Remember those heady days of the Green Rush a decade ago, when markets were small and it seemed everyone had a chance? Now it’s more of a mad rush to get some green in the form of investment capital.
The majority of states in the country now have some type of legal cannabis market. Businesses in those states operate in spite of regulations that are restrictive, confusing and make it very difficult to make a profit. Meanwhile, heavy tax burdens, differences in enforcement techniques and varying degrees of oversight are other factors that influence bottom lines in the cannabis industry.
Saturated markets are giving businesses trouble when it comes to their bottom line
Inflation also continues to be a prominent force across world markets. Sales of cannabis products have fallen as consumers adjust to inflation and post-COVID supply chain issues that are causing higher prices on necessary staples like food and gas. An oversaturation of cannabis flower is becoming a perennial problem in some states and another factor causing industry distress.
When cash flow slows to a trickle, companies of all sizes seek out investment funding to keep their momentum. But catching the eye of an investor group requires more than just sticking your hand out.
What Attracts Potential Investors?
A company is best positioned to attract those interested in cannabis investment opportunities when it appears serious about its growth plans. That means being well positioned with a solid upper-management foundation and so much the better if there’s an advisory board in place too. A company built with a diverse group of talent—ideally from consumer packaged goods companies—presents an attractive opportunity for investors.
Talent from the CPG space can help attract investors
Top-quality and industry savvy finance employees who maintain sound financial books and establish a solid banking arrangement are also important. If the company’s financial scenario is robust enough to provide confidence in case of an audit and the books are in good shape with auditable METRC logs investors will be far more inclined to put money on the line.
A cannabis company with full inclusion (or seed to sale) is often a smart choice for investment. The vertical integration of cultivation, processing/manufacturing and retail allows them to sell their own products while also stocking other brands’ products on the floors of their dispensaries. If their products are respected and the brand is held in high regard, even better. Similarly, a cultivation enterprise that can grow crops for multiple brands can also be very attractive. The ability to pivot and adjust production to reflect the market and consumer demands indicates a strong business foundation.
Despite the current headwinds and saturated markets, other chances for growth exist. When a local municipality finally decides to “opt-in” to adult-use cannabis sales, there’s opportunity for both established brands and startups. It’s a matter of being ready for those opportunities and having a plan to leap in whenever new licenses become available.
What Businesses Will Struggle to Attract Investment?
Culture is key here. Poor employee relations and weak cohesion across departments are indicative of deeper problems. Do people actually want to work for the business? Do they feel supported by human resources? A company with underdeveloped or non-existent workers’ compensation policies and a management team that is not respected by its employees is not going to look good in the eyes of potential investors.
Non-diversified cannabis businesses are also at a major disadvantage when seeking investors. Cultivators of one type of product or service are locked into a single operation geared to do one thing. Any changes to market whims or problems with the supply chain can wreak havoc on a business based around a single product.
Stick to Business Basics
The cannabis industry is unique, but the basics of running a business well enough for success still apply. Strictly adhering to the traditional methods that any successful organization follows is extra important in cannabis. Businesses that are active in their community and make a real effort to be involved will be held in higher regard by investors. They want to see cannabis businesses that are not just setting up shop to make a quick buck, but are dedicated to bettering their community. That indicates a relationship with customers that involves mutual respect and promotes business longevity and financial stability.
Disclaimer: Marguerite Arnold has just raised the first funds for her blockchain-based company, MedPayRx in Germany (and via traditional investment funding, not an ICO). She will also be speaking about the impact of blockchain on the cannabis industry in Berlin in April at the International Cannabis Business Conference.
You have probably heard of cryptocurrencies, tokens and smart contracts. You might have also heard, even if you did not understand the significance, that IBM recently suggested that the Canadian government use their form of blockchain, called Hyperledger, to track the recreational cannabusiness. Or that a large LP called Aurora is also looking at this space (as are other licensed producers large and small). Or maybe you have seen an item in the mainstream news about an ICO for a cannabis company that is now also going terribly wrong.
What on earth is going on?
These are all related issues, even if highly confusing and disjointed. Blockchain technology and cryptocurrency are hot right now and getting hotter – both in the mainstream world and in the cannabis industry globally. But for all its fans, the drumbeat for caution is also growing louder the more mainstream this technology (and the legitimate cannabis industry) becomes.
