The Marijuana Investor Summit with David Friedman

David Friedman

Find out why investors and cannabis companies are converging on The Marijuana Investor Summit in April in Denver. Avoid the mistakes that most rookie cannabis investors make and understand where the market is heading before the masses.

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Key Takeaways:
[1:22] – David’s background
[3:55] – David talks about the rate of growth in the cannabis industry
[5:35] – Family offices getting into the cannabis space
[7:09] – David talks about the biggest mistakes cannabis investors make
[10:35] – David discusses different ways to invest in cannabis
[12:05] – Valuations of younger companies
[13:30] – David talks about how supply and demand affects the ecosystem
[16:25] – Startups doing interesting things in the cannabis space
[19:53] – David recommends funds for investors
[21:53] – David deals with investments that don’t touch the plant
[23:12] – David talks about the Marijuana Investor Summit coming up in April
[27:31] – Contact details

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Read Full Transcript

Matthew: Hi, I’m Matthew Kind. Every Monday and Wednesday look for a fresh episode where I’ll take you behind the scenes and interview the leaders of the rapidly evolving cannabis industry. Learn more at www.cannainsider.com. That’s www.cannainsider.com. Do you know that feeling when you sense opportunity, when you see something before most people and you just know it will be successful, then you're ready. Ready for CannaInsider Consulting. Learn more at www.canninsider.com/consulting. Now here's your program.

Investing in the cannabis industry is a bit like throwing your money over a wall and hoping for the best. That is the say it is very opague, fragmented and there’s a lot of disinformation out there. That’s why I brought on David Friedman founder of Marijuana Investor News and the Marijuana Investor Summit to tell us how to navigate cannabis investing. Welcome to CannaInsider David.

David: Great, thanks Matt.

Matthew: To give listeners a sense of geography, can you tell us where you are today?

David: I am in the cold, windy city of Chicago.

Matthew: Okay. I want to dig into all the different ways people can invest in the cannabis industry, but can you give us a little background on yourself first? Your background professionally and how you came to start Marijuana Investor News.

David: Sure. Well I started, I was an entrepreneur, and have always been attracted to closely held small businesses, but I learned early on that I was much better starting businesses, buying businesses than really running them. I have a very Type A personality so when stuff starts operating smoothly it’s best for me to get out of the way or I start changing things that aren’t broken. So I moved more into the outsource nature of financial consulting and then eventually into private equity and venture capital. And we still have an outsource CFO firm that services a number of industries. And after doing distressed assets for a number of years we decided that we really wanted to focus on emerging markets, just a better place to play. So we did a lot of early stage Tech. And about a year and half ago we were all individually kind of thinking about the cannabis industry and made the decision to dive in, and we’ve done that here now in the last year.

Matthew: Yeah it is a huge opportunity. Maybe once in a couple generations I think.

David: Yeah I would say so. I mean, you know, it’s got some makings of the internet bubble and the real estate bubble, but it’s different. It’s more like prohibition. When a market goes from being illegal to legal, people forget about the fact that you’re not creating any market that already exists. The guesswork is taken out of what the size of the market opportunity is to a large extent. Even though nobody will agree on a number, we all agree it’s somewhere between $40-$70 billion direct product sales of the agricultural commodity. And yet on the ancillary and you’re into a couple hundred billion. So, you know, that’s always an interesting way to look at it.

Matthew: Valuations could be screwed up and there could be a bubble blowing up right now, but do you feel like the bubble can’t really expand the way the tech bubble could because it’s a state by state market still? So there’s not this national blowing into equities and there’s not NASDAQ or NYSE listed stock. So it really can’t blow up with the same velocity as Tech stocks. Would you agree with that.

David: Yeah, I think that’s a spot on analysis. You know, it kind of goes backwards. I’m not sure if that’s a problem or the symptom. I think what it really comes down to is real institutional money is not available yet. The reason it’s not available is because it’s illegal. So it’s all cyclical, and so you took a part of the circle, but it all comes back. Until it is legal, until you can ship it over state lines and build distribution platforms that are similar to other industries and create economies and scale, and create a national brand and do those things, it’s really going to be difficult to scale a business.

