by many individual states.

“In terms of conversations around vice industries, we see a consistent pattern of social change towards tolerance, personal responsibility, secularization, and transparency.”

Beyond that, they face incredibly strong challenges in taxation, especially when compared to advantages typically enjoyed by small businesses. We see this situation making gradual progress, often lagging social change due to political dysfunction.

Tell me about Vice Ventures. How did the idea first emerge?

The idea was borne of frustration. I was managing a founder’s VC portfolio and came across a company that gave me an incredible feeling. That company produced a canned rosé called Bev that was a rare combination of incredible product, charismatic and energetic founder, and cohesive brand identity. It was one of the most frustrating set of introductions I’d ever made for a company.

Of every investor I introduced to them, nearly every single one told me that they loved the company and believed in their ability to be successful, but that they couldn’t invest due to vice clauses in their fund investment agreements. I invested personally in Bev and nearly forgot about that friction until I ran into an eerily similar situation with Recess — producers of a CBD and adaptogen sparkling water — and tried to make introductions for them. That was when I finally started turning over the thesis in my mind and building interest for the fund.

So what is a vice clause? Why is it important?

Vice clauses are a traditional part of a limited partnership agreement for venture capital funds. Even funds which might prefer to have flexibility in these matters often adopt such clauses in order to market themselves to other funds and institutional capital. Given that religious organizations and sovereign wealth funds are often major investors in venture capital, fund managers are asked to choose between vice investments and capital.

“Of every investor I introduced to them, nearly every single one told me that they loved the company and believed in their ability to be successful, but that they couldn’t invest due to vice clauses in their fund investment agreements.”

Since traditional venture investment has been focused on applications, web platforms, and business services, this trade-off made sense for many fund managers. Bucking that trend made attracting capital significantly more difficult, but we believe it also offers an untapped opportunity for investment that will generate valuable returns for the fund’s investors.

What barriers have you faced in raising a fund?

Creating a fund that approaches a rather mature field of investment definitely can yield some feedback, especially as an investor who is a younger woman. To me, these barriers were both expected and motivational. I find it incredibly important as an investor to have conviction beyond your thesis while still being willing to examine a contrary point of view, and I was never persuaded by skepticism I came across.

You’ve invested in four startups so far. What was it about these startups that made you want to invest? What do you look for?

Coming from consumer products VC investing, I have a major affinity for brands and see them as especially well-adapted for a space that is largely moving from a hidden area out into the open. I also have several opinions about subcategories of vice in the short term which these investments fit in to. For example, I feel strongly about the growth of CBD usage in skincare and drugstore products, experience focused alcohol with powerful brand identity, and measured or dosed cannabis consumption.

Do VCs investing in this space have any unique responsibility? Looking at Juul for example, which has received a lot of backlash for targeting youth and for the uncertainty surrounding the role of their products in teens developing lung disease, but has raised more than $14 billion to date. When are VCs responsible for behavior and when are they not?

VC responsibility in the vice space is highlighted mostly because of the controversial nature of the products — when one talks about fossil fuels, alcohol producers, cigarette companies, echo-chamber news, manufacturers who rely on cheap labor, producers of single-use plastics, etc. — we rarely talk about the investors. Every investment has social consequences. Not just the ones from social impact funds or vice funds.

As an investor, it’s important to support companies that have healthy relationships with society and can maintain this in the long-term. For me, that often involves dealing with founders who have a strong ethical and moral compass, are knowledgeable about regulations, and have a view on how they might change over time, and who care deeply about building a positive and long-lasting relationship with their customers. I don’t see the responsibility of a vice investor as larger than that of another investor, however, I do feel that the space is unique for bringing these moral questions to the forefront.

The case of JUUL is quite divisive, and one I don’t have a major opinion to add on. There’s absolutely questions that need to be asked about underage use, and whether the product was designed to appeal to underage users. In these sorts of cases, VCs bear some responsibility for negative behavior when they support founders and decisions which go against the interests of society.

Where is the line in supporting vices versus supporting founders in the vice space?

There isn’t a line. Our founders are the people we think are best suited to represent the vice space as a whole. We search for founders who we think will succeed in expanding the appeal of the vice space, growing it far beyond the size of a socially isolated market. For example, in CBD we look for founders who have the ability to turn CBD products into a mass-market item and can sell to individuals completely uninterested in cannabis and associated THC products.

“I don’t see the responsibility of a vice investor as larger than that of another investor, however, I do feel that the space is unique for bringing these moral questions to the forefront.”

You’ve personally questioned whether a vice is truly bad for you. What do you think the role of vices should be in our lives? Is there a level of moderation we must retain, surely?

I see vices as part of our lives derived from basic human nature. Whether we choose to acknowledge vices or not, they have been a persistent part of human society for thousands of years, including a central yet unspoken role in the economy. There’s absolutely a level of moderation which must be maintained, but we feel that openness, transparency, and better medical access for individuals who need it (including the treatment of addiction as a medical and not a criminal problem) will provide much better results for all involved.

What advice do you have for founders operating in this space or for those looking to enter it?

Build flexibility into your organization from the start. Vice industries are constantly changing, from both a social and regulatory standpoint, and require operators who can adapt at a moment’s notice and rebuild their plans in a short period. To me, that includes operating responsibly and having a constant ear to the ground to anticipate change before it happens.