Using Data to Help Cannabis Investors with Emily Fata

Emily Fata Green Pioneer

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Matthew: Hi I’m Matthew Kind. Every Monday look for a fresh new episode where I’ll take you behind the scenes and interview the insiders that are shaping the rapidly evolving cannabis industry. Learn more at www(dot)cannainsider(dot)com. That’s www(dot)canainsider(dot)com. Are you an accredited investor looking to be part of some of the most sought after private cannabis investment opportunities? Get on our free private investment alert service at www(dot)cannainsider(dot)com/invest. Once you have subscribed to the investor alert service you will get access to curated opportunities that the public will simply never see. Again that URL is www(dot)cannainsider(dot)com/invest. That’s www(dot)cannainsider(dot)com/invest. Now here’s your program.

This is Matthew Kind with just a quick announcement. You may have noticed that my voice at times is not loud enough during a few interviews and I just want to let everybody know that that issue is going to be resolved very shortly so I appreciate your patience. Now to your interview.

Cannabis companies raise money, create products, and make decisions based on data. To help us understand how cannabis companies are using data to make informed decisions is Emily Fata. Emily welcome to CannaInsider.

Emily: Thank you. I’m happy to be here.

Matthew: To give us a sense of geography can you tell us where you are in the world today?

Emily: I’m in Denver, Colorado.

Matthew: Great and before we dig into the data in the cannabis business tell us about your background and how you got started in this crazy world of cannabis?

Emily: Yeah absolutely. So my background is actually in finance and I moved to Colorado in the summer of 2013. So this was about six months before the adult use markets opened up here and I had previously worked as an analyst for a private equity firm. So I moved out here to start my own business and I put an ad on Craig’s List to say hey I can do financial models, write business plans for companies looking to raise capital, and the first person who actually emailed me was a grower. Someone who had owned a grow house since 2009 and they were looking to raise capital so they could build out the rest of their facility and buy enough equipment so that they would be able to start selling it to the adult use market as well in January.

Matthew: Great and so what is your day to day job look like now?

Emily: Yeah so my business has really evolved since then. So after I worked with that first client they introduced me to a few of their friends who were also looking to raise capital and I think that those first few experiences were really pivotal for me because first of all I got really curious just kind of what’s going on in this industry? Where is it going and secondly I realized how nuanced and how complex it actually is to cultivate and manufacture cannabis. So I really saw an opportunity to kind of build a business around its niche, around financial modeling specifically for cannabis cultivation and manufacturing facilities. So that’s really what I do day to day now.

I’m mostly an analyst so I specialize in financial models and data analysis but I also really do a lot of storytelling. So working with entrepreneurs and working with business owners who are looking to raise capital I help them create financial models and create projections but then also find ways to embed these numbers into compelling investment narratives. So kind of creating a story around the projections and come up with a thesis that’s going to be really interesting to potential investors.

Matthew: So your primary clients are cultivators and infused products companies would you say?

Emily: Mm-hmm (affirmative).

Matthew: Okay.

Emily: Yeah absolutely. So I work with; I do work with entrepreneurs and business owners. Mostly ones who are looking to raise capital or apply for state and city licenses in new medical marijuana markets but I also work with investors. So I also work with a lot of people who maybe have real estate or technology investing backgrounds but don’t really know a lot about cultivating cannabis. So I’ll work with those kinds of investors to kind of educate them on the nuances and on kind of everything that goes into operating an indoor agricultural facility.

Matthew: So what type of data is most important to communicate to investors so their ears perk up and they’re getting the info they need?

Emily: Hmm. So from the perspective of the business owner or an entrepreneur really the most important thing is doing the research to back up your projections. So anyone can put together a spreadsheet that says hey by year three we’re going to be making 100,000 dollars a month but the question really becomes what research and what data do you have to back up that statement? So it’s very important to just kind of understand. Understand your market, understand your target demographic, understand potentially the ramp up of how many sales you can expect to make in the first month and how that will ramp up over time. Yeah so it’s really important to kind of have that initial research before going into the modeling process or before actually building your projections because you really want to be able to back up the numbers and the projections that you’re presenting to an investor.

