Investing in Taboo Products: A Case for Sex, Drugs & More

Rethinking Investment Strategies: Embracing 'Vice' for Broader Impact

During a recent appearance at SXSW London, impact investor and advisor Christian Tooley challenged conventional thinking with a provocative question: could investors achieve greater positive change – extending beyond purely financial returns – by acknowledging and accepting human complexities?

The Role of Vice Clauses in Venture Capital

Tooley’s inquiry primarily centered on vice clauses, the stipulations imposed by limited partners on venture firms designed to mitigate investment risks. However, his perspective broadened to encompass investing in fundamental systems – the very fabric of daily life, spanning biological and social structures.

Typically, sectors deemed undesirable for investment include those related to sex, controlled substances like psychedelics, gambling, and tobacco. These restrictions are predominantly enforced by substantial institutional investors, wary of associating with potentially contentious or even detrimental products.

Unlocking Innovation in Underexplored Markets

Tooley posits that investors are potentially overlooking significant innovation by avoiding these so-called vices, particularly within the realms of sexuality and substance use. He emphasized that investment returns aren’t solely financial; they can also be cultural and systemic.

“Sex represents a high-volume, consumer-driven market requiring relatively modest initial capital,” Tooley explained. “Substances, while offering a moderate-to-long investment horizon, present the potential for substantial payoffs.”

He contends that these restrictive clauses often stem from societal stigmas, despite the possibility of startups delivering both financial gains and positive health or social outcomes.

The Untapped Potential of Sex Tech

The sex tech market, for instance, is projected to reach approximately $200 billion by 2032. Despite this considerable potential, the industry has received only limited venture capital funding – a few hundred million dollars at most.

While specialized investors and firms, such as Vice Ventures, have actively supported companies in this space, mainstream investors have been hesitant to follow suit. Even OnlyFans, a platform generating billions in revenue, encountered difficulties securing investment due to its association with adult content.

Tooley remarked to TechCrunch, “Entire industries remain underfunded not due to a lack of inherent value, but because they challenge established norms.”

Tooley’s Investment Portfolio

As an investor, Tooley has actively backed ventures like Polari Labs, a company focused on enhancing anal sex experiences, and linq, which aims to provide a more secure method for sharing intimate images.

Institutional Investor Caution

The reluctance of large institutional investors to engage with these categories is understandable, given their obligations as endowments and pension funds to avoid legal complications and protect their reputations. Concerns about potential access by minors were cited as a reason some investors declined to support OnlyFans.

Navigating Regulatory Challenges in Substance Investing

The situation with substances is further complicated by legal inconsistencies, exemplified by cannabis, which remains legal only on a state-by-state basis. Backing a product that is, in many jurisdictions, still considered illegal introduces legal, regulatory, and tax uncertainties.

Opportunities for Niche Investors

Tooley suggests that this reduced competition from larger funds creates a unique opportunity for smaller limited partners, family offices, and progressive investment funds. He asserts, “Focusing solely on perceived controversy can lead to missed innovation and, consequently, diminished returns.”

Addressing Societal Stigma

Tooley stresses the importance of confronting the stigma surrounding investments in areas that, while currently marginalized, may offer significant benefits. He points to the historical taboo surrounding open discussion of menstruation as an example.

Today, venture-backed companies like Flo, femble, and WomanLog – period tracking applications – are thriving.

A Vision for the Future of Investment

Tooley envisions a future where increased investment in previously taboo areas leads to advancements in sexual health technologies, more culturally sensitive psychedelic therapies, and biohacking solutions tailored to the needs of queer and trans communities. “We require not only funders comfortable with risk,” he concluded, “but those fundamentally dissatisfied with the existing order.”

Note: This article has been updated to provide further clarity regarding the speaker’s presentation topic.