Investment Discipline in Practice: Waiting for the Right Pitch¹

In a capital environment often driven by thematic momentum, we continue to evaluate opportunities through a dispassionate fundamentals-first lens. At 10 East, that means passing when we think key individuals, structure, scalability, or governance fall short — even when the story is compelling.

"You don't have to swing at every pitch. You can wait for your pitch"²

- Warren Buffet

Five years ago, we learned about and began tracking a medical diagnostics company that we believed had become ripe for an investment roughly 18 months ago (the “Company”). Our team ran a diligence process on an opportunity to co-invest in the Company, which had developed the first commercial cannabis breathalyzer. At first glance, the intellectual property appeared strong, regulatory momentum was building, and customer demand was substantial prior to commercialization. The Company claimed a backlog of sales orders totaling several hundred million dollars.

A Differentiated Product in a Nascent Market

The Company's flagship product, a cannabis breathalyzer, claimed to detect recent cannabis use within a timeframe aligned with active impairment, unlike traditional tests that generally register usage days or weeks later. The Company stated that the device identified THC in parts per trillion and delivered results within hours, providing comparable functionality to an alcohol breathalyzer.

The long-term potential was determined to be significant in law enforcement, but the immediate sales pipeline was focused on sectors where safety is paramount: transportation, oil and gas, manufacturing, logistics, and education. Think: school bus drivers, warehouse staff, and oil rig operators.

Far from an early-stage concept, the Company had advanced the technology deep into pre-commercialization, having raised over $127 million from investors, including prominent venture investors such as Benchmark. By the time we re-engaged, the Company had closed a $50 million Series E round and was positioning itself as a late-stage diagnostics player that was set to employ a razor-blade model, with single-use cartridges for each test and no viable competition in sight.

Why We Passed

Despite the product's potential, we passed in Q2 2023. The Company was valued at $225 million based on a significant equity round that was about to close; however, we discovered that the Company was in default on its venture debt, and that the quality of board governance and management leadership was sorely lacking - all clear deal killers for us, despite a promising product underpinned by proprietary intellectual property.

Specifically, with board approval, the Company's CEO closed the new equity round without restructuring that venture debt. We were shocked and politely passed.

Subsequent to that capital raise, the venture lender was acquired by a large private credit firm that enforced its creditor rights, triggering a wind-down. To us, this was not a surprising outcome. The CEO's judgment, and the board's willingness to enable it, fell short of our standards. We generally avoid investing in companies pre-revenue, with misaligned capital structures, or poor leadership.

From Growth Story to Special Situation

After enforcement, the Company entered an Assignment for the Benefit of Creditors (ABC) in California. A sale process for the Company's IP, including 51 patents filed and 24 granted, was launched, but no bids were received that would clear the outstanding debt. The business was wound down with the majority of employees terminated, prior investors received a zero, and by the end of 2024, the lender chose a different path.

In early 2025, a seasoned healthcare executive was recruited to inject both capital and operational discipline to devise a turnaround plan that included: manufacturing 250 commercial-grade breathalyzer units, revalidating product-market fit in regulated workplace environments, and completing third-party testing with medical device validators. As part of this effort, 10 East's founder and employees also participated in the capital injection, demonstrating our conviction and alignment with the strategy.

"There will always be opportunity in value investing — all it takes is capitalizing on other people doing dumb things."

- Warren Buffet

From Growth Story to Special Situation

We re-engaged because the fundamentals were intact, the valuation significantly more compelling, and we had conviction that Company leadership now had the proper expertise to execute the business plan.

The Company emerged from bankruptcy with a clean cap table, minimal debt at favorable terms with the former lender aligned with equity holders to drive returns, and a sharply defined execution roadmap. Importantly, we believe the entry valuation reflected liquidation value, providing meaningful downside protection.

Beyond THC, the Company believes that the breath-based diagnostics platform holds potential for broader healthcare applications, from infectious disease detection to metabolic analysis and real-time health monitoring.

At 10 East, we don't fall in love with an alluring idea alone. We look for asymmetric risk/return profiles supported by a disciplined investment process. When we swing, our personal capital is on the line… and we will wait for the right pitch.

The above is a prime example of doing the work, sticking to our disciplines, and re-engaging when the fundamentals align. Many fallen startups have the potential for a second chance, and we encourage you to share one with our team if the circumstances are appropriate.