Secondarily while it’s illegal it’s impossible. So the institutional money is not coming in yet. The explosion will come when it becomes legal federally, or at the very least when the banking problem is figured out people will start to make a move. Peter Thiel made a move in the last couple of months, but he’s a bit of a renegade and I don’t expect everybody to come jumping in behind him, and he also made a very small move. And that’s the other thing,institutional markets can deploy money into this sector yet. They can’t do $50,000 or $100,000 deals that’s just not set up for when you have a billion dollars in capital. They can’t keep track of deals that small.

Matthew: I heard recently that the, I think it’s the Pritzker Family in Chicago invested in Dow Capital, and now Dow is making some investments in different companies in the cannabis industry. Have you heard anything about family offices starting to get into the cannabis space?

David: Yeah I mean I still talk to quite a bit of family office people. I used to run a family office. They’re like everybody else. Some will and some won’t. I had heard the Pritzker Family specifically though, I was told and these are unsubstantiated, but Joby Pritzker who works out on the West Coast was doing something. I don’t believe J.B. and his group here in Chicago have done anything officially. I’ve heard he’s asked questions but so has everybody else. So I don’t know beyond that, but I’ve heard from a number of people that Joby Pritzker’s got a group that’s involved. So that might be it.

But other family offices, yeah you bet, they’re looking at it. They don’t have as much of the reputational risk, you know, that funds do, but they still have the legislative risk, and that scares them. They’re smart people. So they’re taking it as it comes and making assessments, but some are jumping in. If you can imagine some families are more aggressive than others.

Matthew: Sure. And for listeners that aren’t familiar with the Pritzker name, that is the family either owns or used to own or currently owns Hyatt Hotel, and they’re usually considered very savvy, wealthy investors. But I want to jump into how we can help investors, either first time cannabis investors or current cannabis investors. So what is the number one mistake you see first time investors making in the cannabis space David?

David: Yeah, you know, making decisions too quickly, going it alone, moving too fast in general. There’s just not a lot of information out there, and you have to be really prudent about how you invest your money. It’s hard enough when you’ve got analyst coverage coming out of your ears for a publically traded company to determine if that company is going to make money, when you not only don’t have analyst coverage, but you don’t have industry data or even, you know, market segmentation breakouts. Understanding what you’re investing in is so hard. And then obviously because of the fact that it’s illegal and unregulated, it can’t help but attract some of the less savory characters. They’re in every industry. There’s no question about it, but as you can imagine, you know, I think it tends to be a little bit higher. There are some people that play around this industry because of their ability to do so who are, you know, a little savory. Regulation will hopefully send that to the sidelines, but we can’t regulate until we legalize so it’s again another vicious circle.

Matthew: So with your background in understanding financial statements and being a CFO would you look at profit/loss statements, bad balance sheets and all the different ways you can assess a business, I’m just curious of what your lens is. If someone gives you ten minutes and says, or twenty minutes or an hour, and says David, what’s the health of this company, what is the first lens you put on when you look at it?

David: I mean the first thing I’m going to do is look at the book value which is going to be zero on all of these companies. Most of them are startup businesses. They’re low, they don’t have a lot of capital invested in equipment and things like that. There are some. So I’m not saying that they don’t exist, but a lot of them are more service based businesses, internet companies, you know, data and research companies, and these are ancillary businesses that I’m speaking of, touching the plant. I’m looking at cash flow, and cash flow’s a very difficult thing to analyze because you’ve got specific sections of the internal revenue code that are some of the goofiest I’ve ever heard in my life that make it really unprofitable. You’re paying taxes essentially on a large portion of your gross revenue, income.

What’s funny about it is that in their infinite wisdom they decided that you can deduct the cost of the product, the cost of goods sold as it’s shown on a P&L, but you can’t deduct your ordinary business expenses. So what that translates to in the cannabis industry is you can deduct the cost of the illegal drug that makes this whole thing a train wreck, but you cannot deduct your payroll and your rent and all of the other things that you need to run a business because it’s an illegal enterprise. So you really got to kind of wonder who was smoking what when that law was written.

Matthew: Government knows best David, don’t question.

David: Yeah exactly.

Matthew: So most people know they can invest in some cannabis companies via Penny or OTC stocks, but what are some other ways they can invest in cannabis?

David: Yeah, so you know, there’s a big Angel Network community. Most notably ArcView, a lot of people keep threatening to do what they’re doing, but really nobody else has yet. And you know, that’s a phenomenal community, that was the first meeting I ever went to when I went into this business. I’ve really never gone anywhere else. I’ve met everybody through that network. Everybody you need to know is part of it at this point in time. You have to be an accredited investor so it is somewhat limiting. And accredited investors, a lot of categories, but generally speaking you either have to have $200,000 a year in income or $1 million in net worth. There’s some variations on that, and a lot of people don’t qualify.