Matthew: Yeah and what’s the best way to back that up? Is it by using hey I’ve worked with cultivators in the past and this is what you can expect in terms of yield per square foot or something to that effect?

Emily: Yeah absolutely so and that’s kind of where I come in because I’ve been working in this industry for about three years now so I have collected a lot of data on kind of the true costs of cultivation and what kind of yields you can really expect based on the type of flowering lights or equipment that you’re using. What’s a realistic amount to spend on nutrients and on soil and on electricity per month? So I do think it’s very helpful if you are a grower or if you don’t necessarily have the operational history or have operating statements to back up your financial model to really seek out that data. To seek out quality accurate data that’s going to put together a realistic proforma.

Matthew: Right and just for people that aren’t familiar with the term proforma can you just elaborate on what that means specifically?

Emily: Yeah. So essentially sometimes you’ll hear a financial model or a proforma used interchangeably but essentially it means looking forward. So really the goal is to kind of create projections for the first few years of the businesses operating history or sorry of a business’s operations in the future. So it’s really kind of predicting the sales that you’ll get annually. The cost of goods sold, the cost of productions, and then as well as the operating costs, payroll, everything else that goes into operating a business. You’re kind of looking forward and you’re saying hey this is how much it’s going to cost to start this business and this is how much money we’re going to make every month, this is how much money we’re going to spend every month.

Matthew: So put together a proforma or help business owners put together a proforma and then they raise money and then when there’s a gap between because proforma is an estimate or a guess in some regards. A well educated guess or estimate with (07:46 unclear) putting in as much good criteria and variables as you can but you can’t project perfectly. When the gaps do arise between the proforma or sometimes you exceed expectations too that could happen.

Emily: Mm-hmm (affirmative).

Matthew: But when you do exceed expectations or fall short of expectations; when the business owner does why is that typically? Where do they fall short?

Emily: That’s a really interesting point and I always like to say that the point of the model is not to be right but it’s to be useful. So the goal when you set out creating these financial models or these proformas the goal is not to kind of have this perfect, accurate statement of what’s going to happen in the future but the idea is really to get a strong idea of how much. When you’re realistically going to start bringing revenue and kind of be in the black and how much money you need to get yourself through that period or through that burn rate. So I would say that’s the most dangerous thing. If you underestimate how much time you need to get your business up and running and really be profitable and be generating revenue then that can be problematic because you need to infuse capital into the business to keep it up and running but if you told your investors hey we’ll be in the black by month three and you’re not actually generating revenue until month six then that’s kind of where it gets problematic if your model is not accurate.

So that’s kind of, that’s the one case where you really do want to either overestimate how long it’s going to take to get your business up and running and especially within cannabis because this is agriculture. These facilities are filled with living, breathing plants that don’t always act in predictable ways. So I always really recommend that entrepreneurs and business owners that they overestimate how much capital they think they’re going to need until they can get their business kind of past that mark.

Matthew: Are there any expectations that you find investors have of business owners or the market segment of cannabis in general that’s not realistic perhaps returns or anything else where they’re just not being realistic or they don’t understand the particulars of the cannabis market?

Emily: Yeah absolutely. So I’ve worked with a lot of investors who come from a real estate or technology background. So they understand money in valuation really well but they don’t always have a good understanding of agriculture. So as I just mentioned when you have a facility that’s filled with plants a lot of things can go wrong. There are a lot of moving pieces, a lot of variables, and then on top of that you have these shifting legal regulations that can change very quickly and have major implications on revenue and operating costs. So I think that can be something that investors from these more traditional backgrounds don’t always understand right away. So that’s something that they definitely learn with time but and then another thing is when I was working in private equity we had these standard metrics for IRR or multiples for every type of deal. So we knew what kind of multiple range we could expect for a luxury hotel versus an infrastructural project.

