Harness the Green Wave of Cannabis Investing with Poseidon Asset Management

Emily and Morgan Paxhia

Emily and Morgan Paxhia have jumped on to the scene of cannabis investing with a fury. They are emerging as thought leaders in the industry and focused exclusively on cannabis investments. Learn why they are so bullish on this industry and what they are investing in now.

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Matthew: Hi, I’m Matthew Kind. Each week I’ll take you behind the scenes to interview the insiders that are shaping the rapidly evolving legal marijuana industry. Learn more at www.cannainsider.com. That’s www.cannainsider.com. What are the five disruptive trends that will shape the cannabis industry in the next five years? Find out with your free report at www.cannainsider.com/trends. That’s www.cannainsider.com/trends. Now here’s your program. What is it like to be at the center of the cannabis investing community, first to hear about deals from entrepreneurs while grappling with decisions about which investments have the best risk adjusted return? We’re going to find out the answer to that question today with our guests Emily and Morgan Paxhia founding partners of Poseidon Asset Management. Welcome Emily and Morgan.

Emily: Hello.

Morgan: Thanks for having us.

Matthew: To give us a sense of geography, can you tell us where you’re located in the world?

Emily: Yes we are located in San Francisco, California which is where we feel is right in the heart of all that is happening to the industry.

Matthew: Now you’re not California natives. Why did you choose California and why do you think it’s the center of it all?

Emily: Yeah because, you know, there’s a lot of things that are great that are happening in Colorado or Washington, but we really had our eyes set on the massive potential of the state of California. From an economic standpoint, the state is the largest… the 8th largest economy in the world, and we feel that once cannabis is legalized for adult use and with the existing medical side getting streamlined and kind of brought under that umbrella, we think the potential is greater than that of Colorado and Washington state’s combined. We also like being near the entrepreneurial spirit of what’s going on in Silicon Valley with all the startups going on there. And then it’s just really easy access for us to travel to all of these great markets including Colorado, Washington, Oregon, Alaska and Las Vegas. So there’s a lot of things really nearby and it just gives us a lot of access.

Matthew: And what does Poseidon Asset Management do?

Emily: So we launched the Pioneer Hedge fund that focused entirely on the cannabis sector.

Matthew: Okay. How did you get started in this business? What’s your background, and how did you come to focus on cannabis?

Emily: Yeah I think we’ll both dive in on this one. Morgan do you want to take it?

Morgan: Sure, yeah I will start off. So I have an investment focus background doing investment management for several years prior to this. And you know, we have a deep tie to the cannabis plant itself which we can touch on that in a minute. So we saw a lot of potential there, and it was just one of those opportunities where we were all at a point in our lives where we were ready to commit to something that we were passionate about. And I feel like there’s only a few times in life where your passion and your profession can align. And so taking my investment background and crafting a strategy that was needed in this industry was really where it brought my interest to this space, and I will let Emily explain about her’s.

Emily: Yep, and so I have a research and consulting background. I worked with a lot of different companies including American Express and all the Viacom entities and even the McKenzie Group. So spent a lot of time doing that, looking at markets, looking at segments, looking at companies and brands and trying to understand where they’re viable and what their potential growth is and how they can improve upon all of that. And we just thought it would be an interesting synergy to come together with Morgan’s financial background and my research and consulting background to really take a look at the market not just from kind of a math and numbers and strong finance side, but also from that kind of qualitative softer side of understanding trends and where they all fit into a market. And then we have another partner who is our digital person. He does all of the work on our website and our blogs, and he’s a writer and he keeps all of that updated. So we really are trying to bring a fresh take on the financial approach to investing and doing so in a very new category.

Matthew: So Emily with your research background was there any particular investments that you thought sounded good, but then when you dig into the numbers you say this particular kind is not as good as I thought, but it looks good on the surface. Are there a lot of those out there?