So in those cases they are only left to either get into the public markets or start a business or go to work for a company and get stock options and things like that. Now there are some creative ways that you can get involved in the business. You can do consulting for them and get compensation, you know, as stock. You’re just not allowed to “invest”. And so that gets a little dicey. And education around how to do that without getting yourself in trouble is really important.

Matthew: Now you’ve seen a lot of entrepreneurs make pitches. What are their valuations looking like for young companies, and do you think they’re fair, overvalued in general? What can you tell us about that?

David: Yeah, I can tell you that they’re all over the board for the most part. They’re way overinflated. You know it’s not any different than the dot com days when people just pick a number of the air because it’s internet related and the internet is going to make money no matter what you do so we’re going to randomly pick this valuation. I’ve seen, I don’t know, if I see another pre-revenue, pre-money, $10 million valuation for an app that is the same as 20 other apps I’ve seen, I think I’m going to throw somebody out of the window. But the ones that are out there, I’ve started, I know it could be deal sourcing could be getting better, but in the last 3 to 6 months, I’ve started to see have a little bit more substance that still have some hefty valuations, but they’ve got the ability to get there. Those are certainly interesting. You’re going to make more money in those deals, but they’re few and further between. So you know it’s still the dawn of a new industry. Let’s put it that way.

Matthew: Now how do you feel about the supply and demand dynamic of cannabis, and how do you think that will shake out in the future as markets become efficient? How will that affect the ecosystem?

David: Yeah that’s a great question, and one I hadn’t contemplated until a few weeks ago when Tripp Keber and I were talking about the summit that we’re having in April, and he’s actually going to give a presentation on market saturation and the risk that it poses to investors who are, you know, running to Colorado to stake their claim and don’t realize that the price of cannabis is dropping rapidly. And nobody’s telling that story, you know, because it’s happening so fast. I know the same thing has occurred in Washington. We ran a story a while back about an auction that went off. You know the market is getting saturated in certain places. Eventually it will equalize itself out, but this is how it is in a new frontier, you know, especially one that’s unregulated. It’s quite interesting and no matter how smart you are, as I have said to several people, you know the more I learn the less I know.

Matthew: It’s true. Now do you think more companies should validate their idea? Can they get one customer before they start seeking money from investors, or in some cases that’s not possible, but do you think there’s more startups that should do that?

David: Well you know that’s a great question, and it depends on how you frame it, but I’ll tell you this, I think in general the longer you can wait to take money the better off you’re going to be. And that’s just simple, you know, theoretical physics here. You are going to be worth less money until you prove that you aren’t. And the earlier you take money, you’re going to be giving up a larger piece of equity because that’s just the way the numbers work. If you’re worth less and somebody gives you $100,000 today, you’re going to give up X, and if they give it to you three months from now, and you’re worth more, you’re going to give up Y, and I would rather have Y. Too many people jump in and just pick a number and say alright we’re going to go for a million and a half.

And you really don’t even have business plans, source and use of funds, all the basic blocking and tackling that you need to know about. But I always advise entrepreneurs who are raising money to take as little as you possibly can, push yourself to the point where you’re working 90 hours a week and everybody donating every spare second that they can and then go out and get your first round and get your valuation, and even then only pull yourself back a little bit. You know, you got to still continue. And if you do that, you know, by the time you get to an MVP, a minimum vital product, whatever that might be, you’re valuation could go up 10X, and that’s a really important thing because you can’t usually get the equity back that you’ve given away. And so once you dilute you’re playing with a smaller piece of the pie, it’s harder to get big.

Matthew: Now speaking of startups, are there any companies out there that you feel like are doing really interesting things in the cannabis space?

David: Yeah there’s a lot. You know I’m a data junkie, and that’s a big reason why we got into the industry. We just invested some money so full disclosure in a company called New Frontier which, you know, in short will be Big Data for cannabis. The exit is Bloomberg or Reuters or somebody like that, but the data doesn’t exist, and it’s only just coming online. Theirs is some historical data. So getting that data repository where people can go in and grab the data, pull it. Legislators can use it to justify bills that they’re bringing to the House floor. You know, governments can use it to justify changing the laws around cannabis, and then of course businesses can use it to figure out how to make money. It’s a game changing piece of technology in business we always knew we wanted to be in that space. We’ve looked at a lot of different people trying to get into the data, and there are a few other companies out there that we’re actually talking to to try and bring onboard. We think there’s really no such thing as competition in the industry in general, but state specifically, you know, there’s so much to be gotten. So that’s a really interesting thing.