So it became very easy to pass on a deal if it didn’t meet X metrics. If it wasn’t like it’s spects multiple or whatever it was so and I think these metrics this is something that I’d like to work on developing but right now because the regulations differ from state to state so much and the data is still relatively sparse. It’s tricky to say; to come up with this across the board metric and to say hey this multiple is really good for a cultivation facility just because every state and every market is so different.

Matthew: Right. That makes sense.

Emily: Mm-hmm (affirmative).

Matthew: It’s just to fractured of a market and segmented and it’s too, these that are broken up into fiefdoms so you can’t create like an IRR for California that’s also going to apply to Illinois is what you’re saying.

Emily: Exactly, exactly.

Matthew: Okay that makes sense. Now if an entrepreneur is pitching to investors, what do you think kind of the minimum math or projections they should have ready for perspective investors should be?

Emily: So I really recommend doing a three to five year proforma. So basic projections that lay out your potential revenue and your potential operating expenses for the next few years but as I mentioned before even more important than this is to really do a lot of research on your market and to understand kind of who your competitors are, what they’ve done to understand your target demographic, your potential customers or clients. So I think that element especially if you’re an early stage business. That part of the research is almost more important than these projections because projections it’s a guess. It’s a very educated guess and it’s really hopefully built around a lot of analysis and a lot of research but I think the most important thing as an entrepreneur to do is to really understand your market better than anyone.

Matthew: Yeah. Great point. Now is there any terms growers in particular or cultivators or maybe even infused products companies they just don’t understand? They don’t come from a private equity background they don’t understand IRR is Internal Rate of Return or some other acronyms that they should perhaps know or at least look up. Is there any that you feel like is important for them to know out of the gate they should be thinking about?

Emily: Hmm. That’s a really interesting question and I think yes absolutely EBT which is your earnings before taxes and depreciation. That’s a great one but I do think and when I work with entrepreneurs and business owners I always try to educate them on these just so they don’t get caught off guard in an investor meeting where someone is dropping all these terms and they don’t understand them but more importantly I think the gap in communication between investors and entrepreneurs isn’t really about terminology but it’s just about approaching a deal from a completely different mindset. So I think for entrepreneurs and business owners especially within the cannabis business they really understand kind of intuitively. They understand their costs very intuitively.

They understand how much it’s going to cost to expand a business very intuitively but they can have a difficult time communicating this vision to an investor just because it’s based on years potentially; like a decade of experience kind of running this kind of business. So that’s really where I come in. It’s really kind of capturing and harnessing this vision and creating a compelling narrative that’s going to resonate with an investor. That’s going to make them interested and have a lot of faith in this entrepreneur’s ability to start up this business.

Matthew: You really get granular with expenses. I mean apart from revenue projections that we’ve talked about a little bit here let’s kind of drill into operating costs. What are some of the costs that business owners should be focused on controlling or mitigating?

Emily: So I would say definitely energy costs and this is critical and I think this is a huge part of my business and the cannabis industry is very unique in the way that it evolved underground. So a lot of growers; so over the past decade or so there was very little technological innovation and a lot of growers were using equipment that was never really designed to flower plants or to cultivate cannabis and some growers are still kind of stuck in the old way of doing things. So a lot of growers still use high pressure sodium light bulbs to flower plants which really were never meant for actual agricultural uses. They have visual applications. They’re meant to be the light bulbs on a street corner.

Matthew: Yeah.

Emily: So I think kind of this and unfortunately it’s not uncommon for a grow house at least in Colorado to be spending 15,000, 20,000 dollars a month on electricity and to think that that’s normal.

Matthew: Yeah.

Emily: Because with these light bulbs not only are you using a lot of energy but you’re also creating a lot of heat. So you have to blast the air conditioning to kind of mitigate the heat effects of these light bulbs.

Matthew: Yes.

Emily: So even though the technology has evolved a lot in the past few years some growers and processes are just hesitant to change their methods. So I think that’s something. I think that’s something that within the next few years we’ll really see a lot of growers focus on is reducing their energy costs and moving towards more energy efficient manners of cultivation.

