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Cannabis stocks are all the rage. IPOs valued at billions of dollars are popping up on Wall Street and the Canadian Stock Exchange, and private equity funds are investing multiple millions in cannabis companies.
If you’re watching all this from the sidelines, wondering if you’re missing out on a golden opportunity but not sure what to do about it, you’re not alone. Many potential investors believe they don’t have the cash to get in the game, and in some instances they’re correct. Due to regulations, many funds are not even permitted to accept investments for less than $200,000.
On this week’s Green Entrepreneur podcast, we talk to Codie Sanchez, a partner at Cresco Capital Partners, about how to invest in cannabis companies even if you don’t have a lot of cash. This is a full transcript of our interview.
You started your career with lots of spreadsheets and more traditional investing, and have now transitioned to the cannabis industry and business. I’m curious to know why you made that change.
I think there might be some parallels to a lot of people’s story in this space in that once you figure out investing, and particularly if you’re trained to do it, once you figure out how to find dislocations in markets – something where everything just doesn’t fit together perfectly so that people smarter than you and who have more money than you do can take advantage of it – when you see those dislocations, you learn to jump on them quickly. In investing we call this arbitrage. That’s when something typically costs less than it should or costs more, and you can take advantage of those things happening.
So I saw that happening in this space. I’m certainly no genius or clairvoyant in it; it really just came down to the math and looking at math in this space as an investor and saying there’s a real, tangible generation of wealth creation event happening here.
But I have to say that probably math would not have been enough if I was going to call my mom and tell her I was going to go into the cannabis game. [laughs] It was a little bit deeper than that.
I started off my career, even before I was traditionally investing at firms like Goldman or State Street or Vanguard or doing some of the venture stuff, I was actually an investigative journalist. I don’t know if we talked about this before, but I worked at the U.S.-Mexico border. We were writing stories about human trafficking and drug smuggling.
Wow, that’s intense. What part of the border?
The part that you would probably know is right across the border is a place called Juárez, [across] from El Paso, Texas.
Yes, it’s notorious.
Exactly. They call it Ciudad de la Muerte, the city of death. It’s a pretty tough place to be young and female. Thy have hundreds and hundreds a year of murdered women there for some reason.
But what that taught me, besides to be relatively jaded, is that as an investigative journalist you really don’t take anything at face value. You have to question everything, find the root of why things happened, and then dig deeper. You really can’t let stigma get in the way, or people’s assumptions; otherwise you’ll never write a good story.
This tendency taught me to do this deep diving, and that’s when I got to the math, and also a little bit of the heartstrings. I think anybody in this space has a story – and I know you’ve shared some of yours too – about the impact that it’s had. I dug into that a little bit in particular with veterans, which we can talk about later. We fund an initiative called Texans for Veterans, which is trying to give veterans in Texas access to research and medicinal marijuana.
How many times in your lifetime do you get a chance to be a part of a generational wealth creation event where there’s massive dislocation so little guys can play too, because the big guys aren’t all allowed to with their legal background, and then in tandem you get to make a huge impact – I think in multiple areas, but certainly with mental health and veterans, which I’m very aligned with since my partner is one.
Your partner is a veteran?
Yeah. My significant other. He’s active duty military right now, in the Navy.
Has cannabis made an impact in his life?
No, they’re very, very highly regulated. He does some particular things for the military in which that’s not allowed. Actually, for the military overall, if you use cannabis, you can lose your VA benefits, be fired. There are huge repercussions. But what he and I both have done is be a part of this nonprofit that essentially is trying to push for access for veterans.
He’s the first one to say, “Gosh, if I could use it, I absolutely would,” for the chronic inflammation that you get from being deployed so many times, and certainly from – everybody comes back with some type of hyperawareness and certainly that stress that comes from being in a warzone.
And you’ve seen firsthand that cannabis has helped veterans with those symptoms you’re talking about?
Oh, absolutely. There’s one gentleman whose name is Keith who’s a bronze medal winner. He served in three different branches of the military, lifelong veteran. He was actually here in D.C. when the Pentagon was hit and was one of the first responders because he was a trained nurse. He’ll very publicly say – so I can say his name – that without cannabis, he doesn’t know if he’d still be around because of the opioid cocktails that they were giving him. He just wasn’t reacting well to them. He had a lot of anger and anger issues.
