Philip Broenniman and Ezra Gardner of Varana Capital: 5 Things I Need To See Before Making A VC Investment

Oct 3, 2022

An Interview With Jason Hartman

As part of my series about “5 Things I Need To See Before Making A VC Investment” I had the pleasure of interviewing Ezra Gardner and Philip Broenniman, co-founders and managing members of Varana Capital. Ezra Gardner has over 20 years of public and private market investment experience. Prior to co-founding Varana Capital in 2012, he held the positions of Portfolio Manager at KCPS Capital, an alternative asset management firm based in Tel Aviv, Israel; Head of UBS’ US Equity Portfolio for the Fundamental Investment Group where he also sat on US Trading Committee; Senior Analyst at MSD Capital (Michael Dell family fund management office); and Analyst in investment banking at JP Morgan.

Philip Broenniman has over 30 years of investment, analytical, and advisory experience. Prior to co-founding Varana Capital in 2012, he held the positions of Principal and Portfolio Manager at Visium Asset Management, LP; Managing Partner and Portfolio Manager at Cadence Investment Partners, LLC; and Investment Analyst with the Bass Family Office in Fort Worth, TX. He began his career at Salomon Brothers Inc. trading fixed-income futures and options. Both Ezra and Phillip sit on or advise the Board of Directors of multiple public/private companies, working with each on strategic planning, operational dynamics, and balance sheet needs/restructuring.

We prefer to invest through bespoke securities that enable us to manage our exposure upfront, while allowing us to press our bets, even at higher prices, as our knowledge of and comfort with a company grows.


Thank you so much for joining us in this interview series! Before we dig in, our readers would like to get to know you a bit. Can you please share with us the “backstory” behind what brought you to this specific career path?

Ezra: After many years in the traditional finance investment business, both Phil and I came to believe that there was a “dirty little secret” in the asset management business. Although with good intention, a fundamental mis-alignment of interests between asset managers and their LPs had been created. Specifically, the industry insists each manager have a very defined, narrow strategy rather than providing room for their managers to create portfolios that include different approaches and assets, allowing them to build and manage the portfolio as they would their PAs (personal accounts). We wanted to solve this problem. We decided to launch a structure that would permit us to invest in privates, semi-privates — public companies that behave like privates — and start-ups (VC), all at different stages and investment vintages. Further, we often continue to manage investments after companies go public or uplist, effectively creating a very tax efficient, diversified evergreen fund.

Phil: Both Ezra and I come from very traditional hedge fund arenas, managing portfolios where we would be long our 20 favorite securities and short our least favorite 40. As many PMs realize too late in life, this is a great way to get paid and an absolutely terrible way to live. Therefore, when we launched Varana Capital more than a decade ago, we decided the best way to solve the dirty-little-secret Ezra describes is by investing in a concentrated portfolio of companies to which we can bring more than just the value of our capital. Now, when we allocate capital, we bring to the table our collective education, scholastic and professional; our decades of analytical experience and corporate insight; and our native curiosity. Working together over the years, my partner and I have found our approach much more fun and more interesting. That it has proved much more profitable is a pretty nice bonus.


Is there a particular book that made a significant impact on you? Can you share a story or explain why it resonated with you so much?

Phil: Years ago, I curated a list of required reading — happy to share with your readers — which I carried over to the launch of Varana Capital. From this list, there are two very different books that were most impactful. The first is Seth Klarman’s Margin of Safety, a rather revered tome in financial circles, and the second Getting the Best of It by David Sklansy, which dives deep into probability in gambling. Both books take very different approaches to arrive at the same destination: how to ensure you have the best chance to maximize returns, while minimizing risk. The analytical fundamentals expressed by Klarman combined with the probabilistic dynamic of Sklansty created an extremely powerful prism through which I viewed (and still view) investment opportunities. They, also, were written by very different, perhaps strikingly so, personalities, which makes the reading and intersection of the two even more interesting and entertaining.

Ezra: I am a big student of financial market history and found The Panic of 1907 to be a particularly powerful book. This book is a must read for any investor that wants to understand how seemingly unrelated events can create a perfect storm of panic and crisis and how reasoned and rational response (in this case led by John P Morgan before there was a Federal Reserve) could help restore stability. This book particularly resonated with me because it was written in January 2007 before the Global Financial Crisis began and yet provided immense insight into what was about to transpire. As an investor, it is imperative to understand how business and financial risks can spiral and what is necessary to prepare for them and survive them.


Do you have a favorite “Life Lesson Quote”? Do you have a story about how that was relevant in your life or your work?

Ezra: The comedian Stephen Wright once said “43.7% of statistics are made up,” which was a joke based on Mark Twain’s quote, “There are three types of lies. Lies, damn lies and statistics.” I always loved this joke and quote because what it teaches is, do your own work! Don’t believe everything you are told and learn to question and verify “truths.” This is a universal approach that can help throughout all types of life decisions and is also especially useful in investment decisions.

