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Ep 283 – The “Pot Com” Bust: Almost Over or Just Getting Started?

andrew zatlin southbay research

Have we seen the last of the Pot Com bust in cannabis stocks? Or should we expect to see more downside ahead?

Here to help us answer this is Andrew Zatlin of SouthBay Research, the cannabis industry’s rising leader in unconventional investment data tracking.

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

Key Takeaways: 

  • Andrew’s background in economic forecasting and how he came to start SouthBay Research
  • An inside look at SouthBay Research and its mission to provide best-in-class macroeconomic forecasting and actionable insights
  • Andrew’s insight on cannabis stock valuations and where we currently are in the Pot Com bust
  • The vice index and why it’s important to the cannabis industry
  • Shocking similarities between alcohol, gambling, and cannabis
  • Reasons why cannabis might start looking like Kentucky’s whiskey industry
  • The types of businesses that Andrew foresees excelling in cannabis
  • When and how cannabis brands will begin to emerge
  • Andrew’s advice on how cannabis investors and entrepreneurs can best position themselves for the years ahead
Read Full Transcript

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 cannainsider.com. That's C-A-N-N-A insider.com. Now, here's your program.

Is the pot combust in cannabis stocks over or do we have more downside ahead? Will cannabis be left with only two huge cultivation and extraction companies similar to the whiskey industry? Here to help us answer these questions is Andrews Zatlin of South Bay Research. Andrew, welcome to CannaInsider.

Andrew: Thanks for having me, Matt. Hello, everyone.

Matthew: Give us a sense of geography. Where are you sitting right now?

Andrew: I'm in Silicon Valley, actually just North between Silicon Valley and San Francisco.

Matthew: Okay. And what is South Bay research on a high level?

Andrew: So South Bay Research actually got started a few years ago. During the recession, it was pretty evident that we had a clash between obvious feet on the street information. Everybody could see the bubble happening in the real estate market, but then you had Wall Street talking a totally different line. And what I found was that we had an opportunity to bring new information. The internet was bringing new data points, fresher data points. And I brought that to Wall Street, it was bringing main street to Wall Street. It was kind of a moneyball approach. In fact, the "Wall Street" journal has called me the money ball of economics. But it's not so much, you know, coming out with this wonderful rainman way of seeing things. It's more the way companies operate, the way Wall Street companies operate. I was able to come to them and show that they were too conventional and too mainstream in the data that they were using. The way we were measuring the economy was really just out of step with the way the economy had grown. You know, where we were buying, how we were buying, what we were buying dramatically changed and still changes. But Wall Street was using these data points and this frame of reference that was literally dated to post World War 2, and it still goes on. And so, that's the interesting thing is as always South Bay, what we're trying to do is share alternative data but not alternative data in the bizarre sense like pigeon guts and reading tea leaves, but more actionable, better data that's just not in the mainstream, defined as mainstream and conventional. And that's obviously what people wanna know, is what's really going on because the information I'm getting is either too late or out of step or somehow it's warped. It's not in step of what the real the economy is doing.

Matthew: Yeah. Yeah. And we were talking about the show, you know, kind of the corporate stodginess that exists out there and, you know, a lot of businesses just try to get, like, a slight evolutionary edge when there's so much room to make giant leap forwards if you expand the context of your thinking. And I wanna jump into that. But before we do, can you share just a little bit about your background and journey before starting South Bay Research, what you were doing?