Now with cannabis, he has a lovely family and wife and a cute dog. I think, while that is not quantifiable because there’s not enough research on it, there is certainly a lot of qualitative human interaction that you can see that it makes a difference
I know there’s no such thing as easy money, but I think people who are not necessarily directly involved in the industry, whether they’re touching the plant or not touching the plant, might have some interest in investing, at least, in the industry. That is what you do. Your clients are generally big spenders, right? To get into your fund – tell me a little bit about the fund that you work with.
It’s called Cresco Capital Partners, and it’s a private equity or growth equity fund in the cannabis space. What’s interesting is due to the regulations around a lot of how these funds are structured, they actually mandate that you have higher minimums, typically because you’re only allowed so many investors in the fund and they have to be accredited. So even if I wanted to allow everybody in at $5 or $10, it’s very hard to do that at this stage.
Now, that changes, and as you get more funding you can create a more complex fund business. But at this stage, this is our second fund, which is $55 million. The first one was around $25 million. We have co-investments, so we’re probably right around somewhere like $100 million in assets. The minimum is $200k, so that does make it difficult for everybody who wants to invest. It’s still one of the lowest in the space. I’ve tried to keep it lower. It’s an administrative nightmare to do so.
But I think the whole point of this industry is democratizing access, right? I think that’s what we’re going to talk about today – how to do that, whether it’s investing with somebody like us, or ramping up to invest with somebody like us, or doing it on your own. We can talk about all of the above and how I started investing in cannabis.
Let’s talk first of all a little bit about what you do with the money that people invest with you. Who has Cresco invested in and some of the companies that are under your purview?
This is where I get excited. There’s nothing more fun than giving the lifeblood, which is capital, to really incredible organizations. In this industry in particular, it all moves so fast, you get to see what that money does that you give these companies quickly and all the people you’re able to serve one way or the other.
We’ve invested in a lot of interesting companies. We’ve had about seven exits thus far, which means companies that have been sold or gone public or done some sort of merger. We invested in some names probably people know, like Acreage, one of the biggest companies out there, who’s had a little bit of news.
They recently merged or were acquired by Canopy Growth.
Yeah, for a tiny amount, $3.5 billion. We’ll see. It’s the right to buy them, so it’s pending that legalization happens – but you covered that well.
Then we invested in GTI, which other people probably know. We invest in a company called Ebbu that was bought by Canopy Growth for just shy of $500 million. We invested in another company called Form Factory, which was also sold. That one’s interesting. It’s kind of a co-packing business and a branding company. And then we have lots of up-and-coming companies in the portfolio, like Prohibited, which is a big media company. You guys have done stuff with them. I think that company is fascinating because they’re doing brands too and leveraging this medium platform to maybe figure out who will be the future brands of cannabis. And then we invest in another company called Sublime. Great product.
I love their music.
Oh, the music? [laughs] Well, these guys are not of the ’90s. They were probably born around that time period. But they do these little things called Dosies, which are micro-dose, almost. They look like Tic-Tacs. They’re manufactured by the same manufacturer of Tic-Tac to do the candy coating that they do. So they taste like orange Tic-Tacs, and they’re great for sleep. My grandmother has a problem with her hip and she can’t sleep, so she uses Dosies now. I got turned onto it. One of my partners, who’s another woman and a mom, said after you have kids you really never sleep again, and these helped her. So I thought it might work for my grandma, too.
You oversee a $100 million dollar fund. I’m sure you get pitches all day long. What are some of the main things that you look for in a company?
I’ll tell you one thing, my inbox never gets to zero, that’s for sure. We’ve screened over 1,800 companies and hundreds a year, and what we look for is twofold. One, we’re not seed stage, meaning we don’t invest on the early side of the business like a tech company might when there is no revenue yet or no product. We invest in the growth equity space. Typically we’re looking at companies that are already generating anywhere from $1-$20 million in revenue. We need them to be revving a lot in order for us to invest.
We definitely are interested in companies that first and foremost – which I think any good investor will tell you –you’re really betting on the team. The idea is important, but as any entrepreneur knows, there are going to be pivots, there’s going to be heartbreak, there’s going to be backstabbing. It’s like Lifetime TV if you want to go run a company. You have to pick people that are resilient to do it. So we do a ton of time on due diligence on the teams. I was just talking to a big MSO today, actually, and one of the sales points for them –
That’s a multi-state operator, for those taking notes at home.