The many problems the entire cannabis vertical has with banking has make this current development almost inevitableOn the technology and finance side, that is why so many big names right now are urging caution. Nouriel Roubini, professor at NYU’s Stern School of Business, is just the latest to do so – and for reasons that everything to do with history. Including recent history ten years ago, when the world stood on the brink of a financial disaster thanks to unchained derivatives. The biggest worry in fact, right now, is about the financial implications of widespread adoption of the technology, beyond the tech itself and how it may (and may not) be legitimately used. Which itself is a huge question.
So why all the fuss?
This is revolutionary technology which is also being introduced into the market at a time when decentralized processing for automation is on the horizon. But also because blockchain can be used to create tokens or digital coins that act like financial instruments. And once created, such tokens can be issued much like money or even stock, to raise additional funds – for both start-ups and ongoing enterprises. The best thing though? This technology was invented to create a decentralized form of value exchange and trust-less, anonymized auditing and verification. No traditional financial institutions or even governments needed, wanted or should apply (at least in theory).
The many problems the entire cannabis vertical has with banking has make this current development almost inevitable. Not to mention accessing investment cash (although this is certainly changing outside the United States). Compliance issues in every direction are another wrinkle this tech will help solve. Starting with tracking product but also rapidly expanding to uses including protecting users’ privacy and facilitating access to high-quality, inspected product for qualified users and buyers. Not to mention other areas that are literally space-age but coming fast. Look for cool stuff coming soon involving both AI (artificial intelligence) and IoT (internet of things).
It is a fascinating, complex space. However, one aspect of this world, in particular, Initial Coin Offerings – or ICOs are getting attention right now. Why? They can be an incredibly efficient way to raise money for companies – both ones currently in business and start-ups with little more than a whitepaper or business plan and perhaps a working prototype. More and more of the successful ICOs are, however, for an existing company or are even attached to an asset, including a license, a prototype or a fund of money (or other combinations). They also rely on blockchain and alternative currency or tokens (sometimes also referred to as smart contracts) to work.
From a technology perspective, you can “mint” new coins relatively easily these days, sourced from a variety of different kinds of blockchain. Or even combinations thereof. You also can issue tokens or altcoins without an ICO.
In a world where there is vastly expanding cannabis opportunity, and many of these hopeful entrepreneurs are both digitally astute but without access to traditional capital, what could be better?
Bitcoin quickly became one of the more popular cryptocurrencies
From a financial and investor perspective, ICOs are a hybrid form of an IPO meets social media. “Coins,” “tokens” and “smart contracts” –or cyber currency collectively– are digital forms of cash, contracts, membership cards, discounts or even authorizations for identity. There are many ways tokens can be used, in other words. This by way of saying there are also important differences too. Not all tokens are the same. Not all are used as “money.” Some are but have assets assigned to them (like real estate). Others, particularly smart contract tokens, are strictly functional (pay funds when product is delivered and verified). The one caveat here is that the exchange of any token or altcoin will also cost money. Why? It is the electricity cost of computer processing the request for transfer. Plus access and service fees. There is no such thing as a “free” token. How tokens are priced, sold, bought, maintain value and for what purposes, is a debate if not process function that will not be solved anytime soon. Starting with the fact that some blockchains are more energy efficient (and sourced from green energy) than others.
To add to all of this confusion, not all ICOs function the same way. Some do give investors ownership in the company or specific portfolios that even include real-world assets. Others offer to use pooled funds to buy assets (like real estate or an expensive license). Many rely on the “coin” issued as a kind of discount scheme, reward mechanism and in many cases, direct discounted payment for future goods and services, of both the digital and real world kind. Many offer banking services directly, including in the very near future, the ability to exchange cyber cash for the fiat variety at even remote ATMs. Sound futuristic? It is coming and soon.
Most ICOs in the market now, however, rely on the following supposition: Issue a token with a unique name. Put up an ICO website. Encourage investors from anyplace on the planet with an internet connection, to use either crypto or fiat currency to buy tokens in the issuing startup as an investment that will give the new company funds to operate and build out services or the application (whatever that is). Also, plan to use the tokens for an exchange of some kind in the future (either for other coins or a good or service). Watch the value of the coin increase (for whatever reason) while informing investors (or contributors) that this is not really a security but a “utility” token that is expected but not guaranteed to become more valuable. Retire early with the prospect of having brokers of expensive real estate in places like London and Dubai come calling.The public tide of opinion, even if regulations are slow to move, is on the side of reform if not outright advocacy.