I see a lot of the branding that’s very interesting to me. You know, it’s amazing what a good brand will do. Everybody in the market knows Dixie Elixers. Tripp’s got an amazing brand, and if the market blows open that guy can be the first pot billionaire because he would go national. And I mean, a legitimate one, not one that wrote his Penny stock up for three days and was a billionaire. No, that’s negative. So those brands and the people fighting for those brands, you know, there’s Incredibles, there’s Cheeba Chews, there’s Bhang Chocolate. Those are only one brand, but those people are all positioning themselves to go national with a brand when the market opens up. This about it, if you own Nike or Nestles or something today, you know, how will that be. That would be great.

Matthew: Yes and I think a company like Dixie or some of the larger successful brands have a real advantage over people that are just producing flower because the oil or concentrate is just one input into their whole operation. Whereas if you don’t have a brand or an edible or some value added good, then you’re just subject to the whims of the market price. So I think there’s some advantages there.

David: Yes, there’s a commodity aspect to this. It’s still a very volatile commodity, but it will level itself out. We’ve also been interested in the commodity side of it. One of the other publications that we own is Futures Magazine so we’re very interested in what marijuana futures might look like someday in the future, but that’s not an easy thing to accomplish. Tobacco is not traded on the futures exchange because there are too many strains. We think it might be the same way, but some derivative of this product will be traded and that will be interesting to see.

Matthew: Now are there any funds out there that you would recommend for investors?

David: There’s only a few that really exist, I mean legitimate ones. I should say this, there’s only a few that I know of, and because I think we’re the largest investor news publication in the marijuana industry, I would be surprised if there are others out there, but they could be out there and just be stealth, and they just might not be taking investors which is kind of the problem even with some of the ones that exist. Duchess Capital, they don’t have any outside capital, but they’ve got I think the second largest fund in the industry behind Privateer. Privateer just raised $5 million or $30 million I think or something like that from Peter Thiel, who’s very well-known. And their fund got a $475 million valuation. They also have the license on Bob Marley, but their minimums are pretty huge.

Another couple of funds out there, smaller funds, there’s MJIC in which, the marijuana index. There’s Poseidon Asset Management. Those are both funds that accredited investors can still get into. I’m trying to thing, I know probably 15 more that are kind of sort of almost there, and a lot of individual investors who are looking to connect with other investors to form funds. So I think more will be coming online. But those are the main ones at this point in time. Supposedly High Times has a fund. I did meet the guy they hired to to run it. It’s mostly soft circle money right now, but they do intend to do deals. They’re being pretty quiet about what they’re looking at. And then the guys from Lead Maps, Justin Hartfield, I think Emerald Ocean Capital or something, but I don’t know if they’ve got any velocity. I haven’t heard any of them talking about any deals that they’ve done or anything like that.

Matthew: Now in general are you more excited about investments that touch the plant or don’t touch the plant?

David: You know, I don’t really care. Honestly I am excited about investments that are going to make me money. You know from my perspective right now there’s still so much money to be made, that touching the plant is a risk that I don’t feel I really need to take. That’s not to say that we won’t take. I’m sure we will at some point in time. I just don’t know when and I don’t know what, but right now there are too many other opportunities for us to leverage that we want to go after first. I certainly think the quicker money and the more money is going to be made by the people who are touching the plant successfully. And I think by in large most of them will be successful. But you know I just don’t want to be the 1 in a 1,000 that the DEA raids. And even if you don’t go to jail, they take all your inventory and you’re out a couple million bucks and you’re bankrupt and you’re done. I just don’t want to do that. Even with the laws that they’ve passed and the safeguards that are in place, you know, the changing of an administration or an Attorney General, you know, a lot of different things can happen. So just prefer to limit my risk if it all possible right now, and I think that’s for me a smart move.

Matthew: So you have a cannabis investing conference coming up in April. Can you give us an overview of what will be going on there?

