The Market Minute: No Porn Investments Please, Vice Clauses And How They’ve Evolved

As much as funding to startups is up and it seems like all sorts of companies are raising money, there’s still one thing stopping investment in certain companies: vice clauses.

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I wanted to write about vice clauses after the whole OnlyFans situation a couple of weeks ago. If you somehow missed it, London-based OnlyFans said it would stop allowing porn–what it’s most widely known for–on its content-sharing platform. The company attributed the change, which it later reversed, to pressure from banking partners. But Axios also reported that the company struggled to raise money from investors.

The company’s reported issues raising money more or less came down to VCs being uneasy with the idea of investing in porn. For some funds, at least, that’s because of so-called vice clauses, or prohibitions on where money can be invested.

Vice clauses and how they work

In the case of venture capital, vice clauses are restrictions by limited partners on where their money can be invested. According to Bryant Smick, a corporate attorney focused on startups at the law firm Carney Badley Spellman, VC funds typically don’t have their own vice clauses, but limited partners who invest their money in the fund do.

“The LPs that require this stuff are almost always larger institutional investors, and the reason why they can pull this stuff is because they’re usually investing a lot of money in larger funds,” Smick said. “You don’t see vice clauses in smaller, seed-stage funds.” 

Smaller funds typically have family offices or high-net-worth individuals as limited partners. Larger firms usually count institutional investors like pension funds or university endowments as limited partners, and those LPs are the ones that typically have more restrictions on where their money can be invested.

A religious institution or a sovereign wealth fund, for example, wouldn’t want it to come out later that it was indirectly investing in OnlyFans, a company that offers porn on its platform, Smick said.

“A big LP will be like teachers unions or basically a teachers’ retirement fund,” Smick said. “So you can imagine that a teachers’ retirement fund won’t want to be a large holder of Juul or a cannabis company.”

The reason OnlyFans ran into problems raising money was because it wasn’t looking for a seed-stage investment, it needed a growth-stage investment, and the funds that could write that large of a check likely had restrictions from their LPs, Smick said. 

Cannabis brought the idea of vice clauses to people’s attention a few years ago, according to Catharine Dockery, founder of seed stage fund Vice Ventures. 

Vice Ventures focuses on investing in companies in “nontraditional sectors”–areas that have historically been taboo for venture capitalists. The firm has invested in companies including sexual wellness startup Maude, nicotine alternative company Lucy Goods, and espresso martini company Deloce from its $25 million fund. 

As for vice clauses dissipating, that may depend on the industry in question. For example, venture-backed startups in the cannabis space have raised nearly $848 million globally in funding so far this year, according to Crunchbase data. That’s up from around $691 million raised last year, but not close to the nearly $2 billion raised globally by cannabis companies in 2019.

“I think as we see nationwide legalization, I think that’s when we start to see attitudes changing, specifically for cannabis, but across the vice category,” Dockery said.

But while specialized investors like Vice Ventures exist, vice clauses likely aren’t going away anytime soon, according to Smick. As more institutional investors focus on the venture asset class, it could be that the LPs with vice clauses will bring those restrictions to more VC funds. 

“There is a trend right now that more and more institutional investors are getting into the venture asset class,” Smick said. “And as venture investing becomes more commonplace, it could be that these things start to relax over time. But I don’t know if there’s anything in the works right now that’s pushing a huge shift.”

“The news has really pointed out that institutional investors and hedge funds, and really downstream investors are focusing more on the venture asset class,” Smick said. “It could be that they could invest more in smaller funds and bring their vice clause to those things.”

Illustration: Dom Guzman