Good one. The thing that sold me was they are a multi-state operator and their COO is one of the smartest operators I’ve ever seen. That’s always a good trick if you’re looking to invest: figure out, can they actually operate? Because cannabis is not a simplistic business. It’s highly complex. You want to make sure you have somebody that can handle it.
Let’s get to the million dollar question, which is: I don’t have a million dollars, but I want to be a player in this business, or at least I want to invest in this business. Where do I start? What do I do? If I know that a lot of the really successful funds such as yours have a pretty high bar of entry, unless I have $200,000 – which I don’t.
I think the goal here is to do just that, to get your seat at the deal-making table and to get you deals and access into the space that really outstrips your network. The secret is, I really believe wealth is made on the private side. If you look at anybody who has accumulated wealth – not just rich, but real wealth – it’s because they’ve done investing either on real estate or in their own company on the private side. That’s just the “why” of this even mattering.
Explain that a little bit to me. On the private side, meaning they’re not public companies that they invest in?
It’s very hard to make generational wealth or real wealth by investing in public stock markets. You can see that very quickly. Say you put all the faces from the Forbes 100 list, billionaires out there, on one page. What you would notice if you went through all their bios is not a single one of them made their money from smartly investing in public stocks.
The brilliant Warren Buffett, Carl Icahn, they only move when they have three things. The first one is an unfair advantage. For instance, Carl is an activist . He can go bother the founders of the company until they make changes to the actual company and make him money. So you need an unfair advantage in some way.
Your unfair advantage, Jon, might be that you have really incredible deal flow because all these entrepreneurs want to pitch you all the time. So you might be able to see trends and know people and be a connector because of all this deal flow that you see.
So one is your unfair advantage. That’s what you need. The second thing that you need is intimate knowledge. Not insider knowledge. You can’t have anything illegal. But you need intimate knowledge of the industry, the company, whatever you’re investing in. You really can’t get that with public stocks because otherwise it would be insider information.
So intimate knowledge meaning you have some access to their financials, or just that you know an industry intimately?
I believe access to their financials or access to the actual founders or access to their actual distributors. Something beyond what the news and Jim Cramer could scream at you on CNBC. So you need that.
Then the third thing that you need is the ability to affect the outcome. That’s how we invest on the private side because by giving them capital, we can talk to them about how they’re going to exit, who’s going to buy them, if we could help them structure the exit on the backend, all of that.
Those three things are really key to massively investing. But we’re talking at a super high level. We’re not all going to have that on Day 1, but you should always have that in the back of your mind. It’s why I’m really worried about anybody who’s a price speculator.
What does that mean?
Price speculator basically means – everybody knows about the cryptocurrency crisis. The housing crisis really was no different, and there was also the internet bubble, and then if we go way back there was tulip mania, which was where people were paying hundreds of dollars for a tulip bulb. Nuts.
It’s all the same thing, though. It’s all called price speculation, which basically means people invest in something just because they think the next guy is going to buy at a higher price and they’ll be able to sell after he gets in. But they don’t believe that there’s real value in what they’re investing in. They’re price speculating that the price is going to go up no matter what.
We’ve got to be careful about that. There’s a little bit of that in cannabis, so on the public side I’m really cautious about investing. We talk about price a lot. Warren Buffett talks about that too.
It seems really out of whack right now on the public side, the valuations of the companies.
Yeah, I think so. I think you’re nailing it. I don’t have a crystal ball. If I did, we’d be on my yacht while we’re recording this podcast. But what I think is important to think about on the public side, or any time valuations or the price of stocks is concerned, is it might be really exciting the numbers that they’re at, and they might do all the things they need to do in order to grow into that price, but I’m always looking at the downside.
Does it make sense for the top 10 cannabis stocks to be worth 4x more than the top 10 biotech, tobacco, pharma, or healthcare stocks, from a price-to-sales perspective (which just means the price that they’re worth versus how much they actually sell)? I would say I don’t know. It’s a growth industry; it could be, but probably not. The key to investing there is always buy low, sell high, and train your brain on that, to focus on price first before excitement.
You gave us the three attributes or the three keys to think about and ways to position yourself. You had also mentioned you need to make relationships, you need to network outside of your network. How do you recommend doing that?
