Following a record year in the cannabis industry in the US, Cabrillo Chairman, Wade Hansen, spoke toYonatan Meyer, a Partner at Casa Verde Capital, about what makes this space so attractive for investment, and what trends to watch in the next year or two.
For those not familiar, Casa Verde Capital is the leading venture capital firm focused exclusively on the cannabis industry and boasts none other than Snoop Dogg as a Partner of the firm.
Yonatan sat down with Wade to discuss the opportunities and complexities of this industry and what lies ahead for the cannabis industry.
1. What was the inspiration for establishing a venture fund focused exclusively on the cannabis economy?
The firm was founded in 2015 to provide much-needed capital for one of the most compelling investment opportunities of our generation: the prospect of harnessing the unique versatility of a single plant to disrupt multiple industries simultaneously and compete for market share with the giants of tobacco, alcohol, pharma, and CPG, among others. Having identified the financing needs for companies across the cannabis value chain, Casa Verde has positioned itself to be a key partner and thought leader for the cannabis industry well into the future.
2. What are the key themes behind your investment strategies?
Distinct and Lasting Market Need: We target companies solving long-term, structural industry problems that will persist both pre- and post-federal legalization. We aim to invest in businesses with staying power that will continue to serve a vital need for the industry over many years.
Competitive Moat: We are interested in companies that have high barriers to entry and difficult to replicate models, due to factors such as a regulatory framework and requirement such as Metrc, two-sided platform scale like LeafLink, or entrenched customer relationships and high switching costs such as Green Bits.
Scalability: It is also critical that the businesses we invest in demonstrate scalable growth potential. As such, we generally avoid capital-intensive, commodity-type businesses like cultivation or manufacturing, and focus instead on technology platforms, consumer brands, and similarly scalable business models. Technology and service platforms like LeafLink, Dutchie, Eaze, and Vangst are able to grow clients and customers cheaply given the low unit-level costs of their core operations.
Other priorities that drive our investment strategy are economic fundamentals, market leadership, management teams, etc.
3. What innovations have been required to address the unique regulations and challenges of this industry, and how does that create opportunities in your fund?
State-level legislation differs from market to market and is constantly changing. Because of this, compliance platforms like Metrc are paramount to the long-term success of the industry, as they help regulators maintain transparency and ensure control over the entire supply chain. While many other industries see compliance as a small part of a bigger picture, for cannabis companies, it is quite literally foundational. Therefore, compliance-driven solutions like Metrc will see high demand for years to come, as they sustain the continued reliable functioning of the industry itself, by ensuring consumer safety, marginalizing the black market, tracking tax dollars and the supply chain itself in real time.
With the prospect of full federal legalization, and ultimately the approaching global expansion of cannabis commerce, we expect that compliance-based businesses will be seen as an indispensable cornerstone upon which the entire industry relies.
Historically, the fragmented regulatory environment and the incredibly high stakes of running afoul of it have served to deter larger financial institutions from participating in the capital markets. This dynamic has left an opening for companies like Bespoke Financial to provide cannabis businesses with ready access to working capital while ensuring compliance. Until SAFE Banking is passed, cannabis-specific financing solutions will be critical to the industry as traditional institutions continue eschewing the space. And once SAFE Banking and federal legalization eventually become law, Casa Verde still expects the original capital providers to remain successful, having compiled a track record of cooperation and goodwill with the cannabis industry in the face of persistent, significant risk.
4. What does the infrastructure of the new cannabis economy look like and how are your portfolio companies positioned in this landscape?
Any attempt to describe the infrastructure of such a rapidly-evolving economy would do well to ground itself firmly in the immediate historical context to fully comprehend where we are and how quickly we got to this point.
When we began investing four years ago, the political risk was heavy and palpable, while experienced management teams were few and far between. This first wave of businesses experienced disjointed retail operations, ephemeral brands, low capital investment, and regulatory inconsistency. We invested in some of the businesses best positioned to support and scale alongside the geometric growth of the industry as it matures.
Today, there are 18 US states with fully legal recreational markets, plus Washington, D.C. The domestic political attitude has become more favorable, with over two thirds of Americans currently favoring full adult-use legalization. As political risk continues to recede, there are now more experienced management teams, and winners are more easily identified on a B2B level because of the proliferation of data. The confluence of these trends lead us to believe that commercial cannabis is an even more promising investment environment than it was four years ago. Granted, while there remain vast stretches of blue ocean with unmet business needs, the outlines of a regulatory regime have coalesced to the point that companies up and down the supply chain must refocus their investments and attention on improving operational efficiency to remain competitive. The market we’re currently investing in is certainly more mature, but we believe that is an advantage for our longer-term focus on foundational businesses.