Matthew: Is there anything you can tell us about what you think about LED’s versus traditional lighting and in terms of yield or metrics outputs from those two different types of lighting standards?

Emily: Yeah. So I’m a big proponent of LED’s. I think in terms of yield there are so many different variables that go into that. A lot of it is not just about the light but it’s about your growing style. So that can vary and it’s not only effected by the type of light you’re using but in terms of energy costs I think if you were to switch a grow house that was outfitted with high pressure sodium lights to LED lights I think you could reasonably expect to cut your energy costs in half if not more and a lot of that doesn’t just come from the energy that you’re using for the lights but also you can reduce the air conditioning and make other subtle changes that will reduce your electricity and energy costs.

Matthew: If you were to give the same information to two business owners about a grow they might arrive at different conclusions about what needs to be done, what the problems and opportunities are. Do you ever see business owners use data to arrive at the wrong conclusions?

Emily: Fortunately no at least in my business. I really think data can give you a lot of power in terms of making the next moves in what’s best for your business and that can come from paying attention to your operating statements, paying attention to your point of sale data, paying attention to kind of the people who come into your dispensary. So I think paying attention to data is always a good thing. Potentially you might have a really good sales month and think that one particular product sells very well in the course of one month and produce that more. I could see that going on but typically I think using data is always a powerful thing.

Matthew: How about after lighting or electricity what are some other expenses that are important to find ways to mitigate their effect on a business? Any that stand out?

Emily: Hmm. I think there are definitely different types of growing methodologies that I’ve seen. Just be more efficient with the cost of goods so maybe soil and nutrients. I’ve seen a lot of people have success with Sea of Green that type of growing style but in general it really just depends; it really just depends on the grower and what he or she feels comfortable doing and what he or she has had success with. So I wouldn’t necessarily advocate for one type of growing methodology to reduce costs but yeah I think just definitely being aware and understanding what’s possible with the new technology and the new types of machinery that exists now.

Matthew: Now we had talked once before and you had mentioned that smoking cannabis is a result of prohibition and will likely go back to how we consumed cannabis pre prohibition.

Emily: Mm-hmm (affirmative).

Matthew: Can you tell us what you mean by that?

Emily: Yeah absolutely. So that’s actually not my theory. I took it from Ed Rosenthal. He has a book that came out maybe a year ago called “Beyond Buds.”

Matthew: Okay.

Emily: Which is about marijuana extracts and his theory is that before prohibition people were drawn towards tinctures and teas and concentrates and these products that had concentrated amounts of cannabis so and I think the data is kind of supporting this theory. In Colorado we’re seeing demand for infused products go up each year. We’re seeing more and more consumers kind of shift their demand from just raw flower to concentrates to shatters, waxes, edibles. So I think that this is a growing market segment and I think it’s a really important thing to pay attention especially for growers who are considering expanding to not only look at the market where it is right now but to look at it where it could be in five years, in ten years.

Matthew: Yeah I think particularly for the baby boomers there is a stigma associated with the smoking of cannabis and when they see it in a drink or a tincture or a salve that stigma is not as nearly as strong or doesn’t exist at all. So I think those are good points.

Emily: Exactly and I also think kind of for people that are newer to consuming cannabis even younger people inhaling burning vegetation isn’t always a comfortable sensation. A lot of people are not attracted to that. So I think when you can create ways to make the consumption process easier and also just more natural and more comfortable for people who haven’t tried it before I think you expand your market by quite a bit.

Matthew: Yeah and what about if I am considering opening a dispensary in a market is there any rules of thumb in terms of like hey I need a certain population within a certain distance of this location to get this many patients or customers in the door? I mean is there anything you could tell us there because I mean obviously placement of the dispensary is crucial. So how can we think about geography for the dispensary?

Emily: Mm-hmm (affirmative). Are you talking about in a new or medical market or an established?