Codie: I think there are a couple different ways. One, if you want to invest, in my opinion, or if you want to do anything – say you want to play baseball. The first thing that you should probably go do is watch a baseball game. Then you should probably go try to play a baseball game amongst you and your friends. Then you should probably try to figure out who are the reporters that cover baseball. Then you should probably try to go to three or four conferences of people who are talking about baseball or selling baseball gear or something related to baseball.
It’s not dissimilar to investing. You go where the game is played. In cannabis, in my opinion, that would be places like ArcView, which is kind of like AngelList, if you know what that is. AngelList is where you can go and invest in lots of different startups, but at very low dollar amounts. ArcView is similar but for cannabis, and they also have conferences. So I think you go to a couple ArcView conferences, you join that.
They should be, in my opinion, getting smart. They’ve got to listen to all the podcasts on Green Entrepreneur, and then go over to CannaInsider podcast, and then go and look at some of the investor intelligence reports like Cohen. Don’t spend a lifetime; do this in a weekend. You can binge-listen to a couple podcasts, binge-read all the investor intelligence on MJBiz or Green Entrepreneur or Cohen.
Then you start reaching out. Then you try to go to an ArcView event. Schedule one. Then you email all the speakers at the ArcView event. Give yourself a timeline. You have 30 days to get smart on it.
What’s crazy is, after you do those three things – listen to a ton of podcasts, read as much as you can about the industry, and then get hooked up to an industry group and go to one of their conferences – you are smarter than 90% of the population on cannabis.
What’s the conversation you have with these people that you connect with through ArcView or these different platforms that you have recommended? Is that the moment when you present yourself, about who you are and what you have to offer?
I think you have to first have a belief that I’ve found to be true across every industry I’ve been in, which is that if you go where the game is played because you want to be in the game somehow, you will have opportunities presented to you that you never otherwise would.
That’s my promise to you. If you do these three things and you go to where the game is played with a curious and open mind and dig in, you’re going to have stuff come up that you didn’t exactly realize how the opportunity was presented to you, and you wouldn’t have picked it exactly this way, but it’s even better than you thought.
If you have that belief, then when you go, I think there are two things that are super important. One is curiosity. We’re all egoists, right? I like to have my ego stroked. I’m sure you do [laughs] Never. But the truth is, if somebody comes up to me and says, “Codie, I’ve been reading your stuff, listening to your podcast here, I saw you speak here, and I’m really curious as to what you meant here” or “I’m really curious, what do you think about this?” or “how would you enter this space?” or “why did you do this particular move?” – those small, tailored questions to somebody’s ego, showing that you’re truly curious, not faking it – that goes really far. If you do that to five or ten people, the likelihood is you have two to three to four who want to engage with you. So that’s where I’d start. Curiosity.
But then I think the second thing you’ve got to do if you actually want to get in – I just interviewed an analyst today, actually, for our firm. The way he came to me was similar to this. Reached out, said he had listened to a few things. But he did something different that I loved, which was “I’ve been doing research and analysis on the space. I’m in grad school right now and did some models on vertically integrated companies” — which are companies like Acreage, let’s say.
So he said, “I did some research on these guys. Would that be useful to you?” I was like, “Huh, that’s interesting. Yeah, sure, I’ll take a look.” I looked at it. The models were actually really good, so I followed up with him. Right now I’m looking at the lab testing space, for example. Every time somebody wants to sell you cannabis, they’ve got to go make sure that they take it to a third-party lab to see if it has any sort of pesticides in it or if it actually is THC at the level that they say it is. I’m interested in that space. So I said, “Why don’t you try to apply your thought process to this lab space?” He did it, did a great job, and I’ll probably offer him a job.
So that second key is not what they can do for you, but what you can do for them. If you provide value to people who are in positions of power, that is so rare – so rare – that they are going to want you in their circle.
Right. There’s an example of somebody who might not have had $200,000 to invest in the fund, but had an expertise that you appreciated and needed.
Absolutely. And if you’re an employee in a fund, you get an allowance where you can invest much less, so you don’t have to put in $200k if you actually work at one of these funds. Even if you’re in admin.
What are some common mistakes that you see people making?
First is be careful with public stocks. If you’re going to do it, be fine losing the money and be prepared for a lot of volatility. I say that because there are also some great public stocks, so I’m not saying you shouldn’t do it; just be cautious.
The second thing I see people do that makes me nervous is they just go and invest in one company right off the bat. Everybody’s raising for cannabis something or other these days. Even if it’s just the $1,000 that you have to invest, it’s really risky to throw that out there. It’s called angel investing, but it’s risky to do that with the first couple companies you’ve seen especially.