That will not be the case for the vast majority of ICOs, however, no matter what returns, goods or services they offer. Even if they also have vibrant communities already using their services (whatever those are). It will not be the case for most of the cryptocurrencies upon which such ICOs are based (most at the moment are based on Ethereum, NEO, Hyperledger or combinations of the three). There will be more of those too. And not every blockchain will make it (cryptocurrencies and tokens are based on an origin protocol or blockchain much like computer operating systems are either PC or Mac or mobile phones are Android or Apple). Some speak to one another well. Most do not “exchange” easily – even between themselves – let alone back into good old cash. And while nobody wants to be the Betamax of blockchain, there will, inevitably, be quite a few of them. When that happens, any economic value of the coins and even contractual relationships created with them disappear as well. Add in extreme price volatility in the current market pricing of these tokens, and you begin to get a sense of the risk profile involved in all of this.
The real hurdle, not to mention expense, comes when transferring back from the world of crypto to the one of fiat (regular money). Being a Bitcoin billionaire (there are about 1,000 individuals who own about 40% of the entire global Bitcoin issuance) is no fun if you have no place to spend it.
A Rapidly Changing Marketplace
In the past 18 months, cryptocurrency and ICOs have gotten increasing attention because of the increasing value of all kinds of cyber currency (far beyond Bitcoin). The total market cap for all forms of cryptocurrency itself zoomed past $700 billion at the turn of the year. That is impossible to ignore. You might have heard of some of these currencies too. There is ETH, Litecoin, Bitcoin Cash, Dash, even Dogecoin (created originally as a joke on an internet dog meme). Right now, in fact, at some of the most expansive exchanges, there are literally hundreds of these coins which are constantly bought and sold if not exchanged and used.
This has red flags written all over it.
And then there are the sums ICOs are bringing in some cases, flagrantly flaunting regulatory agencies and doing end runs on the global banking system that cannot keep up with them. The top ICO of 2017, a company called Block.one and registered in the Cayman Islands, so far holds the record at $700 million and counting. Filecoin, the second largest ICO last year, raised $262 million in one month from August to September. And then, of course, there is the cannabis industry-specific case of Paragon – now headed for class-action lawsuit litigation over their $70 million pre-and ICO sale intentions.
It would be logical to assume, given the eye-watering sums potentially involved not to mention the large role a smart digital media footprint has to do with an ICO’s success, beyond its service or technology offerings, that this would be a perfect place for cannapreneurs to turn for funding. The global market is opening for cannabis reform at the same time the crypto craze meets Fintech Upheaval is occurring – in fact, these two things are happening almost simultaneously.
Thanks to regulatory realities and an ongoing stigma, there is still no institutional investment in the industry in the United States (that is rapidly changing other places). These are two new industries and dreams are large.
In the legit cannabis space, so are the expenses.
The price of opening a dispensary in most U.S. states tops a million dollars right now. In Europe, the price of entry is even more expensive. A GMP compliant grow facility in Western Europe, plus the money for lawyer’s fees and negotiations for the license itself will set you back anywhere from $20 million and up, depending on the location. Even staying afloat in the industry once the doors are opened is a challenge. And loans, even for outstanding invoices, are still tough to come by in an industry where banking services of the simple business account kind are a challenge. Particularly in the United States.
The public tide of opinion, even if regulations are slow to move, is on the side of reform if not outright advocacy. Why shouldn’t a reform-group-rooted ICO aspire to own or provide ongoing business financing to a community-minded canna farm in California, Canada, Germany, Israel or Australia? Or even Greece?
However, right now, with some noted exceptions, the cannabis business remains at minimum, a dangerous place to consider issuing altcoins that act like financial instruments or raise money with them. Why and how?
Formed in 2015, Outco is a vertically integrated, licensed producer of medical cannabis in Southern California. Outco manages Outliers Collective, the first licensed dispensary continually operating in San Diego County. They operate the first licensed cultivation on Native American land in Southern California, the first cultivation building permit in Southern California and the first licensed extraction facility in San Diego County. Outco is on track to be the largest licensed producer of medical cannabis in Southern California.
Lincoln Fish, co-founder and chief executive officer of Outco
The company prides themselves on attention to detail; the well versed team implements real science in their cultivation and extraction processes. Lincoln Fish, co-founder and chief executive officer of Outco, has more than 30 years of experience as an entrepreneur. Before entering the cannabis industry, Linc started and sold companies in the healthcare technology and nutraceutical spaces.
With construction underway at new facilities, Outco is anticipating an expanding market and higher demand.
Fish’s experience with FDA regulations in nutraceuticals prepared him for running a business in such a tumultuous, highly regulated environment like cannabis. “One thing I took from the nutraceutical industry is how to present products to consumers and letting them know it is safe, effective and consistent,” says Fish. He says he noticed a serious lack of consistency in products. They tested 25 different vape cartridges, with their own oil, to find a consistent product they can use and know that consumers will safely and consistently get the same results. “There is a lot of room for more professionals and a lot of room for more science,” says Fish. “We try to position ourselves in a way that is consistent with where we think policy will go so we are very careful with recommendations from a scientific standpoint, patient information and product safety.”