Andrew: Oh, yeah, sure. So, I grew up very entrepreneurial and I was always fast. I'm a numbers guy, but I think numbers tell astory, which then becomes a call-to-action. I thought, originally, being an economist would be the best way to go. I'm very analytical, I see patterns, and then I would show what to do. But I was always entrepreneurial, taking that information, moving it forward. I found that being an economist tends to be more stodgy and more backroom than not. So, I ended up getting an MBA from University of California and then jumping into Silicon Valley back in the 90s, back in the heyday of the internet. Got to ride the internet for a while, made a fortune, lost a fortune, made a fortune, lost a fortune. And essentially, what I learned is that history does repeat itself. And even today we're no longer doing the hardware plays. We're not doing software and SAS, but it's the same business models emerging over, and over, and over. I mean, when you look at, for example, WeWorks [SIC]. What is WeWorks? Is this suddenly we're taking office space and subdividing it to people who can't afford to have a receptionist and other backroom infrastructure? No, that's been going on for decades, hundreds of years. There's nothing new about WeWorks, but if you rebrand it, you sell it and then you get some capital into it, it becomes bigger and better. My take as we talk about cannabis and other things is that the same business models come up because they work. But at the same time, there has to be an evolution. And what happens during those changes in those evolutions is where the money gets made. And I think it's really interesting right now, some of the transitioning that's emerging in the cannabis market.

Matthew: Now, you've kind of coined the term the pot combust. Where do you think we are with the pot stocks or the cannabis publicly traded stocks?

Andrew: You know, I think that we're not through it yet. And I think the real death nail will come when cannabis is legalized nationally in the U.S. Right now, what you had was the hot money leaving. I mean, it's just common sense. We're talking about stock prices like Tilray and others that have fallen about 50, 60% this year. And when you take a step back, you still have these out of control P to E ratios and valuations. When you have companies that are trading worth billions of dollars and they're doing maybe $10 million of sales. This is hot money. This is one-to-one with what we saw in the .com boom and bust, out-of-control valuations and just a disconnect between true demand and supply, but it's even worse. Why haven't we come down to the bottom yet? Well, partly because the number plays are few and far between and so, there's only so many places can absorb the hot money. Look, we know this is gonna be big. We know cannabis. We're in the early stages of the cannabis business, whether it's CBD or THC, early stages. And there's gonna be winners, but we just don't know which ones are gonna be winners and there are only so many players. And so, the money's gonna flow in and that's gonna lead the stock prices to go up for a time. But as we've been seeing, you know, how many apologies can companies make for not quite making their numbers? And then recently the bigger, broader macroeconomic concerns, investors are saying, "You know what? What's it gonna take for this company to really succeed" And that's before marijuana gets legalized across the room. You don't have patents on cannabis, you just don't. This isn't like a router or a switch. And so, for me, I think this is sort of like the first phase, the .com. bust. This is the .com bust where evaluations return from their lofty levels to a much more reasonable level. Again, a lot of growth.

But recognize that a lot of this initial growth we've seen over the past couple of years was, I don't wanna say novelty, but it was just spending that came from underground to above ground. It's legal now. But there's only so much spending that's gonna happen for bud consumption, for flower consumption. There's still more out there. I think the reason that we're seeing this first phase, and we're gonna wait a little bit, is we're seeing a conversion also to how people are consuming. Aand I think right now the idea that I'm smoking a joint. Okay, we've kind of saturated that market for guys who are smoking joints. But that's not where the real play is. The real play is gonna be in the derivatives, the real play is coming to be cosmetics companies that put CBD into Vicks Vapor Rub, that kind of thing where you're no longer talking about, you know, 100,000 pounds of pot, you're talking about lot higher production being demanded. And so, I think the next stage will be big business coming in, wanting to legalized. They're already here, they're just not out of the closet, so to speak. But once that happens, once big business steps in, you're gonna see that transition. So the .com bust right now it's still, you know, a lot of the growers and investors starting to realize, "Wow, so supply is kind of endless and demand is not if you're just talking about, you know, recreational marijuana, so where do we go next?" And companies like Tilray and Aurora, they don't have an answer, really. But we're still transitioning.

Matthew: Now, a lot of people listening might call cannabis a vice, other people a virtue/ But more people are looking at it more as, you know, not so much as a vice anymore, but it has medicinal qualities. You have a vice index. What is that and why is it important?