So I think the biggest thing you’ve got to get used to if you want to be an investor is saying “no” upfront. You’re like the hot girl at the bar. “No, no, no, no.” You want to go on a lot of first dates, but you don’t want to get married to somebody – you don’t want to give them your money – until you’ve gotten a feel for this weird industry and how to do some investments. Don’t make your first investment when it’s been given to you.
And Lord, I made some bad investments when I first started, so don’t feel bad if you did. But I think they say that the best way to make a million dollars in angel investing is to start with three, which is the same for vineyards too.
So diversify. Do a fund.
Yeah, do a fund. ArcView is the only one that I know of in the cannabis space. I don’t want it to feel like I’m doing a commercial for them. But you can go to these angel investing groups. The goal that I had when I first started investing was to invest alongside somebody that’s smarter than I am
How do you do that? Well, you can go to something like ArcView and listen to all of the companies pitch. It’s like YCombinator, which is famous in tech circles as being an incubator. Go to ArcView, listen to everybody pitch, and then see and ask them what other investors are investing in their company besides you. Then you very easily reach out to those people and say, “Hey, I’m Codie and I’m looking to invest in XYZ Cannabis Company too. Do you have a minute to talk so I can understand why you’re investing?”
Once you are in the investing circle, it’s much easier to get doors open for you. So invest alongside people that are smarter than you. You can do that by starting at something like ArcView, or I think you can do that in a fund structure.
Or you can do that by following some of the big names in this space, like what is Steve DeAngelo investing in? He probably has interesting insight, being in this industry for a long time. What is Jonathan investing in? He’s seen a lot of different cannabis companies. So look for those influencers and then see if you can get a little piece of the pie and put in a small amount of what you can.
Should we apply the same sort of criteria that you apply when you’re looking at companies? You said that you say “no” a lot. What are some red flags that you would say “no” to? What would you see in a company that you would be like, “no”? Or what should I see in a company where I might have second thoughts?
I think when you’re an early angel investor, you should never invest in a company that doesn’t have revenue. There’s too much deal flow, especially in cannabis, there’s too many companies to invest in somebody that has never made a dollar. So I would not do that. Look for companies that at least have a couple hundred thousand dollars to a million plus in revenue.
What you’ll be amazed by is they’ll take your money – you might not have much, let’s say, but if you can provide some other type of value, some sweat equity – these startups are usually strapped for cash and for help. So you can probably even leverage your sweat equity a little bit there. But I would start with don’t invest if they’re pre-revenue. I think that’s way too much risk upfront.
Then I would say also, be really careful about investing in friends who are not absolute rock stars who have already done this before. Maybe they had already run an alcohol distribution company, so now they’re going to go into cannabis distribution. That makes a lot of sense. But otherwise, be careful about funding friends early on, before you really know how to analyze if they’re capable or not. That’s where a lot of people lose money.
You said that you want to make sure that you like the team and are impressed by the team that is running a company. Will you have that kind of access as somebody who’s new to the game? It’s not like you can call up every CEO. You’ll have access because of who you are and your status in the industry, but how does one – should you just do your own research online? How do you find out more about who these people are?
One way you can get access is through special purpose vehicles. What a lot of people do when they don’t want to invest or don’t have a ton to invest is they might pool their assets. It’s pretty inexpensive. You create an LLC, which basically costs nothing online these days, and that LLC allows you – say you have $10,000 that you could invest, and a couple other people have $10,000 that they could invest, and you pool it together and now you have $100,000.
You can make yourself sound very fancy. “I am in charge of Cannabis, Inc., which is an LLC of investors in the cannabis space. We’re analyzing companies.” So with very little work and with very little money, you can actually get a seat at the table and say “We have $100,000. We’re looking to deploy it, and maybe it’s with your company.” Then you can get better access, certainly.
Or you can join into somebody else’s syndicate or join angels groups. There’s CannaAngels – almost every city has a cannabis angel network, and if you join one of them and you pool all your resources together – but you don’t have to do the actual work – then you can get real access.
How quickly will you see an ROI?
Well, in cannabis it’s been faster than it typically is. Most venture capital or private equity funds are 5-year funds, so your money’s locked up for 5 years with a 2-year extension, meaning they can extend that 5 years by 2 years if they want to. That’s typically because it takes that long for a company to have a liquidity event, which means when they sell or you get your money back in some way.