David: Sure so the Marijuana Investor Summit is being co-produced by our company, Marijuana Investor News, Panther Media and Crowd Fund Connect and specifically CannaFunder. And it’s really going to be two hard days of education around investment opportunities and risks in the legal marijuana industry. We’ve got a lot of different general sessions that will cover everything from key legislation, how to find the right investors, what are deal terms. We’ve got two boot camps that we’re running; one for investors, one for entrepreneurs that will dive deep into details, touch on things like evaluation, how to structure your deal, what type of investor is a strategic investor. Some of the questions that you asked on this interview will be things that we’ll address. We’ve got a live pitch session. We will be awarding money or people will be able to invest live. As far as we know this is the first of its kind in the cannabis industry. There’s been a number of competitions. ArcView does them quarterly, but people invest money offline. Nobody is required to invest money, but we will have Kevin Harrington who is one of the original Sharks from Shark Tank, and sitting on the pitch panel along with several other investors. And if they decide that they like an investment then they may make an investment. So we hope to see that happen.

And then we’ve just added actually and the details are still being finalized, but on Monday 4/20 when we’re running the boot camps the Medical Marijuana Conference has been added to the agenda, and that’s being done through another group, and it will be for healthcare professionals and I believe they’ll have continuing education credits available through that conference as well.

Matthew: And for people that aren’t familiar that specific week is going to be a big celebration in Denver. I mean 4/20 it will be a big party week, big learning week, there will be a lot of stuff going on. So it’s an exciting time to be in Denver when you have that conference going on. So just so I make sure we get the full information for anybody that’s on the fence about going, let’s say I may a somewhat sophisticated investor. I feel like I know a good bit about traditional investing. What will I’ve learned after the conference? You know I’ve come in kind of not knowing that much about cannabis investing, but I’m interested. How will my perspective have changed by the end of the conference do you anticipate?

David: Yeah so there will be stuff there for novices, and there will be stuff there for intermediate, you know, and there will be stuff there for people who are advanced. We’re going to have a couple of sessions that just kind of focus on the laws and, you know, what the risks around that. Several different attorneys will be presenting in those sessions. We’ll have sessions on where do you look for deals and how do you find deals. We’ll have sessions on due diligence in the cannabis industry. So a lot of those are a little bit more advanced sessions for somebody who understands what those things are to begin with which is not everybody.

A lot of people are coming in, this is the first business they’ve started or the first investment that they’ve made, and they don’t know what any of those things are, and so there will be some basics. And again the boot camps on the first day will address some of those in depth a little bit more. We also plan to have pitch coaching available I believe for a full day where people will just be able to sign up and go make their pitch and have some professional investors critique them and beat them up a little bit so that they can go home and also even have the opportunity through our partners at Cannabis FN to video their pitch and create one they can use on the crowdfunding sites, because those can cost money to do, and if you’re all assembled in one room you can get them for a much better price. We’re hoping to provide a lot of resources for everybody.

Matthew: David in closing how can listeners learn more about Marijuana Investor News and the Marijuana Investor Summit?

David: Yeah sure, so the Marijuana Investor Summit is www.marijuanainvestorsummit.com. And I think my team’s done a pretty great job of getting a lot of information up there. We’re adding more every day. We’re adding exhibitors every day. We’re adding speakers every day, but we’re pretty close to finalizing everything here 45 days out. Marijuana Investor News is www.mjinews.com. And you know we would love to have your listeners come and view us, and at the summit we have created a series of discount packages for your listeners. We have a lot of different things available and separate tickets. But if they enter the code CANNAINSIDER, I’ll spell it, but hopefully your listeners know how to spell it. Then they will get a mystery discount probably between 10% and 20% depends on what’s going on. Charity events probably much, you know, much less. We are running a couple of charity events. So come on in and check all your surprises.

Matthew: Well all right well I definitely appreciate that David, and of course I’ll be there and this is one of the three conferences that I will attend and I recommend. There’s a lot of conferences out there that are let’s say, not the most, don’t have the most integrity behind them. This one does. I definitely recommend the ArcView Group and the Marijuana Business Daily Conference. So I will be there, and I hope to, I’ll see you there David, and I’ll hope to see a lot of listeners there. So thank you for that coupon or discount, and thank you for being on CannaInsider.

David: Yeah my pleasure. Thanks for having me. I really enjoyed it, and I hope to see you and many of your listeners there as well.

Matthew: If you enjoyed the show today, please consider leaving us a review on iTunes. Every five star review helps us to bring the best guests 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 at cannainsider.com. We would love to hear from you.

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