Andrew: So I started the vice index. Again, going back to my starting point of what do people really spend money on? And so, what I started with was, if you look at these conventional data points, consumer confidence, consumer sentiment, they're going out and they're talking to literally 400 people. And every month, this big data point comes out and hedge funds move trillions of dollars accordingly because 400 people said, so. I found that if you go out and you track things like gambling, cannabis consumption, you're looking at something that millions of people are indulging in every month. And so, if you can track what they're really willing to spend their money on, a vice, then you're really putting your finger on the pulse of where the real economic situation is for consumers. Are you willing to go out and spend, you know, 10, 12 bucks on a pint of beer? If so, you've got money in your pocket. If not, then well, that's interesting. If you can't even afford drinking money, that's a problem. Same with cannabis. You know, for the most part, it's a vice. It's a discretionary spend. And I found that it cuts across every demographic you could talk about, rich or black, white, Hispanic, you know, women, men, old, young, everybody smokes. And so, by tracking that, you have a legitimate way to track a broader economy.

But what happened was over time, I came to look at cannabis as this massive business opportunity. I think everyone knows it. We're not all clear, you know, big, broad brush strokes. We know that there is a lot of money being spent right now to smoke cannabis, whatever form it is. But that is just the tip of the iceberg. Remember though, this has been around for millennia and it's been around not just for recreational purposes, but also for some kind of therapeutic purposes. The problem is we haven't explored that and we haven't explored that because it's been illegal. So we don't really know what it can and can't do. I mean, you're always gonna have those crazy claims, you know, it cures brain cancer. I once spoke with Tommy Chong and this was hilarious because, you know, Tommy and I were talking and he was mentioning that he had to return to cancer and words of the great comic Chong, you know, he took, you know, oil and "I just, you know, stood right up and, you know, used it on my prostate, man." So, you know, you've got that therapeutic inclination. We don't know what it's gonna do. Tommy swears that it is curing prostate cancer. We don't know what it can and can't do. Right now, can you imagine, given how much we spend on healthcare, if you come out as a pharmaceutical company with some kind of derivative from cannabis, that does create a cure. I mean, right now my mother, 80-year-old woman, uses CBD lotion on her joints. But she's got, you know, a mild form of arthritis and she swears it works.

So you do have opportunities here, and that's where the big spend is gonna go. And it's gonna go there predominantly because it's also patentable. You do an extract, you can patent that. If you right now go out and say, "I've got the best strain of Kush," come on, give me a break. Anyone can reverse engineer that. You can't really patent that. You kind of can, but kinda can and, you know, to be honest, consumers don't care. Most wine is sold at stores like Costco and Safeway and they don't really care what brand it is. The bulk of wine comes out the door, it's middle road wine because consumers really aren't that crazy. They're not fetishized. You'll always have the fetishists. You'll always have wine stores. You'll always have cigar stores for the pure hardcore Epicurean and indulging person will have that with marijuana as well. That's not where the bulk of the business goes. And that's not where the opportunities are.

Matthew: Circling back to the vice index, what is it saying right now? Like what kind of data with alcohol and gambling and cannabis is it telling us about, you know, where we are in the market cycle?

Andrew: So, Matt, the thing about the device index is it has this wonderful leading-edge, four months in advance. So this is just, I have this 25-year-old data and it's just so strongly correlated to just general spending. And right now, that data is saying the consumer's done, that there's no more growth for the next three, four months. We're going into holiday season, so what that really means is, for the most part, everyone's already budgeted for this holiday season. But when we come to January, device index is saying, put on a seatbelt, do not expect the consumer to show up in the first quarter. And that's a problem for our economy.

Matthew: Okay. Now, you've mentioned before that the whiskey industry is largely based in Kentucky and that you think that the cannabis industry might kind of move to one or two players. Can you talk a little bit about your thesis there?