Starting at a seed or cutting, plants are grown with the protection of biological control agents
According to Fish, they currently distribute cannabis products to about 75 licensed dispensaries in Orange County, San Diego and Los Angeles. With construction underway at their cultivation facility on Native American land, Fish says they plan to generate roughly 2600 pounds of cannabis each month. Gearing up for that in addition to the expanding recreational market requires some planning in advance, says Fish. Part of that plan is making sure quality controls are in place to keep consistency in the product quality and dosage. They are also actively seeking to open their distribution channels further.
One of the cultivation facilities at Outco
“We are building out a full lab of our own in addition to third party testing to perform internal quality controls,” says Fish. Equipped with their own laboratory instrumentation like HPLC and GC, they hope to establish proper in-house quality controls as well as provide that resource to younger startup companies. As one of the founding partners of Canopy San Diego, an ancillary startup accelerator, Fish sees great potential in working with younger companies to get them off the ground. Fish met Outco’s vice president of extraction, Dr. Markus Roggen, at a Canopy San Diego event. It was there that they had the idea to build a startup accelerator for companies that actually touch the plant- extractors, cultivators and infused-product manufacturers, as opposed to a startup accelerator that would only help ancillary businesses.
Dr. Markus Roggen, vice president of extraction
Dr. Roggen, who is an organic chemist by training, heads up Outco’s supercritical CO2 extraction operation. “I came to the ‘art’ of cannabis extraction with an open, yet scientifically focused mind,” says Dr. Roggen. “My approach was to look past the myths and stories about extraction methods and focus on finding data, as there really wasn’t much available. I therefore, from the beginning, started to study the capabilities of our extraction equipment by chemometric methods.” Chemometrics is the science of relating measurements made on a chemical system or process to the state of the system via applications of mathematical methods. “Already the first sets of experiments showed that long-held beliefs in the cannabis community were inaccurate,” says Dr. Roggen. “For example the particle size of extracted material matters. Or that it is possible to preserve and even isolate terpenes by CO2 extraction methods.” With plans to have a full plant and analytical chemistry laboratory on site, they hope to perform more research that focuses on optimizing extraction processes.
Plant irrigation and fertigation procedures are determined via experimentation
Dr. Allison Justice leads their cultivation team with a background in greenhouse management and commercial horticulture. Dr. Justice says plants are grown, starting at a young age (seed or vegetative cutting), with the protection of biological control agents. “Biological control is a management strategy that entails the release of beneficial insects or fungi, such as parasitoids and predators, in order to suppress or regulate insect populations in greenhouses and grow rooms,” says Dr. Justice.
Dr. Allison Justice, vice president of cultivation
When implemented properly, this eliminates the need to use synthetic pesticides. “Biological control agents are not put in place to eradicate pest populations yet are applied as preventives to minimize plant damage and maintain their own populations.” They are constantly evaluating light types, spectrum and intensity to determine optimal ranges, according to Dr. Justice. They don’t use any pre-mixed “cannabis” nutrient supplements for their plants, instead they design an experiment to determine the desired levels and ratios of essential plant nutrients. “We have found it crucial to determine what ratios of nutrients the plant actually needs and by knowing this, we know how to manipulate the recipe determined by the plant’s given nutritional symptoms,” says Dr. Justice. Every type of adjustment in cultivation and extraction is based on results from experimentation rooted in legitimate science. Instead of guessing when it might be time to harvest, they use a water activity meter, logging and recording all the data to determine the appropriate time to trim and cure plants. Performing analytical testing at every step is key, says Fish.
Looking toward the recreational market, Fish sees an obvious opportunity to expand their wholesale operations substantially, with several larger new cultivation projects planned. “The key though is to produce flower and concentrate offerings with the same standards we employ for medical cannabis,” says Fish.
Greenhouse Ventures (GHV), a cannabis business accelerator based in Philadelphia, PA, announced they are bringing on Lindy Snider as the lead advisor to the organization. GHV helps seed-stage startups through a ten-week, 90-hour curriculum-based program. Using industry mentors and staff, the accelerator trains founders on emerging best practices of building sustainable cannabis businesses and helping them to raise up to $5 million in seed or growth capital, according to a press release.
