Beyond the Ban: Why Investors Should Reconsider 'Vice' Industries
In the world of venture capital, certain sectors have long been off-limits, deemed too controversial, too risky, or simply too 'vice' for mainstream investment. These restrictions, often formalized through 'vice clauses' in agreements between limited partners (LPs) and venture firms, typically exclude industries dealing with sex, certain substances like psychedelics and cannabis, gambling, and tobacco. The rationale is usually rooted in a desire to avoid legal uncertainty, reputational damage, and potential ethical conflicts, particularly for large institutional investors like endowments and pension funds.
However, a compelling counter-argument is emerging, suggesting that by rigidly adhering to these traditional boundaries, investors are not only missing out on significant financial opportunities but also hindering innovation that could bring about positive health and social benefits. This was the core message delivered by impact investor and advisor Christian Tooley at SXSW London, where he challenged the audience to consider the potential if societal prudence were momentarily set aside in pursuit of profit and progress.
Tooley's provocation centers on the idea that the discomfort surrounding these topics, rather than a lack of inherent merit or market potential, is the primary barrier to investment. He posits that industries labeled as 'vices' are often ripe for disruption and offer unique return profiles.
"Returns can be financial, cultural, and systemic," Tooley explained, highlighting the diverse potential upside. He specifically pointed to sex tech as a high-volume, consumer-facing market with relatively low upfront capital needs, suggesting a quicker path to financial returns. Substances, while potentially having a longer return on investment horizon, could offer higher payoffs.
The Untapped Potential of Sex Tech
The sex tech market serves as a prime example of an industry facing significant investment hurdles despite its substantial size and growth projections. Tooley cited estimates suggesting the market could reach nearly $200 billion by 2032. This is a massive addressable market, encompassing everything from sexual wellness products and educational platforms to relationship apps and consent-focused technologies.
Despite this enormous potential, the sector has historically received only modest venture capital funding. While specialized investors and firms, such as Vice Ventures, have actively sought out opportunities in this space, mainstream investors have largely remained on the sidelines. This hesitancy persists even for companies demonstrating immense revenue potential, like OnlyFans, which reportedly earned billions but struggled to attract traditional investors due to its association with adult content. Concerns about potential legal issues, such as the presence of minors on platforms, have also contributed to investor caution, as highlighted by reports on the challenges OnlyFans faced in securing funding.
Tooley's own investment portfolio reflects his belief in the potential of this sector, including backing companies like Polari Labs, which focuses on improving anal sex experiences, and linq, a platform designed for safer sharing of intimate photos. These examples underscore the breadth of innovation occurring within the sex tech space, addressing specific needs and aiming to improve sexual health and well-being, areas often overlooked by traditional healthcare and wellness markets.
The narrative around sex tech is slowly shifting, moving from a purely taboo subject to one increasingly recognized for its potential to address health disparities, promote education, and enhance personal well-being. Startups in this space are developing solutions for issues ranging from sexual dysfunction and reproductive health to consent education and pleasure enhancement. By avoiding investment, traditional VCs might be missing the next wave of health and wellness innovation simply because it intersects with a historically sensitive topic.
Substances: Navigating Legal Gray Areas and Shifting Perceptions
Investing in companies dealing with substances, particularly cannabis and psychedelics, presents a different set of challenges, primarily centered around legal and regulatory uncertainty. Cannabis, for instance, remains illegal at the federal level in the United States, creating a complex patchwork of state-by-state legality. This poses significant risks for investors, including potential legal repercussions, difficulties with banking and financial services, and unpredictable tax implications. The criminalized status in many jurisdictions makes large institutional investors, bound by strict compliance requirements, particularly wary.
Psychedelics, while gaining traction for their potential therapeutic applications in treating mental health conditions like depression, anxiety, and PTSD, are also largely illegal or heavily restricted. Research into psychedelic-assisted therapy is progressing, and some jurisdictions are beginning to decriminalize or legalize certain substances for medicinal or therapeutic use. However, the regulatory landscape is still nascent and highly uncertain, making it a high-risk area for traditional investors.
Despite these challenges, the potential returns in the substances sector are significant. The legal cannabis market is already a multi-billion dollar industry, and the market for psychedelic therapies is projected to grow substantially as research advances and regulations evolve. For investors willing to navigate the complexities, the reduced competition from institutional funds creates opportunities for potentially higher returns.
Tooley argues that the focus on perceived controversy often blinds investors to the underlying innovation and market potential. Companies in these sectors are not just selling products; they are developing new therapies, creating safer consumption methods, and building infrastructure for emerging legal markets. Investing in these areas can be seen as a form of impact investing, supporting ventures that could have profound positive effects on public health and individual well-being, alongside financial gains.
Challenging the Stigma: Lessons from Femtech
The reluctance to invest in sex tech and substances echoes historical patterns of stigma surrounding other health and wellness topics. Tooley drew a parallel to menstruation, a topic once considered taboo and rarely discussed openly. Today, the landscape is vastly different, with a thriving femtech industry that includes venture-backed companies focused on menstrual health, fertility tracking, and women's wellness.