Phil: On the wall of my childhood home hung a small sign with a long quote that ends with “Unrewarded genius is almost a proverb”. Though the full quote was about the power of persistence, this last line struck me the most, since it observes that smarts alone are not enough to ensure success. Indeed, as most learn the (very) hard way, success comes with the willingness to endure the challenges and setbacks life consistently throws at us. And … things sometimes happen when you hang around the hoop long enough. Therefore, I always keep the adage in mind, particularly in a business that attracts extremely bright competitors. It keeps me grinding, focused, and determined. By the way, only years later did I learn the author of the quote was Calvin Coolidge. Regardless of what you think of his presidential tenure (and the aftermath), he certainly had a way with words.


How do you define “Leadership”? Can you explain what you mean or give an example?

Ezra: Phil and I have a front seat in the greatest leadership tournament of all time. Observing Founders and CEOs demonstrate all forms of leadership. Some of it is great, some unmemorable and some downright awful.

Phil: To Ezra’s point, we see all manners of very successful corporate leadership bundled in a variety of personalities and dynamics. Indeed, there is no monolithic personality we demand sit at the helm of our portfolio companies. Even so, regardless of leadership mode and methodology, there is a trait shared by each of our CEOs: They bring a vision to and inspire passion in their employees and partners. No matter the brilliance of an idea, without superalive leadership the company is dead. Therefore, while we certainly run a concentrated portfolio of investments, we credibly can be described as running a concentrated portfolio of outstanding leaders.


How have you used your success to bring goodness to the world?

Phil: I suppose to hew close to the bone I will concede with some embarrassment that the first three-plus decades of my life I spent with my head down, quite focused on the task at hand and on myself. With the benefit of a few years and a good bit more maturity, I have learned that life really is about kindness. Clearly, kindness, of which we can say goodness is a part, can come in many forms, one of which for me is through a family foundation. Along with my younger sister, who will lead the show, I have been privileged to learn how to best run a foundation, to ensure an efficient and effective allocation of capital, from a very, very successful businessman and entrepreneur, who later in life set up one of the better family foundations. He and his staff very kindly have spent hours on Zoom, walking us through their philosophy, approach, and operations. Hopefully, my sister and I can meet the very high standard he has set.

The United States is currently facing a very important self-reckoning about race, diversity, equality and inclusion. This is of course a huge topic. But briefly, can you share a few things that need to be done on a broader societal level to expand VC opportunities for women, minorities, and people of color?

Phil: Speaking for Ezra and for me in equal parts, our responsibility to any community at large is not limited by the confines of our business. Whether within or without Varana, through our hiring practices, mentorship, incubation policies, or other, both us individually and together proactively pursue local and national works we believe will provide others with opportunities they otherwise would not realize.


Can you share a story with us about your most successful Angel or VC investment? What was its lesson?

We invested in an electric motor company when it was simply a drawing on a piece of paper. In an industry that struggles to squeeze out 3% efficiency, this design would enjoy 300% more efficiency than the best in class motor. Now, with much hard work, the company is beginning serial production with several very large, global OEMs. While this investment hasn’t (yet) been our largest generator of profit dollars — though we think it eventually will and by a large margin — in many ways we consider this to be our most successful. The reason is that our process worked (nearly) perfectly. We analyzed the design and the team and asked ourselves three questions: 1. Can this be built? and 2. Are these the guys to build it? 3. If built, will it be massively disruptive? Happily, the “yes”, “yes”, and “yes” answers came to fruition. In this business, success is about process, process, process. It’s worth adding that it is incredibly exciting and satisfying when we are able to identify a successful company at such an early stage that has the potential to literally change not only one industry, but many.


Can you share a story of an Angel or VC funding failure of yours? What was its lesson?

Among the semi-privates we have invested in over the life of Varana Capital, one specifically comes to mind, though we won’t name names. The basic details, however, is what started as a nutraceutical company begat a cannabis oil company transmogrified into an anything-the-CEO-wanted company. At each pivot along the way, a new leader would be slotted into the top seat and somewhat convincingly pound the table about NamelessCo’s new commercial frontier. While we moved in-and-out of the stock of this business much better than we should have — we actually never had a losing investment during the three-plus years we were involved, though the stock now sits close to zero — an astute reader here might infer we were breaking the Varana dictate around leadership. In fact, it was this experience, watching CEOs aimlessly throw darts at the zeitgeist of the moment, hoping something would stick, that codified what previously had been simply a preference: In all walks of investment life, partner exclusively with the best. Succinctly, there are no great companies without great CEOs.


Can you share a story with us about a problem that one of your portfolio companies encountered and how you helped to correct the problem? We’d love to hear the details and what its lesson was.