Emily: Yeah, I mean there are a lot of companies that on first flash look good, and even sometimes their numbers, you know, their projected numbers look good. But then once you really dig in, one of the things we talk about at Poseidon a lot is that we’re really investing in the people, not just the idea. Because the people are really the ones who are going to see a good idea through. So even if a company looks good on paper, it’s really important to get out there and meet with the people and see what they’re actually doing and understand who they’re potentially making this product for or who they’re considering when they’re putting these projects together. We were just up in… as I was telling you earlier, Morgan and I were just up in Washington. We are doing due diligence trips all the time because nothing replaces a face to face meeting and seeing what these facilities look like or what the equipment or what the technology performs like.

Matthew: And Morgan how would you describe your investing style. It sounds like you were in the investment world prior to Poseidon. Did you have the same investing style before coming over and now you just brought it into the cannabis industry? How did that transition look?

Morgan: Yes, there are a lot of crossovers from previous work experience. We’re focusing on managing the risks of the portfolio, building a well constructed, well diversified portfolio of, you know, different assets so they can contribute positively; something that we thought was absolutely necessary in this new industry. You know, we’re very much growth focused as the industry is in growth mode, and we want to make sure that we positioning ourselves appropriately, but also quantifying the risks and building the portfolio around that. So that’s a lot of my background is doing exactly that. And instead of managing investment portfolios for well over 100 families, I’m now focusing on one very focused portfolio. So there’s a lot of similarities, and it’s, you know, everyone thinks cannabis is this esoteric kind of investment. And it’s really just like other sectors in the marketplace. It’s just a new market that’s a newly investible market. So you know, just taking those methodologies that we’ve built over the years and bringing them to this space has worked out very well for us so far.

Matthew: Emily you just highlighted your recent trip to Washington. Can you tell us a little bit about the entrepreneurs you’re doing due diligence on or maybe not these current ones, but some you’ve done in the past. What does that look like, and what kind of investments are actually being made? Are they in physical capital assets? Are they equity stakes? What do the investments look like?

Emily: Yeah, so our investments run the range of the capital spectrum. We’ve done everything from preferred equity stakes, to equity, to you know, like Pre DPO-IPO things to short term high interest rate deals. So we’re looking at everything. We like having that kind of all of that mixture within the composition of the portfolio. You know on these trips that we’re taking we’re looking at pretty much everything. We’ve been taking trips looking at technology around improving growing efficiencies. We’ve been taking trips looking at real estate. So it’s a range of things, and it’s just really exciting to get out there and see what’s happening in the industry. Because I think people from the outside looking in don’t understand just how high tech everything is, how much process and procedure goes into what’s going in the cannabis industry. So you know, we were at an investment conference a couple… actually a month or so ago, and one of the things we have raised with investors is like okay, have you invested in real estate, yes. Have you invested in technology, yes. Have you invested in consulting or business services, yes. Well if you’ve done all that, then basically you’ve done what we’re doing in the cannabis industry.

Matthew: Right. And you mentioned preferred shares. Can you tell listeners a little bit about what preferred shares mean compared to let’s say, common shares and how they’re different?

Emily: Yeah Morgan do you want to take that? That’s definitely your wheelhouse.

Morgan: Sure. So basically you know, looking at the way the capital spectrum lines up, when you’re looking at common stock, you know, you’re just a general shareholder of the company. You are technically have an ownership stake in the company, but when you are moving up, I guess a tier so to speak, when you’re looking at the preferred shares, you know, you might have different rights than, or you should have different rights than the common equity holder. You might have the potential for distributions in the way of dividends that might technically flow down to the equity shareholders. You might have more rights as far as voting in the company in the decision making process. You might have more influence over the decision making process. So it’s a way that in these early stages we’re able to be a more engaged partner than just generally just participating with capital.

Matthew: Okay that makes a lot of sense. Are the new deals you see priced at a fair valuation you would say? Because I’ve heard a lot of different investors speaking and, you know, they’re saying some of the valuations just seem crazy. Are the majority crazy and the minority fairly valued? I mean, feel free either one of you to weigh in.