Andrew: Sure. You know, I use the alcohol prohibition repeal as a great analog for what we're seeing because time and time again, everything that we're seeing out there in the cannabis market is exactly what we saw in the alcohol market. But there are some important distinctions. At the end of the day, though, we're talking chemistry. With distilling alcohol, it's chemistry. There's no barrier to entry. It's a pure scaling situation. With cannabis, it's the same thing. Could you imagine if our tobacco farmers just started growing cannabis? Can you imagine what the price would drop to? And that's literally the future. Right now, with tobacco consumption dropping, we subsidized tobacco farmers all day long. What do you think is gonna happen when you legalize marijuana growing production? The tobacco farmers are immediately gonna start looking at this. When we talk about that kind of analog, what happens? You're talking about just economies of scale, you're talking about basic economics, you're talking about production eventually concentrates because at the end of the day, there really is no patent here. It's just pure... On one hand, if it's alcohol, it's chemistry. With cannabis, I strongly believe that the heyday of flour has come and gone and we're gonna go to distillates because the producers, they can dodge the FDA requirements that there's no fungus, there's no mites, there's none of this, none of that. The farmers today have to throw away half the crop. Well, if you just focus on doing extracts, you don't have to worry about your crop being thrown away.

For the logistics supply chain, having a liquid that's concentrated is a lot easier to deal with and it's got a longer shelf life. And then if you're obviously a producer at some level of the end product, again, the liquid's much more desirable for various reasons. One of the main things that we're gonna experience over the next couple of years, the main driving force behind the economics of cannabis, will be quality control. It's the heyday of the consumer. In the old days and even today, what you see is what you get. If I go into my dispensary, they have their versions, their strains are, you know, is this is my favorite, you know, "Is orange gorilla in?" I don't know, maybe not. Well, how about this one? And, you know, there's this too much variation. We saw this with alcohol prohibition. Bathtub gin got its name because, again, chemistry, you can make gin. It's not that hard, but the quality control part's a little bit challenging. And so, bathtub gin became cocktails because you had to flavor it because it tasted like crap.

As you go forward, what happened was once alcohol was legal again, you had companies like Seagram's, Bacardi able to come back in and sweep the market because there was this history of quality controlled production. You knew what you were getting. California state recently did a test of a bunch of products here, cannabis products, and found that most of them, not part, but most of the things being sold today is having X percent THC, Y percent CBD. Dope. And it's not small differences. It's, there is no connection between what you're told you're enjoying and what you're really enjoying. That's not allowed going forward. That simply is not gonna be allowed because the consumer now has a choice. And so, the winning companies are gonna be the ones who emerged that say, "When you buy Snoop Dogg, Snoop Dogg is gonna guarantee that this has a certain quality-controlled process and is consistent." You see that with every controlled substance, also from the pressure. Again, FDA, the tobacco has to meet certain regulations. Alcohol has to meet certain regulations and it's tested. Today, those regulations really are not enforced in the cannabis industry. And so, that's where the big opportunity is, but then you get back to who has the ability to deliver that? Who has the ability to meet the tax requirements? Every step of the way, we're going to see changes that support big business coming in. And so, I look at this industry and go, "This is a time of change type of opportunity."

Matthew: Okay. You mentioned Bacardi and Seagram's. We don't have any real brands yet in cannabis. Some are starting to get some traction, but how do you think they will merge?

Andrew: Well, couple years ago, I had pitched that I was shopping around because I think the next stage is they'll continue to be celebrity-based [Inaudible 00:18:30] Because, again, go back to the fact it's quality control. It's not just a question of how much, you know, let's go to Bacardi. And this, by the way, this was happening in era where racism was around. You had, Bacardi was for a certain social class, Seagram's was for a certain social class. But once you tackle the quality control issue, branding came in. The cost... And so, today if you go out and you buy whiskey, oftentimes, what you're buying is just, you know, you'll have someone come out and say, "Oh, we've been making this for 10 years." No, the reality is this company is nothing more than a label. They went to a distillery in Kentucky and they said, "I want a whiskey that has the following properties." And, "Okay, well, we've got that alcohol. It's been around for a few years. Here you go." It's been around for a few years, but they just created bundled into this one package. And so, you have some marketing gyrations here where it can be played to be X, Y, Z years old, but, in fact, this company's only been around for two years.