5. How is Casa Verde shaping technology surrounding the cannabis industry by investing in it?
We focus a lot of our attention on the ancillary technology ecosystem. At the time the fund was raised, it was both a practical and strategic choice. Practically, the political and legal landscape was even more tenuous and uncertain than it is today. Strategically, investing in ancillary technology companies allowed the fund to back the foundational businesses that would become the infrastructure of the entire industry. By focusing on the backbone, the fund could stay agnostic on specific cultivators / distributors / retailers and simply bet on the rising tide. These firms are more scalable, with more sustainable long-term prospects than the plant-touching businesses, which have – until recently – been the darlings of international public markets.
6. Where is innovation happening as it relates to the flow of cash through the cannabis industry to deal with Federal regulation and banking’s inability to service the sector?
While the cannabis industry awaits the entrance of larger financial institutions post-SAFE Banking, a large demand has emerged for financing solutions to address capital constraints that arise from growth. Businesses seeking non-dilutive financing have very few debt options. Portfolio companies like Bespoke Financial and LeafLink are addressing this critical need for working capital with financing solutions tailored specifically for the cannabis industry. By leveraging these solutions, the cannabis industry, which has historically focused on profitability, can now prioritize growth.
7. How do you envision the shifts in infrastructure, technology and payments carrying over to other industries?
Many of these robust compliance and payments solutions that have been incubated within the cannabis industry have analogues in other industries. Whether it is connecting companies to regulators such as Metrc or to other businesses like LeafLink, these technologies have broad applications allowing for modification and conversion for use in other emerging markets or highly regulated industries, like pharmaceuticals, chemicals, and firearms, among others. Moreover, from a public relations and best-practices perspective, the hyper focus on creating sustainable infrastructure and ingraining a culture of compliance will provide a model for success for other industries to replicate, to the extent that they have similar regulatory or financing constraints.
8. Where is Casa Verde focusing in 2021?
We believe that in this second phase of cannabis commerce, increased professionalization combined with an industry-wide pivot to growth and efficiency will only feed the need for tech-based solutions that help companies become better, more resilient versions of themselves. In addition to serving a distinct customer need, ancillary technology fits the scalability profile that Casa Verde looks for in all its investments, as it relies less on human / physical infrastructure and can thus expand rapidly across geographies with lower capital requirements than plant-touching companies.
We also believe the aforementioned trends will allow the true “winning” consumer brands to shine and gain position for outsized market share. Like the CPG space, brands are becoming increasingly useful and valuable to consumers as they look for differentiation among cannabis products. We will continue to evaluate and invest in ancillary technology companies as well as consumer brands with strong entrepreneurs, proven track records, and high growth opportunities.
9. What changes do you expect to see in the industry in the next five years? What does the future of investing in cannabis look like?
Within the next 5 years, we expect to see widespread legalization both domestically in the United States and internationally, particularly throughout the EU. This sweeping legalization will bring with it a mass entrance of traditional CPG, large financial institutions, and other players from outside of the cannabis industry who will leverage large pools of capital to gain quick and broad exposure across the space. Because of this, the industry will look much more mainstream as both consumers and businesses embrace commercial cannabis as a fully legal and destigmatized opportunity.
10. Why is compliance so important at the state-level today?
Even in state markets where cannabis has been legalized and retail sales are occurring, there are still concerns around health and safety compliance and gray and black market activity. Without tracking the entire supply chain, there are multiple avenues for companies to illegally manipulate their product or financials.
Over the past several years, a number of cases have arisen involving companies introducing unregulated pesticides or producing cannabis outside of the regulated supply chain. Not only are the profits from such illicit activities likely to go un-taxed, but insofar as black market operators succeed in this new market, these gains come directly at the expense of those who play by the rules, while undermining faith in the system and the premise of legalization itself. This danger is what necessitates such a large macro-focus on compliance across the cannabis industry. Companies like Metrc are providing solutions for regulators and consumers to receive transparency while allowing for companies to remain assured of continuous compliance.
11. How is Casa Verde the conduit for institutional capital?
Because of our reputation as one of the pre-eminent investors in the cannabis industry, Casa Verde has been fortunate to be able to create critical relationships with some of the largest VC and PE firms in the world, as well as traditional CPG players to support subsequent funding rounds for our portfolio companies such as Tiger Global, Founders Fund, Thrive Capital, Dragoneer Investment Group, DFJ Growth, and Imperial Brands. We work to destigmatize the industry by actively educating major players from other industries so that they can better grasp the full scope of the cannabis opportunity. The results of these efforts have been profound, enabling institutional capital to make their first bets on the industry by way of Casa Verde’s portfolio companies.
About Cabrillo Advisors, Inc.
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