So the typical thought is 5 to 7 years, which I know to all of us who use Uber Eats and expect our food to get delivered in 7 minutes, seems like an eternity. [laughs] But that’s standard. If you’re going to do this, it has to be long money, and in my opinion, you have to want to learn and make money.
Our first fund, we returned the capital in 3 years because cannabis is moving so fast. But that is what draws people to public stocks, I think, a lot. It’s short-term, there’s an ability to make money, and it’s a lot more rewarding to that endorphin-heavy brain of ours that wants immediate feedback loops.
If you’re seeing it too quickly, there might be something going on here that’s not right?
In my opinion, yeah. I don’t like price speculation, which I think is entirely what crypto is about. I think blockchain is different, but yeah. You always worry if you’re at an airport somewhere and the shoeshine guy is giving you stock tips about cannabis companies or about cryptocurrency companies.
The stock market is really there to help investors beat inflation over the long term. You earn your 10% per year, which helps you beat inflation, and compounding investing over time leads to you making enough money to retire, theoretically. So I’m always nervous if the stock market is looked at as an immediate cash cow. That’s probably not sustainable.
As far as the type of cannabis companies to invest in. Tell me the top 3 that you should be looking at and top 3 that maybe you should pass on?
I got offered a really interesting deal in Colombia, actually, by descendants of Pablo Escobar to grow cannabis in Colombia [laughs] I passed on that one. But in all seriousness, cultivation is something that I worry about as the price of flower or the actual cannabis smokeable plant goes down. That’s just natural. It is a plant and it is agriculture, so that’s going to happen as the markets get more efficient. So I’m not running to give money to people who are purely doing grows. I would stay away from that. I don’t think I’m the only one doing that.
I would stay away from brands that are not amazingly executed and with the ability, proven and actual, to scale. There’s a lot of little micro-brands around, and I think many of those will die a death of a thousand papercuts with California regulations and others. So be careful about that space.
I also think I would be careful about any sort of tech that mimics something that’s done by a company outside of the cannabis space. People say to me, “I’m going to be the oracle of cannabis,” and my response is, “Oracle will be the oracle of cannabis.”
I wouldn’t do that because eventually this game will change and those companies – perhaps they get bought, and there are some instances where that could be the case. But I’m hesitant of that space. So those would be the three I would stay away from.
And the three that seem to have a lot of opportunity?
Up until now — and I think it’s still the case — multi-state operators have done incredibly well. They’re out there doing a land grab, trying to grab as many different dispensaries and the grows associated with the licenses in each state for them.
So these are cannabis brands that operate in many different states because they have, like you said, dispensaries and grows in a bunch of different states?
Exactly. It’s not dissimilar to a company that distributes, like Whole Foods for instance, across multiple state lines and grows all their own produce and has a ton of white label brands and everything, like you see in Whole Foods. Not dissimilar entirely for these multi-state operators. Those I think are going to continue to have a lot of value, if done really well and if they scale. I think the small one-off operations I wouldn’t be as interested in.
The second space that we’re really focused on is everything to do with biotech in this space and the ability for cannabis to be used for medicinal purposes, whether that’s biosynthesis or being able to actually create cannabis in a lab through things like yeast or algae. It’s way above my paygrade from a science understanding perspective, but we have somebody on the team that that’s their specialty, so they dive into those companies. So I think anything in biotech and that sector could be really interesting if you get the real plays.
Then the third area is really well-executed brands who are able to scale nationally and hopefully globally. We’ve made a few of those bets in the brand space, but gosh, we have to see a lot.
Explain to our audience exactly what you mean by brands in this context.
That basically means who’s going to be the Coca-Cola, Pepsi, Frito-Lay, Blue Moon of cannabis. These are cannabis brands that will become household names, hopefully. We don’t really have any of those right now. I don’t really think you could argue that there is a nationally recognized cannabis brands
I can’t tell you the amount of times I get pitched, individual small CBD brands or THC brands, and they might have really nice packaging or make you feel good – I mean, a lot of times it’s the same product. We’re all dealing with the same brands, so why is this one product going to break out as opposed to the other hundred that I get pitched? It’s very hard as an investor to know. Is it the people attached to it? It’s the difference between RC Cola and Coke. How do you know which is the one that’s going to stand out
Sometimes it’s very hard to tell whether it’s all hype or if there’s something real there. What would be your way to dig a little deeper?