This sells. People are easily sold to. So you're can get to this area where marketing that's not gonna step in and say, "I know that you want to have a good smoke or enjoy, you know, you're recreational marijuana user. Come over here.You're gonna have a consistent level of enjoyment. And oh, by the way, your buddies will like it too." Or your buddies might be urban, they might be country, they might be rasta. You're gonna have celebrities that will step out. We saw this with perfume. Britney Spears can do a perfume. Does she know anything about perfume? No. But she's got the tab. Kim Kardashian probably will come out with something. Point being, you're gonna see, I think celebrity branding cause it's easier. You see it already with Bob Marley's family has started down this path [inaudible 00:20:27] and that's a global brand. Holy cow. You know, that's a huge opportunity. You're gonna have, I think Snoop Dogg's already moving in. You're gonna have lots of opportunity, but it's all gonna come back to once you get the quality control issue tackled, then it's branding. And you're gonna have every step in this chain segment. And each is gonna have all the golf with or do offloads. Whiskey has basically two distillers or two distillers in America that basically make most of the alcohol sweet drink. It just do. Again, because that's the inevitability of economics. You have only so many cable channels that you watch, only so many news sites that you go to. It's the same thing. After a while, economies of scale. And plus, we're human beings. We only have so much attention span. It's easier to deal with, you know, a couple of companies. There's Lyft and there's Uber, on and on and on. We're gonna probably see something like that, but from here to there, there are opportunities. I'm getting to a concentrated market. Today we're in a very fractured market and it's artificially so because state of California, you can only make and sell within California. Colorado, same thing.

Every year, I've been going up to Portland and visiting various dispensaries there, interviewing managers and finding out what works and what doesn't. And what impresses me is the amount of approach to pure business standpoint. The amount of money made by popular dispenser is incredible. I sat in one for 30 minutes and just watched non-stop traffic float in the middle of the day. And when you talk about, you know, inventory... You know, when you look at these jelly bean jars of bud and you go, "Wow, that's 10 grand worth of bud" and you've got X number of jars, there's this, you know, you got a little spoilers, but, you know, breakage, it's really, you know, the cost of operation are insignificant, There are huge barriers right now because, again, we're not national and legal. Those will go away. So right now you've got this high margin business, high turnover. I guess it's a fabulous visit to get in if you're in. And I think it's just gonna transform overnight once it goes legal. Safeway is gonna jump in. Safeway knows how to sell controlled substances. They sell alcohol and cigarettes all day long. You can even get in some Safeways, prescription medicines through the [inaudible 00:22:55] pharmacy. What makes marijuana special that it won't go to the same channel?

Matthew: So like this is giving heartburn to a lot of dispensary owners out there. They're thinking, "Oh my gosh, am I gonna go away? Do I need to evolve?" How long do you think it takes for something like that to happen where, you know, it moves kind to the biggest retailers? I mean, obviously each state's a little different.

Andrew: Overnight.

Matthew: Overnight.

Andrew: Overnight. Here's the pitch. This is exactly what's gonna happen. Let's use a Safeway as an example. Seafeway says, "Hey, state of California, there's a lot of transactions going on every day and you're taxing us. How are you taxing us? Oh, I see. So you've got some kind of special boutique way of taxing from seeds to store. That's so convoluted. You know, we've been doing this for generations. We know how to collect your tax money and we can guarantee that people aren't, you know, underage kids aren't buying this. Oh yeah, I know the dispensary's have that too. But, you know, do you wanna deal with 1,000 dispensaries or do you wanna do with one company? Let's say. It's a lot easier when you guarantee it. We can step up. We've got the security you're looking for," and on and on and on. And then they pitch it to the producers, you know, the ones who are making whatever form the cannibis takes, right? We don't know if it's gonna be liquid or whatever. They go, "Hey, you know what? I know that the dispensary or this guy over here down the street, their smoke is offering you four bucks for bud. I'm gonna offer you three bucks, but I'm gonna take 100% of your production. Okay? And I'll take next year's production." No, there's no way for a boutique dispensary to survive in an environment where the tax authorities don't wanna deal with them. The police don't wanna deal with them. The police don't like small dispensers for the same reason they don't like liquor stores. They are madness for trouble. And I'm not saying that the clientele are trouble, I'm saying these are cash businesses in a lot of ways with special canibis. There is part of extra fees. And that's not attractive. So, Safeway is a lot more manageable from... Every step of the way, dispensaries are more of a bandaid approach. I'm so sorry, a bridge approach to the ultimate destination.