Matthew: Yeah just any place I’m looking to open a dispensary. If it’s medical obviously there’s going to be probably a less perspective customers because they have to get a card or so forth but even rec too. It’s like how do I make a proforma and project demand for a certain geography? How do I get a handle on how many people might walk through the door? Is there any way to do that?

Emily: Mm-hmm (affirmative). Yeah I think it’s very important to understand the demographics of the locations where you’re considering setting up a shop. So are the people young, are the people old, are the people wealthy, is it kind of a poor region and it’s very important to understand kind of who you would potentially be serving in that region and also what kind of dispensary are you looking to start and what kind of demographic are you looking to serve and I think certainly; yeah I think it’s certainly that’s a big part of the market analysis that goes into kind of creating a proforma or creating a financial model and specifically within medical markets. I think the first and the most important thing to do is to really look at the conditions permitted under the legislation.

So if it’s a limited market Florida for instance where you only have CBD and there are only like five or six conditions it’s possible to kind of do a study and understand okay how many patients with HIV are living in this region? How many patients with Glaucoma or with Cancer or like all of that data exists. All of that data is public and is online. So I think it is very important to understand kind of the conditions and the diseases and the incidences in the region where you’re going to start your business but then also in some of the newer markets it’s becoming tougher to do that because a lot of the newer legislations they include chronic pain which I think encompasses a lot of conditions that are hard to predict and there isn’t necessarily data for that.

Matthew: Yes that’s true. It’s very subjective what chronic pain is.

Emily: Exactly.

Matthew: Have you seen cultivators pivot to concentrates and what are the results when they try to do that; try to expand what they’re manufacturing from going straight from flower to concentrates and is there any words of wisdom about making that transition so to offer concentrates that the market wants?

Emily: Yeah. I think it’s important to do it slowly and exactly how you phrased it through the transition. It’s not something that should be done all at once. So actually and even to go back to your question about using data to come to the wrong decision I think it is a lot of people are kind of coming onboard with this idea that the concentrate market is really the future but there still is a lot of demand for flower currently. So it doesn’t make sense to just use all of your flower to create infused products and then offer nothing in your dispensary. So I think doing it slowly and transitioning with the market and understanding kind of how things are going to change three years from now but still responding to what the market is demanding right now. So it’s a dance in that regard. If you’re looking to expand your facility and raise capital and start a construction process to meet demand a couple years out then you really want to be looking towards that future market but I think it is important to kind of serve and to give people what they want now and what they want today when they walk into your dispensary.

Matthew: Yeah and certainly from a P and L point of view these concentrates seem to be probably the most profitable thing you can sell.

Emily: Mm-hmm (affirmative).

Matthew: Because that’s what consumers want.

Emily: Mm-hmm (affirmative) exactly.

Matthew: Okay and Emily switching to some more personal development questions here is there a book that you have read that stands out over the course of your life that’s had a big impact either on you professionally or personally that you would recommend to CannaInsider listeners?

Emily: Yeah absolutely. So one of my favorite books, I read it in college. It’s called “Small is Beautiful” and it’s by a British economist, E.F. Schumacher and it was published in the 70’s but I think it’s still very, very relevant today and essentially he talks about Buddhist economics and essentially creating business with a soul and approaching business and approaching economics and approaching development as if people really matter and as if the planet really matters so and I think it’s very relevant to the cannabis industry just because there’s so much responsibility when you’re building a new industry to do it in the right way and I talk about energy efficiency and I think cannabis legalization represents so much social progress but if the industry doesn’t evolve in a way that’s sustainable and in a way that is really kind of taking into account kind of the future of this country and the future of the planet then I think that just kind of becomes shadowed the progress that it represents. So yeah I definitely really recommend this book because it’s not all about making money. It really is about kind of considering the future and considering kind of how our actions today will affect kind of future generations.