Morgan: Sure yeah, I’ll jump in. So the valuation, this is such a new investible industry that valuations are really hard to say firmly, this is great, this isn’t, you know, this is a cheap deal or not because we don’t really have a baseline. You know there’s not… this isn’t a developed industry where we can have these easy comparisons versus other companies that are already existing, operating and are trading or valued at X value. So we have our own methodology that we have developed as a way to try to de-mystify the valuation question. And in general though we do feel that the valuations as a whole are too high. There should be a larger risk premium built into this market, and we’re not seeing that for the most part. And I think that is driven by people seeing the growth potential of the industry and thinking, you know, when you put together these financial projections well yeah we should be at this massive company in five years, but reality is not reflecting that. And so so much of what it comes back to is, you know, what does the underlying business actually look like. And to Emily’s point is so much of a qualitative analysis of the entrepreneurs and do we think they’re able to execute even at an X percent of what their projections are, and do we then see that as a good investment opportunity for us.

Matthew: How is the landscape of cannabis investment opportunities evolved in the last year? I mean are you starting to see more of a similar kind of deal structure perhaps real estate or something come up over and over and over again. Because the industry is kind of saying hey this works, you know, investor meets entrepreneur here and these are kind of the terms. Are you seeing more of that happen now, more regularity in terms of deal structure and flow?

Emily: That’s a good question. I think we are seeing… I think we are seeing some patterns in terms of the deal structures that are emerging. But I’m also comforted by seeing some new deal structures emerging that are kind of mirroring what is going on down in Silicon Valley in terms of some of the startup deal structures down there which is kind of nice. But it’s good to see a range of things, but it’s not just pure equity that’s being offered or not just short term debt, but it’s nice to see these things. And you know we are seeing… and the other ways that the investment landscape has evolved is that we are seeing kind of more professional approach of companies seeking funding coming to us. Whereas in the beginning of the year, and this is still happening, but it is improving. In the beginning of the year people are coming and just saying, you know, I have this great idea. And it’s like okay well where is the business plan and where is X, Y and Z. And they hadn’t even thought about that or maybe sometimes haven’t even heard about that idea. So now we’re starting to see these folks taking a little bit more time before they’re approaching us and putting together some of those necessary documents and necessary structures before they’re going to go ahead and start asking for funding. Now I say that.. that is happening more, but it’s not always happening of course. There’s still people rushing into this sector trying to, you know, do the get rich quick thing and just looking, you know, sending off haphazard, you know, that’s poorly typed and not really thinking it through. But we are pleased to see that people are improving in terms of the way that they’re seeking funding.

Matthew: Now being close to Silicon Valley there is just a huge positive in many ways. There’s such a startup culture. There’s a great ecosystem. Have you seen any cannabis startups kind of mimic tech startups where they have an idea, they get capital, it doesn’t work so then they pivot to something else and they’re successful there. Have you seen any of that yet?

Emily: Oh yeah, there’s lots of pivoting going on in this industry, and I think that’s a great thing. Like we said, some of these people are people that are great people. They have great ideas, but maybe they didn’t hit it right the first time and they’re really adaptable and ready to move and make a difference in terms of what they’re bringing to this space. So yes we are seeing that, and I think that’s a good thing. We see that as a sign of adaptability and willingness to stay in this sector and not just to try to do a one off and move on if it doesn’t work out. So we are seeing some of that.

Matthew: Morgan can you tell us a little bit about how some of the real estate deals work? I mean at a high level, you don’t have to disclose any of what you have going on, but just like some of the structure. Like when people say there’s cannabis real estate deals, what does that mean?