You will still see some dispensers because you will still see some people who don't wanna buy the quote, you know, the Robert Mondavi job one, you will still see people who said, "You know what? I wanna buy a shot to old BenchWatch, 2009 and I'm gonna spend 150 bucks, and that's not gonna be safe. Okay, great. You're gonna exist on the margins and you're gonna do business on the margin because you have common source of your cadence. But 95% of the business is gonna be gone. That's a big, broad brush stroke. You'll have also location, location, location. If you are in Vegas, well, yeah, okay. Set up your shop inside Bellagio, you'll do great. But for the most part, you don't wanna be in logistics. If you sell Woodwork fire, what you saw in that TV shows something very simple. The money was made in originally with illegal substances on getting it from point A to point B. But once it's legal, logistical delivery, supply chain no longer really has the lion's share the money. It's random. And the big brands and the big distribution centers [inaudible [00:26:28]

Matthew: So the way you mentioned that like a Safeway might buy a whole, you know, all the production of a farmer, sounds similar to Big Tobacco. Do you think that it's gonna start to look similar to Big Tobacco?

Andrew: Oh, I guarantee no. I don't know if people know this, but Big Tobacco has obviously been circling this for almost 50 years and they have position papers stuff that they wrote back in the 70s saying, "When this goes legal, here is how we're going to enter the market." The key here is that the reason Big Tobacco hasn't been able to get in was partly legal and partly social. They go, "Ooh, marijuana bad." Once it became legal, we've know for a while that the majority of Americans don't look at marijuana as a [inaudible 00:27:15] thing anymore. Once it became legal at a state level, that's one thing. Once it becomes legal at a national level with why wouldn't you? You have a process of going to farmers, helping them grow, guaranteeing their crops. You work with big government to get the subsidies that they need. Who cares if it's corn, tobacco, or marijuana? You have the means and the capital to make a solution happen. That just means the bottom's gonna fall out for prices because once you go to scale, you know, why right now is it two or three bucks wholesale for bud? Why isn't it a dollart? It's a weed. Yeah, I know their cost of production, but guess what? When you are at scale, the cost of production's dropped rapidly. And that's what we're hearing also, by the way, with the companies like Tilray and Aurora. Wow, you know, we added a new warehouse, our prices went down. Yes. Well, you're going to have now suddenly big agricultural business come in and say, "If you do the following things, your crops won't be four times a year. Why can't they be six times a year?" Production is going to get crazy and then you've got import.

Remember, if you're talking extracts, if you're talking distalance, you don't have spoilage issues really to consider. Olivia can ship to us Japan, Siberia. This is now something that can be grown anywhere. You know, it's not necessarily dish weed, but come on, let's be honest. It doesn't have to be amazing. If you're doing distillates and you can extract the THC, it doesn't really matter. You can have higher concentrated THC strains and virgin. Ultimately, that's what we're going to see. Big Tobacco's planning on coming in, and this was revealed. This is not, you know, weird. When we closed the lawsuits with Big Tobacco. They had to share their internal memos with us, and this was literally part of the internal memo sharing, was they talked about initially they sold marijuana as a competitor and they funded a lot of the local resolutions that were anti-marijuana were funded by Big Tobacco because they said, "Oh, you can smoke tobacco, you can smoke marijuana. We got to fight marijuana." But what they eventually found was marijuana was more a gateway to smoking tobacco because people would smoke and then stand around and say, "Well, you got a cigarette?"

