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Cannabis Startups and Investing with The CEO of Canopy Boulder

This week we headed down to Canopy Boulder – a Venture Capital Firm and Business Accelerator in the heart of Boulder, CO. We sat down with the CEO, Patrick Rea to pick his brain about the industry, investing, starting cannabis businesses, and more.

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Tell Us About Your Journey Into Cannabis?

Back in 2013, Colorado was on the verge of legalization. I had just left a year prior from a position in the natural products industry. I spent about fifteen years in natural organic foods, dietary supplements, and personal care doing venture capital, investment banking, strategic management, consulting, as well as operating and running businesses. I was getting a little antsy, so I left and started looking at the cannabis industry to identify some areas where an investment fund could have some impact. Ancillary products and services seem to be a good spot.

There were a lot of businesses starting, people were growing flower or creating edible brands or oils and then dispensing, but there were not a lot of service providers. There wasn’t data, there wasn’t software, there wasn’t the hardware that could help them. So, we decided to launch an early stage investment fund that would operate in the form of a business Accelerator much like TechStars.

We started researching the industry and partnered up with the ArcView group, which is a big investor forum; angel investor group in the cannabis industry. We raised our first fund and we were off to the races. About 120 investments, and probably 93, 94, 95 companies later, here we are.

Talk to us a Little Bit About Canopy Boulder?

We’re early stage investors and we don’t believe in just writing checks. We want to make investments with capital but also bring the companies into our office and work with them through a 16-week business accelerator program. We just closed on four and a half million dollars and are raising more to operate and make investments over the next two years.

In the past, we have only done ancillary products and services, now we’re also expanding our focus to include CBD and hemp. We saw it coming and we’ve talked about it for a long time, but with the Farm Bill passing we felt like there was going to be significant changes in the space that would make it a better investment environment for us.

What are Some of the Biggest Gaps in the Industry you Would Like to See Filled?

One of the biggest spaces that feels like a big a gap is in social use. Having a place to consume cannabis. It’s legal in certain states to cultivate, to process, to sell, but there are no legal places besides your home really to consume, so it’s sort of that last mile.

We’ve actually invested in a company called The Grove. The founder, John Moore, I think he’s the world’s leading authority on social consumption. He’s got a fantastic team and they’ve already executed a number of events and are securing a space as well as creating a marketplace for event planners who are looking for spaces and help to make these events happen. I think that’s a very ripe space for entrepreneurial activity and investment but it’s also hard. I think of it as a restaurant, these are low margin businesses, so it’s not a layup, it’s not easy.

The other thing that I talk about a lot is the need for data and analytics in the industry. I feel like every company who pitches to us, they include data as some asset in the business right? But more often than not it’s not their primary revenue generator, ‘so what?’ Right?

What we want to see is more data scientists and analysts combining with business people to look at the industry and say, ‘hey, we can help’. We can help you get to this piece of your business plan which you’re not getting to because you’re chasing dispensaries to buy your software. You’re working with growers and making sure that your app is working with them. Data is valuable, but you’re not doing anything with it, so let’s help you. We invested in a company called Cannabis Big Data. The founder is Henry Finkelstein who does exactly that and we’re very excited about what he’s doing. He is sort of extracting out the insights and helping companies in the industry monetize the data that they’re collecting.

We’re all trying to sprint 24 hours a day in the cannabis industry. Sometimes there are these big gaps, like consumer data, preference data, trial data, that just don’t exist or are hard to produce because we’re still peeling off the layers of stigma and federal prohibition. It’s not as simple as one might think, but it’s out there and there’s interest. I think that keeps us moving forward.

What is one of your biggest heartbreaks in a company that you wanted to make it?

We have some interesting stories obviously with such a high volume of investments. One company (I won’t name) was really sad to see it not work out. It was a company that was working with budtenders and education. The were doing some things that fit a business model that existed in another space and was very successful.

When you’re focusing, when you’re trying to launch a business, there are all these competing interests and noise. You’re always looking for the signal in that noise. ‘What’s the signal we need to keep moving towards?’ It’s not uncommon for entrepreneurs to get mixed signals and head left when they should head right. Essentially what happened was the company took their foot off the gas going left and meandered right. When they had a partnership opportunity come to fruition after a lot of work, that partner was like well, ‘how far are you left?’ And they were like, ‘well, we’re this far’, and the company was like, ‘well, that’s where you were three months ago, what’s going on?’