Morgan: So typically right now what we’re seeing in the industry is basically a standalone entity that has a real estate, whether it’s one property, ten properties, whatever. It’s an entity that focuses on real estate. And then there’s another entity that is focused on the cultivation or dispensary or whatever that’s actually involved in the cannabis industry. And then you have that underlying cannabis entity then leasing from that real estate property. So that way it’s two separate vehicles and that way as an investor looking at the industry might say, you know, I’m more comfortable having a hard asset such as real estate. Then that way they feel like there’s more of a degree of separation. And you are getting that function of having, you know, the cannabis entity a separate piece and only participating maybe on the real estate side. And that’s also driven because of state laws where for example in the state of Colorado, we’re a California entity, we could not participate in the equity ownership in a Colorado grow facility because we’re not a Colorado resident. However we could invest in a Colorado real estate entity that might so choose to lease to a cannabis grower.

Matthew: Okay. And then looking ahead in the next three years, which is a lifetime in the cannabis industry, here in Colorado we just had vertical integration and pried that dispensaries had to grow 70 percent of what they sell. Now that restriction’s is removed, in what other way do you see the dynamics of the cannabis industry changing?

Emily: Yeah, I mean there’s so many ways that we think the dynamics of the industry will be changing, and not only just like within the state, but we think that once, you know, broader… it grows across the United States, we think that larger corporations and companies will be interested in, you know, putting a towel in and getting involved. And we know that this is already starting to happen. They’re starting to take note and take interest because we know that money talks. But I think it’s going to be very… I mean we’re very interested to see how this is going to play out. It’s a conversation we have with our companies that we’re investing in is where do they see themselves a few years down the line, and how are they going to… are they planning to withstand that influx of bigger companies? Are they trying to kind of keep their niche position or are they looking to potentially be bought out by one of those companies? So that’s like one dynamic that we’re watching to see who are these bigger players who will want to come into the space once they feel it’s safe enough. Morgan do you want to add to that too?

Morgan: Sure yeah. So I think one of the big changes we’ll see in the next couple of years will be banking. That will certainly change the dynamic in the industry right now. That piece is mixing so you have these… you have tremendous amounts of cash being handled which is really unfortunate and unsafe and unfair to the dispensary owners or the growers. Because if they’re being compliant with their state laws, you know, putting that unfair burden to them, but it also prevents them having access to traditional loan instruments that they might need, short term cash, you know, just more of those traditional banking services. So it adds a bit of making their operations less efficient, less profitable. And at the same time it does create opportunities for angel investors funds, you name it, to be able to help them maybe by doing direct loans, but I think that will be a major change for the industry itself. And I think when you see that piece it’s going to also bring in a lot more of that institution money. When they see that green light that banks are functioning and servicing the industry, I think that’s going to bring in a lot bigger capital. And when all of that happens the return profiles are going to shift. The high yield notes we’re seeing right now will go down, you know, you’ll have that yield compression. The equity, you know, how much we’re seeing… even though I was mentioning before about valuations, they’re still generally very positive when you find a good investment. And I think as more capital comes in the return profiles are going to also get compressed. So I think, you know, the opportunities are—as an investor—are the best they’re going to be for the next couple of years. And then as these other services come online, it’s going to change the game.

Matthew: Now Emily maybe you want to start with this answer, but are there any exciting entrepreneurs out there, and they don’t have to be ones necessarily you invested in. They could just be part of the community that you’ve seen and you’re like wow, they’re tackling a big problem and they’re doing something cool. Is there any from out there that you would highlight?

Emily: It’s kind of difficult for us to speak specifics on that just because of the nature of you know, hedge fund rules in the world because it can be seen as us giving guidance. But we are… I can say that we are, yeah, there are some really exciting companies out there. There’s one group that we really like that we think is doing… or a couple of groups that are doing a really good job of consulting. I think consulting is the aspect of the market that’s saturated and a lot people are stepping in saying that they’re going to consult or they’re being consultants, but they really don’t have the experience or acumen to really help people to get their grows off the ground. And there are a couple of those guys that are really standing apart from the rest who are winning the licenses in the critical states that are not giving out very many, and really helping their growth not only once they get the licenses, but then on the other side to help them have the product that’s going to pass muster. There are some really neat things around genetics going on, and you know, when it comes down to these plants, there are a lot of people that are connoisseurs and understanding the niche interests in this industry are important. And I’m getting cloned from A to B is something that’s interesting seeing those really different and unique ways that people are improving on protecting those genetics and getting those things to the patient or clones to the patients or getting them to different shops that need them in order to continue to grow and cultivate the things that their patients are seeking or that their enthusiasts are seeking the adult use market. So that’s a really exciting thing that we’re seeing. Is that okay to be giving kind of that broader level? Is that helping you?