Matthew: Right. That's true. Yeah. Yeah. You know, when I hear you talking about this, I'm thinking, you know, if I'm in the retail in the cannabis, I might want to start to think about doing something differently, perhaps, you know, I want to be the Tiffany of cannabis or the Louis Vuitton because I have some powerful narrative like Tiffany does with the blue box where people are willing to look a lot less at the price and much more at the story.

Andrew: There are literally four places. If I had the capital, there are literally four businesses I would be looking at. What I'm describing as a total overhaul of the supply chain and also at the same time, an emergence of branding. So let's start, let's start with, okay, so I think what you're going to see is some equivalent, and we're already seeing DUI testing provides us. Colorado's police force said, "Hey, now that we're experiencing pot smokers driving, give us 10% of the tax revenue." That's a big dollar amount. Why? Well, we wanna, you know, we've got to now deal with, you know, stoners on the streets. What will emerge... Right now we don't have laws that say if you smoke this much, you need to be pulled over and ticketed. We have that with alcohol. We understand very clearly the relationship between alcohol consumption and drunk driving. We don't yet have that with cannabis. I don't think it matters. I think communities will start to say, "You know what, I need something on the books. So I need it. If you have this much THC content in your blood system, you're high [Inaudible 00:31:06] Well, how do you measure that? Well, you're going to have this new from emerging technology, how do I measure if you're high? Doesn't matter, but I got to start somewhere. So that's one of the four places I would go. Okay. Just looking at how things will become analogous to alcohol consumption. Within the world of the supply chain, the next place I would go is I would get out of dispensary business. Right now it's great because you have a [inaudible 00:31:32] almost a monopoly, there are only so many dispensaries allowed and you know what? It's you're buying and controlling access to the market for cannabis and things like that. But in the space, a large part of the reason we've been hearing deaths from [inaudible 00:31:46] not because of tobacco, because of going to China and buying basically counterfeit cannabis componentry. Basically, it's, you know, again, how do you control that testing?

So that's where I think we go next, is in the supply chain, testing is going to become more expected. So right now, if you're a dispensary, I would be looking to get out. Eventually, you'll be bought up anyway. Safeway is just gonna buy you out or regulations gonna close you down or business demand is just gonna shift. Why would I pay premium preview when I can go get some? Especially for caulking extracts and the guarantees versus the bud. But testing, I think, is going to be around forever. In California, I think there are only two testing facilities. That's not going to continue. If you are big pharma, for example, and you're going to be buying at the scale that you buy other chemicals, you need a testing facility to guarantee. So I would be looking at going into testing because that's just going to grow, and grow, and grow, so to speak. The third one is when you got high-end products, you know, "Ddo I want to invite my friends over and smoke out of a bomb that's all cheesy-looking?" No, I want my Rosewood pipe as gold indolent. Jewel is nice, but surely, we can do better. Jewel is other high-end devices, you know? I'm surprised Jewel hasn't already come up with sound, you know, "Hey, while you're smoking in place sounds for special effect and lights up." You know, I think we're going to come to a place where there's a definite need at the high-end low-end.

I think the more money isn't at the high-end for the, you know, the Gucci and the Louis Vuitton. I think it's more the big, wider equivalent disposable. You know, we have that with a buck 50, kind of e-cigarette. Sorry about, you know, have the devices. I think whoever dominates that market, you know, small-dollar. But I think Big Pen does what, 2 million? Big Pen sales a day or some ridiculous number. There's a company named Kush, which is interesting though. Kush sells supplies through dispenseries. They sell the baggies. Okay? Do you really think that when this goes big business, high-end, you know, large scale, that young brands or Coca-Cola is gonna source their packaging from Kush? Because what Kush is doing is really simple, just they buy in large volume and they parcel it out. That's all they're doing because if you're a dispensary, you can't get to China, you don't want to bother going to China to get these baggies and [inaudible 00:34:22] stuff. It's easier just to go to Kush. Eventually, I see Kush just having problems in a couple of years because, at the end of the day, they depend on dispensers. If dispensers aren't around, what happens to them? And big business doesn't need to go to the middle man, which is what Kush is.