Lindy Snider, lead advisor at Greenhouse Ventures
Snider is the founder and chief executive officer of a Philadelphia-based skin therapy company, LindiSkin, as well as an investor in KIND Financial and Poseidon Asset Management. According to Snider, she is involved in a number of cannabis related ventures at the moment. “In a nascent industry like cannabis, early stage companies require hands-on training reinforced with constant mentorship and continuing education,” says Snider. “Greenhouse Ventures is taking a unique education-technology approach towards early- stage venture development, which stands to benefit entrepreneurs who get accepted into their accelerator, as well as investors who are evaluating accelerator graduates for a potential investment.” Snider’s late father, Ed Snider, was the chairman of Comcast Spectacor, a Philadelphia-based sports and entertainment company that owns the Philadelphia Flyers.
According to Tyler Dautrich, co-founder of Greenhouse Ventures, Lindy Snider is an extraordinarily valuable asset. “Lindy has been essential in the early success that Greenhouse Ventures has experienced to date and we are fortunate to name such an active and respected member of the investment community as our lead advisor,” says Dautrich. The company will be hosting two ten-week semesters in February and September every year. Applicants that are accepted into the program typically receive an average of $60,000 in professional services in exchange for a minor equity stake in their venture. Those accepted applicants are not required to relocate, as virtual participation is available.
Kevin Provost, Greenhouse Ventures co-founder and chief operating officer, believes Snider has played an instrumental role in the company’s growth. “From day one, Lindy has supported Greenhouse Ventures’ goal of positioning Pennsylvania as the east-coast cannabis and industrial hemp capital of the country, and with the recent passing of SB3, Greenhouse Ventures is in a unique position to make Philadelphia the epicenter of medical research and ancillary technology innovation,” says Provost. The organization is currently accepting applications for its Fall 2016 semester in Philadelphia beginning October 3rd and culminating with Demo Day on December 8th.
There are a few business accelerator programs that currently exist in the cannabis space, but Greenhouse Ventures (GHV), based in downtown Philadelphia, seeks to fill a gap in helping ancillary businesses get off the ground. Through a ten-week, 90-hour curriculum, program, Greenhouse Ventures assists startups by increasing their business model sophistication.
Bart Mowrey, founder & CEO of TokerWare in December on the ‘Demo Day’ in Center City Philadelphia
“The program consists of three hour sessions, three nights a week, for ten weeks, covering topics such as general business development, go-to-market strategy, growth strategy, capital formation, legal & financial due diligence, fundraising, valuation, and exit opportunities,” says Tyler Dautrich, founder of Greenhouse Ventures. Business startups in the program are paired with industry experts who serve as mentors providing advice, guidance and strategic introductions.
The program culminates in a pitch event where the startups are given the opportunity to pitch potential investors and advisors in an effort to strategically advance their business model. According to Dautrich, Greenhouse Ventures’ overall mission is to increase the level of business sophistication of ancillary startups.
Courtney Rudolph, founder & CEO of Green Seven, in December during the program in Center City Philadelphia
They differentiate themselves from other startup accelerators like Canopy Boulder and MJIC’s Gateway by using a curriculum-driven program. Participants in the accelerator work closely with GHV staff, industry services providers and industry experts to learn exactly what they need to secure capital and get their business to the next stage.
Tyler Dautrich, founder of Greenhouse Ventures
According to Dautrich, Greenhouse Ventures also differs from other accelerators because they are not an investment fund. “We do not invest any capital into any portfolio companies at this time,” says Dautrich. GHV does however invest $60,000 worth of services into each portfolio company and only takes an average of 5% common, non-voting rights, stock. “The goal is for the companies in the accelerator to validate some, if not all, their initial assumptions and prove that the company can progress without that capital infusion” adds Dautrich. “This serves as a great due diligence process for potential investors.”
Graduates of GHV and CoPhilly Fall 2015 semester
The program successfully completed its pilot semester in December of 2015 with three ancillary businesses in the cannabis industry. The second semester will launch this Spring in the end of April and Greenhouse Ventures will be accepting up to 10 ancillary companies for its second semester. The application window is currently open for the spring semester.
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According to Tyler Dautrich, co-founder of Greenhouse Ventures, Lindy Snider is an extraordinarily valuable asset. “Lindy has been essential in the early success that Greenhouse Ventures has experienced to date and we are fortunate to name such an active and respected member of the investment community as our lead advisor,” says Dautrich. The company will be hosting two ten-week semesters in February and September every year. Applicants that are accepted into the program typically receive an average of $60,000 in professional services in exchange for a minor equity stake in their venture. Those accepted applicants are not required to relocate, as virtual participation is available.