First, I would want to see real revenue. If we’re dealing with a company like Sublime, for instance, we’re talking about double-digit millions in revenue, so then you know that there’s something there. They’re able to operate, people are buying these companies.
Then the second thing — I have two good friends that run a company called Windy Hill Brands, and they sold an alcohol company that I’m blanking on, but it was something Moonshine, to the guys who created Deep Eddy Vodka. They’re just brand geniuses. So one of the things is having people in your corner who understand this space.
The most important part there is also their ability to distribute. I’ve made mistakes before in investing in brands – not at Cresco, but when I was investing at different venture funds. There was a brand that I loved and I wanted this product to exist in the world, but I realized that the management team didn’t have the distribution chops. So they weren’t able to get it on the shelves of Whole Foods, for instance, or CVS or whatever the case may be – and they didn’t have that crazy sales drive to do it.
What you really need in the brand space is it’s all about your distribution, and can you actually get your product in the hands of the distributors, or can you get your product, through ecommerce, sold online in a big way? A lot of founders are pretty lazy about getting their sales out in that way, and they want to do some of the fun stuff. Nobody likes cold calling.
Say you have no money to invest in cannabis. Not a dollar. I’ve totally been there; my dad didn’t get to go to college, so I remember having nothing to invest and worried about my debit card not going through.
The one thing that you can do is look for sweat equity into these companies. That is basically where you start doing all the stuff we talked about – meeting people, reading about it, reaching out to them via email – and then you say, “I’m Codie,” for instance, and say I’m a graphic designer. “I could do some graphic design work for you. You don’t have to pay me. I’ll just do it for you, but how about I work for some percent ownership in the company, and you pay that to me over this time period?”
Or you could say, “I, Jonathan, am really good at copywriting because I’m a journalist. Why don’t I help you write some of your copy for your website or to your clients, and in exchange for that you give me some equity?” So there are certainly ways to use your skillset as your capital. I would think about that. If you google “sweat equity,” you’ll get a million different ways to do it.
That’s great advice. Is it helpful to make a list of what you have to offer? Like, are you a graphic designer, are you a good publicist? What are a lot of these companies looking for?
I think everything. Totally all of them are looking for help from a marketing – the two things that almost every company needs immediately is sales, so they need somebody to go out and bring them more revenue, and they need help with marketing. They need, just like you said, people to pitch publishers, people to write copy.
Social media somewhat, because social media is tricky in this space. But yeah, somebody who’s good with social media in a way that won’t get them banned from Instagram.
Exactly. And you can always say, “What are things that you need to have done that are terrible, that you don’t want to do? I’ll do that.” You can also offer it more broadly if you don’t have a direct solution.
I would say what they don’t need is like “I’m really good at strategy. Let me give you strategy.” Nope, we’re executing. We don’t have time for third-party strategy. So that’s probably not as useful. But introductions to capital, sales, marketing, graphic design, anything like that is really valuable to a startup.
Would you recommend having a formal agreement with a company? What I would be concerned about is that – most people are good people, but there’s going to be some bad apples, and they’re going to take advantage of you and then sell and not give you anything. Should you have some sort of contract with them?
Yeah. We all watched the Facebook story, right? How I’ve done it in the past, before I was a bigger investor, was I would have a little something drafted up. Again, you can find this online, like a sweat equity contract.
But essentially I would have a little contract that basically says “Codie is going to provide the following services. For these services, she is going to be given X percent of equity,” for them to fill in – and it’ll be vested, which means I actually own it – “over a 6, 12, or 18 month period,” whatever period you choose.
But what I would say upfront is, “Hey, why don’t I do this for you, work for you for the next 30 days for $free.99? Free, totally. I’ll do this work for you for 30 days. I believe in what you’re doing. This is the contract that I’d like to sign at the end of 30 days for me to keep helping you like this. Does that sound good?” Typically they’ll be good on that front. You might get burned once, but you’re going to learn a ton, and then you’ll learn who not to trust next time.
I think in tandem with that, then you can actually start adding some cash components of it. Once they see your work and how useful you are, if you crush it for them, people don’t want that to stop. Entrepreneurs aren’t stupid. So if you’re doing good work and you had your little equity thing drawn up, you can ask for cash as well so you’re not slaving away for free for 5 years.
May 23, 2019 at 06:19PM