Another company that I can actually name that is an interesting story is a company called Tradeiv. That was one of our first investments as a wholesale marketplace. So, licensed legal cultivators would create profiles and then upload products for sale to this marketplace like an Amazon or in Alabama, and then licensed brands or dispensers would come on and buy. Sort of like a marketplace. It’s a great story, I recommend everyone to look up in Inc. Magazine (see here).

It went from being worth twenty-two million dollars, just raised from four or six million bucks to essentially zero. One of my friends said it was like multiple ‘Black Swan’ events. You try to control as much as you possibly can, but you can’t control everything. There are sometimes decisions that you make as a founder that you think are going to be inconsequential. Even though others may be saying, ‘hey, let’s pause here and have a think’ but you as an entrepreneur, you have to keep moving forward, and then it comes back to bite you.

It tells the story that successful entrepreneurs usually have some experience or they are wise enough to surround themselves with people that have a lot of experience, and are almost as passionate about what the entrepreneur is doing as the entrepreneur is. It really speaks to the power of an experienced team and strong advisors.

If you’re an entrepreneur or you want to be an entrepreneur, maybe go work for a start-up. Get first hand experience. Build your adviser network through that experience, talk about what you want to do with these people. Be open about what you want, and if it’s the right thing, people will gravitate towards you. Know that you can’t do it alone, you will need help.

And that is Essentially What Canopy is For, Right?

Yeah, that’s what we’re trying to do here. The mantra from TechStars that we’ve adopted is ‘do more faster’ and we want to make sure the entrepreneurs come in and they’re exposed to industry professionals, advisors, and investors. There’s a village that gets built around them to provide stability and a feedback loop that they can trust so they won’t get themselves in trouble.

For Balance Sake, One of Your Favorite Success Stories?

I have quite a few which is nice and I think it speaks to what we’re doing here but also to the opportunity in the cannabis industry. Investors should be having real moonshot experiences with companies in the cannabis industry because it is growing fast. So long as you don’t have some catastrophic failure, you should do okay.

One company doing really well is BDS analytics. They are collecting check-out data from dispensaries and then milling it together so that they can present it. It’s market intelligence. They also get consumer panels and things like that.

Another company called Pot Guide is doing really well in Denver. There’s Weed Maps, there’s Leafly, there are a couple other sites that are designed to provide information to consumers and we know what their traffic statistics are. Pot Guide is not that far behind and is up-and-coming really quick. There are millions and millions of unique visitors every month to their network of sites.

Another is a payroll processing and human resources management platforms. I always use this as an example in this industry and in most industries. There are some opportunities that may seem mundane and simple like payroll processing, but you don’t want to step over simple to get to sexy when simple is just fine and dandy. Payroll processing is an incredible unit in economics, exit multiples, and lifetime customer value metrics.

Lastly the other company we are really excited about is Front Range Biosciences. They do tissue culture propagation, so they create clean clones for cultivators and they’re developing a ton of IP around that and the processes. What they do better than anyone else is this clean clone propagation so the clones are disease free and will not introduce disease into the cultivation facility. But they do it at scale.

There are many businesses in BioTech like Front Range and Bio Synthetic Production. You hear that some of these companies are doing synthetic production of Canabanoids. They’re creating cannabinoids from yeast in a lab. That’s so cool for the minor cannabinoids right? The canabanoids that are hard to find expressed in a plant, and hard to genetically breed to get a high expression of a certain cannabinoid. There are definitely opportunities there but it’s easier to do it in the lab.

Trying to take it into vats and ponds and dams at large scale is very difficult because it’s a living, organism, like kombucha, its ever changing. To zero in the process is hard. Front Range is doing a great job of taking their cloning tools and techniques and operations to scale.

That leads into the Idea of Constructed Cannabis, can you comment on that?

We’re not sure at all what mixture of cannabinoids and terpenes produce a desired result. We have anecdotal and observational evidence (tons of that) but when I speak to practitioners, whether it’s medical doctors or naturopaths, they’re always asking about dose and that’s just not out there.