Companies like Flo Health, a period and fertility tracking app, have achieved significant success, including reaching unicorn status with substantial funding rounds. Flo Health, for example, raised $200 million at a $1 billion valuation, demonstrating that investors are now comfortable backing companies addressing previously sensitive topics when there is clear market demand and potential for impact. This shift in investor perception for femtech provides a hopeful precedent for other currently stigmatized areas like sex tech and psychedelic therapies.
The rise of femtech shows that societal attitudes and investment norms are not static. What is considered taboo today can become mainstream tomorrow, driven by increased awareness, advocacy, and the development of innovative solutions that address real needs. Investors who were early movers in femtech benefited from recognizing the opportunity before it was widely accepted.
Who is Willing to Take the Leap?
Given the hesitations of large institutional investors, Tooley suggests that the opportunity in 'vice' investing is particularly attractive for smaller LPs, family offices, and progressive funds. These investors may have greater flexibility, a higher tolerance for risk, or a specific mandate for impact investing that aligns with the potential positive outcomes in these sectors.
Family offices, often managing private wealth, may be less constrained by the strict compliance requirements and public scrutiny that large pension funds or university endowments face. This allows them to pursue investments in areas that are perceived as riskier but offer potentially higher rewards or align with the family's values or interests. Similarly, progressive funds specifically focused on social impact may view investments in sex tech (promoting sexual health and education) or psychedelics (advancing mental health treatment) as consistent with their mission, despite the associated stigma.
These investors can act as pioneers, demonstrating the viability and potential of these markets and potentially paving the way for broader acceptance and investment in the future. Their willingness to engage with controversial areas can help destigmatize the sectors and build the necessary infrastructure and regulatory frameworks for growth.
The Future of Taboo Investments
Tooley envisions a future where investors are more willing to back companies operating in currently taboo areas, leading to significant advancements. This could include better sexual health tools that are accessible and destigmatized, psychedelic therapies developed with cultural sensitivity and nuance, and biohacking solutions tailored to the specific needs of marginalized communities, such as queer and trans individuals.
The potential for positive impact in these areas is substantial. Improved sexual health tools can reduce rates of STIs and unintended pregnancies, enhance relationships, and address sexual dysfunction. Psychedelic therapies hold promise for revolutionizing mental healthcare, offering new hope for individuals struggling with conditions that are resistant to traditional treatments. Innovations tailored to specific communities can address long-standing health disparities and improve quality of life.
Achieving this future requires a shift in mindset within the investment community. It demands investors who are not merely comfortable with financial risk but are, as Tooley puts it, "deeply uncomfortable with the status quo." It requires a willingness to look beyond ingrained social norms and perceived controversies to evaluate opportunities based on their fundamental merit, market potential, and potential for positive impact.
The journey towards mainstream acceptance for these sectors will likely be gradual, marked by continued regulatory evolution, public education, and the success of pioneering companies and investors. However, the arguments presented by advocates like Christian Tooley highlight a significant blind spot in traditional venture capital and point towards potentially lucrative and impactful investment frontiers that are currently being overlooked.
Navigating the Challenges
While the potential is clear, it is crucial to acknowledge the significant challenges that remain. Legal and regulatory risks, particularly for substances like cannabis and psychedelics, are substantial and can change rapidly. Reputational risk is also a genuine concern for investors, as public perception of these industries can be volatile. Ensuring ethical practices and responsible innovation within these sectors is paramount to building trust and achieving long-term success.
For sex tech, addressing concerns about content moderation, user safety (especially regarding minors, as seen with OnlyFans' struggles with investors), and data privacy is critical. In the substances space, navigating the complexities of medical versus recreational use, ensuring equitable access, and preventing misuse are ongoing challenges.
Investors entering these markets must conduct thorough due diligence, understand the specific regulatory environments, and be prepared for potential public scrutiny. They must also partner with founders who are committed to ethical development and responsible growth.
Conclusion: A Call for Courage and Vision
Christian Tooley's call to action is a reminder that innovation often happens at the edges of societal comfort zones. The industries traditionally labeled as 'vice' are not monolithic; they encompass a wide range of ventures, some of which are genuinely harmful, but many others that are pushing boundaries in health, wellness, and personal empowerment.
By applying rigid 'vice clauses' without nuance, investors risk excluding themselves from markets with significant financial upside and the potential to address important societal needs. The success of sectors like femtech demonstrates that stigma can be overcome and that investment in previously taboo areas can yield substantial returns and positive impact.
The future of venture capital may well involve a more nuanced approach to risk, one that weighs perceived controversy against genuine innovation, market potential, and the opportunity to support ventures that are challenging the status quo for the better. For investors willing to look beyond the ban and engage with these complex, yet promising, sectors, the rewards – financial, cultural, and systemic – could be substantial.