Matthew: Yeah. There does seem to be something with businesses as they get bigger. They kind of lose some of their soul. It seems hard to maintain the character sometimes it gets deluded and sometimes ethics kind of go by the wayside and it’s a little bit inevitable. I mean I think about how Google has evolved from their motto of don’t be evil to something maybe a little bit from the good benevolence to over to something else.

Emily: Mm-hmm (affirmative).

Matthew: Or there’s a lot of other examples besides Google or it comes out that Facebook is suppressing conservative news. You hear these things and you’re just like gosh it’s hard to do that stuff when you’re small but as you grow there is this change that happens and a lot of times you’re customers don’t benefit from growth. They say well that doesn’t help us that you’re growing necessarily. It may help you or your shareholders but you can have a beautiful, profitable business and not have to have a world domination plan so I’m glad you mentioned that.

Emily: Yeah and I really believe in kind of mindful capital raising and mindful expansion and thinking about; for a business to think about their values before expanding. Sometimes there’s all this pressure to just be big. If the opportunity exists to be bigger and to make more money unfortunately kind of society and culture just conditions us to go for that but sometimes that’s not the best decision and I think yeah and I think as you mentioned there could be a lot of pressure from outside investors and outside shareholders. So when I’m working with business owners and entrepreneurs I really like to understand their values and understand what they’re looking for from an investor so they can have a partnership with aligned values and so they’re looking for the same things and that way the business will evolve in a way that kind of resonates with their original goals and their original values.

Matthew: Emily as we close how can listeners connect with you and learn more about the services you offer?

Emily: So you can go to my website which is www.greenpioneerventures.com and I have a contact form on their so you can just contact me through that.

Matthew: Great. Well Emily thanks so much for joining us on CannaInsider today. We really appreciate it.

Emily: Great. Thank you so much for having me.

Matthew: If you enjoyed the show today please consider leaving us a review on ITunes, Stitcher, or whatever app you might be using to listen to the show. Every five star review helps us to bring the best guests to you. Learn more at www(dot)cannainsider(dot)com/itunes. What are the five disruptive trends that will impact the cannabis industry in the next five years? Find out with your free report at www(dot)cannainsider(dot)com/trends. Have a suggestion for an awesome guest on CannaInsider? Simply send us an email at feedback(at)cannainsider.com. We’d love to hear from you.
Please do not take any information from CannaInsider or its guests as medical advice. Contact your licensed physician before taking cannabis or using it for medical treatments. Lastly the host or guests on CannaInsider may or may not invest in the companies or entrepreneurs profiled on the show. Please consult your licensed financial advisor before making any investment decisions.
Final disclosure to see if you’re still paying attention this little whistle jingle you’re listening to will get stuck in your head for the rest of the day. Thanks for listening and look for another CannaInsider episode soon. Take care. Bye bye.

– How much should you invest in your cannabis grow?
– How much profit could you capture if you add concentrates to your business?
– What is a reasonable rate of return for for cannabis investors?

Emily Fata of Green Pioneer walks us through how cannabis investors and business owners can answer these questions and make intelligent decisions with hard data.

Key Takeaways:
[1:41] – Emily talks about how she got started in the cannabis industry
[3:56] – Emily’s primary clients
[4:43] – Most important data for investors
[5:51] – Emily discusses how she backs up the data for investors
[8:08] – Where business owners fall short in expectations
[10:13] – Unrealistic expectations investors have
[12:11] – What Information Investors Want
[15:13] – Emily discusses which costs business owners should watch closely
[17:05] – LEDs vs. traditional lighting
[20:08] – Emily talks about cannabis pre-prohibition
[22:28] – Geography considerations when opening a dispensary
[25:09] – Advice for manufacturers moving from cultivation to concentrates
[26:50] – Emily’s book recommendation
[30:11] – Contact info for Green Pioneer Ventures

Learn more at:
http://www.greenpioneerventures.com/

 Important Update:
What are the five trends that will disrupt the cannabis market in the next five years?Find out with your free guide at: http://www.cannainsider.com/trends

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The Five Disruptive Trends Shaping The Cannabis Industry Now
  • Satoshi

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