So, we need to do more that. We need to understand how a combination of cannabinoids and terpenoids generate and produce a specific outcome in an individual and what all the factors are. I think thats getting back to one of your earlier questions, ‘what opportunitiy gaps are there?’ I think there’s a big gap for science, there’s opportunity for clinicians and academics to come in and do their best with this crazy, awesome, world-changing plant, and all the elements to find out what really does work. There’s a lot of opportunity for that.

Theoretically, a private investor and I want to get into the game in Colorado, what are some things we should be looking at? How does that process work?

The first thing you want to do is start showing up. You want to start getting out of your phone and your computer and the articles online because that’s a media machine, that’s driving an agenda. What’s happening in the headlines is often a misrepresentation of what’s actually happening in the industries, so I’d encourage everyone to start showing up.

Go to meetup, go to Eventbrite, find events in the industry and start being present, have the conversations, join ArcView. Join this great investor organization, raise your IQ, your cannabis IQ, understand the dynamics, understand that wholesale prices are falling and how that impacts investments, read Venture Deals (a great book about early stage investing), become a student of investing in the cannabis industry, find people that know more than you do and collaborate with them, and then started identifying where you’re comfortable in making investments.

I don’t encourage anyone to shoot from the hip. We did a year-long due diligence effort to understand what we wanted to do and when I speak to entrepreneurs and I speak to investors and they talk about a listening tour, that is probably the smartest thing you can do. A Mentor of mine said, you have two years and one mouth, use them in that order.

You spoke at the SXSW CannaBusiness Track this Year, How was it?

There were a lot of familiar faces from the industry. The audience was just like sponges. A lot of good questions, a lot of interest. I think when we go to states where there is an existing legal framework, you know, you go to Missouri or Arkansas or Tennessee, it’s not a Colorado, Oregon, California, Nevada type place. There are a lot of questions. I never really tire of doing that stuff because again, every conversation, every presentation, every brave maverick of an entrepreneur investor that gets out of their chair at work and goes to The SXSW cannabis track is moving us closer to the end of this drug war and the cannabis prohibition, so I’m excited about that.

I thought the content was great. I thought the turnout was really good. I mean, I went down there a year ago for 420 and they had the cannabis entrepreneurs conference. That’s a first one and Hugh Forrest, the guy who runs the programming for SXSW produced it.

Are you a Cannabis User Yourself?

Yes. Vaping right now. I like edibles as well. Consumption for me is very specific. Around 2011,12. I was getting sick all the time. I went a doctor for my checkup one year and he said, ‘well, I have given you antibiotics nine times this last 12 months’. We were trying to try to figure out what it was, and he had no clue. I went to a naturopath and she struggled to figure it out. Long story short, we figured out I wasn’t getting enough sleep and I was over exercising, pushing my limits, and not sleeping enough.

They started giving me sleeping pills and I didn’t feel great about taking a sleeping pills. I was on a bike ride with my one of my buddies and he’s like, ‘what you need is an indica’, and I was like, ‘what’s an indica?’ Maybe four or five days later, he swung by and he said, ‘here you go’. So I gave it a try and put the kids to sleep, went to the garage, a couple puffs, felt pretty good. When I laid down I slept like a baby.

I worked in the supplement industry for 15 years (dietary supplements) and I used to joke that it was the world’s largest faith-based industry. Take a multi, take a seat, take a knee, or whatever and hopefully it works out for you at some point. But with cannabis, there’s a really tight feedback loop, right? You can assume, you feel the effects, and so you loop back around through your trial period to repeat use.

What are your one-year, five-year, and ten-year predictions for the cannabis industry?

One year, I think that we’re going to see cannabis use become something that’s talked about almost every day in the public forums in DC. I think we’re moving from an advocacy to a government relations phase in the industry. We’re here, we’re going to stay. Now how can we work, what safe harbor can we give to the federal government for legalization to move to the next stage which is what I predict in the five-year.

I don’t think we’re going to see much happen between now and the next presidential election. The States Act can be passed in the house but I don’t think McConnell is going to bring it up in the Senate, it’s only going to move forward there. We’ll see though. I’d love to be wrong but I think we’ll see more action after this presidential cycle or very near to it if ‘somebody’ needs to push some votes over the edge to get reelected.

I think in ten years, we’ll see the traditional dispensary model start to go away. It won’t have the same regulations and requirements for compliance. I think in ten years we will see CBD as a primary functional ingredient many foods. I think we’ll see more and more countries globally legalizing.

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