Matthew: Yeah. To your point about the genetics, I mean, there is so much crop lost from mildew and diseases that I don’t know how I feel about genetics, but at the same time I think it will be very positive if we get rid of some of those diseases that cause so much crop loss. So I think that would be great.

Emily: Yeah, no, I think we were talking more about strain genetics in terms of keeping the purity of a strain. We are very… the other side of that, you are absolutely right, like the GMO, anything around, anything that smells of you know, any kind of modifications that reminds us of a big corporation who I will not name.

Matthew: And we’re all thinking the same one. Yes.

Emily: Yes, yes. No, that we are not in support of and we would not be pro that, that would not be tickling us. We want this industry to stay as organic and beautiful as possible without bringing in any unnecessary modifications. And I do think we know there are ways to, you know, promote organic growth of these plants and protect them against pests using all sorts of really natural ways of doing that, and yeah we’re very opposed to anything around that. Thank you for clarifying. Oh and also hemp. How could we not have talked about help yet? Hemp is something that is so exciting to us. It’s something that we feel like is very much in the early stage of getting notice from people in the United States. You know, Kentucky and Colorado just had their first crop harvest, and it was amazing. We went to see a hemp harvest or a crop in Boulder, Colorado, and it was absolutely incredible. I mean speaking of something that doesn’t require genetic modification, the hemp plant can grow in very little water. I mean the ground was cracked and these plants were just thriving. And they’re absolutely amazing, and the things that can be done with hemp are astounding. You can use it to build homes and to replace… BMW and Maserati use it in their cars because—Morgan knows the tensile strength of it—but it basically is super strong and very light. Morgan what’s tensile strength of it? You know that.

Morgan: It’s ten times the tensile strength of steel which is… everyone always turns their head at me sideways when I say that.

Matthew: Wow that’s incredible.

Morgan: Yeah it is incredible. It really is, but it’s just something that’s, you know, we’re only just starting to bring back. We have the strongest seed bank of hemp in the world as of World War II right Em?

Emily: Yep.

Morgan: And we destroyed it all.

Matthew: Now Morgan this dovetails nicely with what you were saying earlier they have a close relationship with the plant. Can you tell us a little bit more about that?

Morgan: Yeah so we have a family history where unfortunately we lost both of our parents to cancer at a young age.

Matthew: I’m sorry to hear that.

Morgan: Yeah it was, you know, and one thing we know is that, you know, it’s not that we’re… you know we still know so little about the plant, but one thing that is pretty obvious to everybody is it benefits from pain management and nausea and helping people with being able to eat because of the nausea relief. And you know, when they were going through… especially thinking back on when our father was going through the intense chemo and just seeing his discomfort and knowing that he actually… he was a flower child back in the day, and you know he really was an advocate for it as well. So we believed he would have benefitted greatly if he would have had safe access to it. You know, we know he would have never have done that in front of us because he wouldn’t want to put us in a… put his family in a tough situation. So just by his discomfort he chose to just deal with the, you know, the general unpleasantness of going through that process. So seeing that first hand really ingrained in our heads just how wrong this was. And I really, at that time when we were so young, I was 12 years old. So I mean it’s not like I was thinking about a hedge fund back then, but when the world started coming around a much more realistic place, I mean that’s really why we felt so passionate about it.

Emily: Actually Morgan I do have to say I think you were born thinking about hedge funds.

