Investing in Cannabis

This past week, Gotham and Cultivated collaborated to put on The Highrise. The feedback has been incredibly positive, and we are already planning on how to make October even better with new conversations, more interaction with the audience (as in who is behind that question), and certainly, six months from now, the cannabis industry will have a whole new slew of topics to cover.

Of our two panels, one was titled “Investing in Cannabis Again,” although I was not sure “Again” should have been part of the title. Tony Repanich, the CEO of Shield Bank, and Carter Lewis of Aquinnah Capital, spoke with Dan Frommer about this topic. Tony and Carter were both insightful about capital in the industry, but no one really talked about how NY companies find capital for their brands, farms, and dispensaries.

This has been an ongoing discussion in the NY industry from the start. There was rhetoric from the government about funding that never materialized, and there are countless reasons for that. Investors care about returns, which means getting their money back and, if they are lucky, more than three times their investment within a given period.

In the early stages, MSOs (multi-state operators) began as private companies, which were savvy enough to raise capital primarily from private equity and family offices willing to take risks in the early days. Their rapid growth enabled many of these MSOs to go public on Canadian stock markets, resulting in a substantial influx of capital. People have made money buying and selling those stocks, but those companies are all laden with debt (taxes not paid), and few are profitable.

Why would someone give money to a singular dispensary that might hit $10M a year in revenue? In the past, banks would lend to owners who needed that type of cash, but they rarely do so these days. Instead, the few banks that are willing to touch the cannabis industry charge a pretty penny to operate in them. The money “lending” has been shifted to the private sector, to venture capital and private equity. There are differences among lenders in how much equity, at what price, the size of the business, opportunity, the size of the market, expertise, and many other factors, and cannabis businesses have yet to answer enough of these questions to make investors comfortable to take the leap.

Perhaps a brand could become a multi-million-dollar company, and Kiva has definitely pulled out of the gate. I have always believed you could build a $100m cannabis brand that sells only in California dispensaries, but now you really need to sell in every state to build something sizeable. That means making deals in every state, negotiating terms with farmers in each state, and selling to state-by-state dispensaries. That is really fucking hard. The government makes it nearly impossible, and the cash to get there could be prohibitive, given the need to reach profitability quickly because you don’t want to bleed cash, but you do want to pay your investors back with a return.

The farmers are operating as they always have, unfortunately, hand-to-mouth. The larger farms need equipment to operate, and that costs money. I have yet to hear a happy story about borrowed money for one farmer in the cannabis industry. The debt weighs on their shoulders, and they need to constantly upgrade and sell to an industry struggling to grow.

Everything comes down to the dispensaries. The ones that survive are at the end of the line, where all products are sold to customers. It is not easy to build a four-walled dispensary when there is still a robust illegal market. It might not be street-level, but there is ample underground, and the powers that be don’t seem to realize that, or are focused on it. The state needs to start thinking and talking with operators about our needs, not what they think they are. Nobody is looking to do anything illegal, but the state needs to work with us and react to help us build with a sense of urgency. We should be able to pull permits to bring and sell cannabis at events just like liquor stores and caterers do…and that means with ease. It will help expand all of our businesses. The product is being rescheduled (waiting for the DEA to complete the deal), and cannabis should be treated more like alcohol, at least for the time being.

The last thing is that this industry will never get out of the debt hole until cannabis becomes federally legal. Investors will then get into the game because the opportunity has changed tenfold. Everyone will benefit, including the government, with more taxes, because the amount that can be done with the plant from the medical industry has not even scratched the surface. Although ignoring the pharma lobbyists is a whole other ballgame. Medical research and the outcomes for consumers are the sweet spot for tax dollars. And our country will need serious funding in the future, because when a new administration takes office, we might find there is nothing left in our coffers.

It is time for federal legalization.