Our investment, initiated sometime in 2018, in Ipsidy Inc represented a very small position in a very small company focused on biometric authentication. The promise, however, was dramatic, as it was and still remains very clear to us that passwords, among other forms of authentication, are going to be replaced with biometrics. But all was not well at the company in late 2019, as both management and company momentum appeared listless. Therefore, at the request of one of the larger shareholders, Phil joined the board very early in 2020. Soon into his tenure, it became quite obvious the CEO had to go, and go quickly. Therefore, to fill the breach until new management could be found, Phil and Deputy Chairman Phillip Kumnick were elevated to President and CEO, respectively. PR and PK, as they were known internally to avoid confusion, remained in those positions for more than a year, cleaning up the company, improving the balance sheet, and elevating morale. Then, in June 2021, they brought in a superstar management team and returned exclusively to the BoD. Though the final chapter of what is now known as authID (ticker: AUID) has yet to be written, this is a great example of how far we will go to create value for our amazing roster of limited partners and all shareholders of a company.


Is there a company that you turned down, but now regret? Can you share the story? What lesson did you learn from that story?

We looked at a drone delivery service in the very early stages. The technology and the technologists were second to none. They even understood that they needed to be heavy in the lobbying department so they could get license(s). We simply couldn’t get over the hurdle that getting permission to operate drones had never been granted, not to Google and not to Amazon. We figured incorrectly that they wouldn’t be the first to overcome this hurdle: we were dead wrong. In fact, they did receive the first drone license and are currently operating and expanding rapidly. There are many lessons here but certainly one of them is that when the approach is best in class, it is too simplistic to assume that a small team can’t achieve a target where a larger, more-well funded company failed.


What are your “5 things I need to see before making a VC investment” and why. Please share a story or example for each.

Leaders who, as detailed above, bring a vision and passion to their team. Enough said on this topic.
A great idea or product, around which we can build a wide, deep moat. Stämm Bio is building a bioreactor that will completely disintermediate the manufacture, and eventually the development, of drugs at big pharma. The Stämm tech will produce more proteins and antibodies in a much shorter period, at a high quality level, and with more information via machine learning. This is not simply science fiction; Stämm is doing this today. The pain points for which the company is solving should be well-defined and extremely well understood. This is obvious on the face of it. However, more than a few of your readers almost certainly will understand the dearth of insight by many management teams asking for money.

Management and team members who are subject matter experts. Though there are a few examples of folks who have been successful with an idea outside their area of core competency, there are legions of failures. To mitigate risk, particularly given the concentrated nature of our portfolio and the time/attention/elbow grease we bring to each of our investments, subject matter expertise is paramount. See NamlessCo above as an example for why this is so important.

An investor base, Varana included, that is willing to finance the next round, perhaps more, should markets prove difficult. We rarely make an investment without having an idea of when and at what price the following round will be realized. A corollary to this precept is that we rarely invest when the IP and/or other assets will not cover our post-money valuation. As Klarman will tell you, it’s about margin of safety.

We prefer to invest through bespoke securities that enable us to manage our exposure upfront, while allowing us to press our bets, even at higher prices, as our knowledge of and comfort with a company grows.


You are a person of enormous influence. If you could inspire a movement that would bring the most amount of good to the most amount of people, what would that be? You never know what your idea can trigger.

Phil: Even while we will hope to change the world with our investments, most specifically in EV and biotech, we concurrently are focused on our own little corner, as well. A variant, I suppose, on the think-globally-act-locally mantra. And indeed, both Ezra and I are very much involved in our local communities in a variety of ways. However, at the risk of injecting a little politics into this interview, domestically the easiest, quickest, and certainly most effective change to benefit the most people would be to immediately raise the minimum wage to $22 — $25. This is where it should and needs to be. Anyone who makes the argument to the contrary is extraordinarily disingenuous, wildly misinformed, or willfully blind. Whether my partner and I could claim credit for such an impactful change would never matter. But should it be necessary, we are happy to be the catalyst and/or the foil.


Some of the biggest names in Business, VC funding, Sports, and Entertainment read this column. Is there a person in the world, or in the US whom you would love to have a private breakfast or lunch with, and why? He or she might see this.

Phil: To take some liberty, again, with your questions, if I get to choose I will choose two individuals. The first would be John Doerr, the original OG of Sand Hill Road venture capitalists. Given his vast experiences and array of knowledge, I would love to learn more about what has allowed Kleiner Perkins to grow and to succeed through decades of investing. My second guest, if not at all second choice, would be Bob Iger, former CEO of Disney. Few leaders so dramatically changed the face of a company, while creating so much value for investors. To have these two titans at the same table together would be extraordinary, even if completely fanciful. If I can add a third, it would be Kara Swisher, who is absurdly talented, sharply insightful, and ridiculously amusing.

Ezra: I am going to piggyback on Phil’s idea and choose two dinner mates, as well: These would be Walter Isaacson, for his knowledge of and critical thinking about so many important innovators, and Eric Schmidt, since he is just-so-damn-smart and for his understanding of how to successfully integrate new management into long-time founder run business. It is never too early to plan for the future!