Morgan: Sure I did start investing at age 12 so I guess I did.

Emily: Yeah he was born 40.

Matthew: Well that’s an inspiring story and it’s been really interesting to hear a lot of people have different ideological reasons why they feel passionate to get into this industry. So I’m glad you shared that. Is there any… go ahead Emily. I’m sorry.

Emily: I mean one of the things is, I mean, for us it’s like we spend more than a full time job focus on growing our funds and supporting this industry and being passionate about is really what enables us to do that because we really care. And we really care about the funds’ performance and we really care about the benefit of this industry, on the society as a whole. So it’s one of those things where it’s easy to work hard when you believe so strongly in it.

Matthew: That’s true. Do either of you have any investment heroes that you look to for kind of your play book?

Morgan: You know, I’ve always, you know, the big guy in the world today still is, you know, Warren Buffet, he was just a legend. And, you know, he has just always been so focused on the big picture and really getting into these companies and understanding them inside and out, and not getting deterred by what’s going on in the media or the general stock markets. You know, and I think that is something that is so easy to get sucked into day to day with the amount of, you know, headlines and this that and the other thing. And just having that complete focus I think is just something that is so impressive and I think has led him to be, you know, so successful and so I hope that we can, you know, capture as much of his thought process as we can. So he’s always been someone I’ve read his books and follow as closely as we can. And I’m actually reading another one of his books right, or not his books, but one of his favorites, The Intelligent Investor, by Benjamin Graham. And a lot of his, you know, he says he learned a lot from Benjamin Graham and it’s just amazing. You know reading about these guys because even though a lot of these practices they did decades ago are still working today. When you hear this time is different, you always want to question that statement, and those guys have always stuck to that. You know, they don’t let the bobble heads on TV try to tell you different.

Matthew: Great point. Now in closing how can listeners learn more about Poseidon?

Emily: Okay so they can go to our website which is www.poseidonassetmanagement.com, and I should spell it just because a lot of people don’t know how to spell Poseidon. It’s www.poseidonassetmanagement.com . We also have a Twitter page that we’re constantly Tweeting or sharing articles or things that we find really interesting or compelling about the industry or even about related industries. Like if we see something that’s interesting in fact that we think applies to cannabis, we’ll tweet about that. And that’s at @poseidonasset, and then we have a Facebook page as well, and again we post all of our updates to those places. And our blog is of particular interest I think for anyone who is really looking to learn more about what’s going on in this space because our other partner Chris has a lot of content that he is posting. We have original content there about our travels. And we’ve interviewed some people, like we interviewed Doug Fine who is this amazing, amazing person who is really leading the charge on hemp, and he’s written a really important book about it called Hemp Bound. And we’ve got some other interviews that we’re actually working on right now that we’ll be posting before the end of the year probably, but check under our media tab under the buzz header.

Matthew: And are you accepting new investors still or no investors?

Emily: No, we’re accepting investors as we go.

Matthew: Okay and how about… go ahead Morgan. Sorry to interrupt.

Morgan: Oh sorry I was going to say yes, we are open to new investors, but unfortunately the hedge fund we are only able to accept accredited investors.

Matthew: Yes and how about entrepreneurs that think they have a good opportunity for you. They can reach out to you as well?

Emily: Yep. We have a contact section on our website and there’s actually a section for people who are looking to submit potential deals and then a section for investors.

Matthew: Well thank you so much to Emily and Morgan Paxhia of Poseidon Asset Management for being on CannaInsider today. If you enjoyed the show today, please consider leaving us a review on iTunes. Every five star review helps us to bring the best guest to you. Learn more at www.cannainsider.com/itunes. What are the five disruptive trends that will shape the cannabis industry in the next five years? Find out with your free report at www.cannainsider.com/trends. That's www.cannainsider.com/trends. Have a suggestion for an awesome guest on www.cannainsider.com, email us feedback@cannainsider.com. We would love to hear from you.

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