The last and fourth one that I would love to do, and this I think is inevitable, it goes back to the origin of the stock. The origins of the stock exchange is really simple. Farmer Ted grows cotton. Farmer Ted wants to make sure that he can sell that cotton. So banker Fred, comes in and says, "Tell you what? I'll guarantee, I'll buy a per bushel and here's your price. And so, you know, no matter what happens, I guarantee this price and I'll buy this many of your bales." And that's the origin of stock exchange, guarantee pricing performance at the same time, guaranteed production and guaranteed consumption. And so, you know, I'm going to make a thousand bushels of corn. I'm now going to sell that at once or in parcels in advance to guarantee that I don't have to worry about it. You know, once I harvest the selling it and I've already got a locked-in price. So life is good. If you're here today with cannabis and you're going large scale operation production, you need the same type of thing. If you're in insurance, insurance, by the way, is the best next step as well. As we mainstream this product, insurance companies will insure your crop at what dollar point? How do I know what the value is of your crop? So you're going to have to have some kind of neutral third party. What they do today, there is a stock exchange for oranges. I'm going to insure your orange crop. I'm gonna go to someplace that says, "Oh, the value of your orange is this much. So if your production is this high, I will ensure your orange growth for this much money."

Cannabis is the same thing, it's a cash crop. You have to insure it, again. But the other advantage of ultimately some kind of derivatives options market emerging for this is again, I don't just want to ensure that I'm covered for insurance, I wanna sell my crop before I've even grown it. And that's what we're seeing. That's where the Big Tobacco analog comes in. Big Tobacco doesn't really grow. They go to individual farmers and they say, "I will buy your crop." And then they buy all this crop and they grade it and take a look at it and they do various choppings and blending so that they get a consistent quality that they're trying to get to. The same thing will happen with marijuana, is you're going to have, okay, you're a grower, you're a grower. There could be huge farms, small farms, doesn't matter. It's legal to grow. Your'e licensed to grow this stuff. But at the end of the day, you are a producer. You are producing a crop, someone else's gonna buy it from you. So now you've got to work with Big Tobacco, essentially, because they're the ones out there with the capital that can come in and say, "I'll buy it for this much." But Big Tobacco and everyone else, I'll say you still have derivatives markets, a futures market. So what's interesting is there have been a couple of attempts to create this kind of a market. And it's interesting to see where it's gone and where it hasn't gone. But I think this is the big deal because once this gets national, you'll see a Goldman Sachs or a Chicago Board come in and say, "Great, we're open for business. You can now buy and sell futures for cannabis." And there are certain rules and certain processes. So if someone's already existing with this, either in Colorado, there was a guy out there trying to do it. An example, if you were doing on a stock exchange, you had to buy a seed on the stock exchange. Let's say the cannabis market, 5,000 bucks. And that just gave you the right to come in. Now, there are certain qualifications and certifications that go with that. Meaning, it's like getting into the club, you know, you're expected to wear a tie and, you know, you pay your bill every month and, you know, on and on and on, we'll kick you out. And the quality of what you produce has to be verified and if you say it's great A and not a grade, okay, but if we find that it's grade B then [inaudible [00:38:34]. On, and on, and on.

So someone out in Colorado did this and made a few million dollars selling seeds on the cannabis exchange that he was creating, just that much money. Because everyone knows that the next stage will be once this is a cash crop, it has to have its own, you know, exchange and whoever creates that successfully, sell off the Chicago board exchange. So that's where I would go right now. I would do it in California. Forget Colorado, forget that buying board seat. That would be, in my mind, stupid because, you know, you don't have to. There are only so many producers legally right now. You just have to convinced them that they're... You get to explain to them the business of selling futures and you have to go to buyers and convince them like the dispensers and say, you know, "You want to get in on this and here's why." But again, you're talking about a semi-fractured market, but it's not that horrible. You're only talking hundreds, you're not talking tens of thousands for producers.

Matthew: This is great stuff, Andrew. You know, I brought you on because you really kind of think broadly about these things. Now, not everything's gonna happen exactly as we project them in the future, but a lot of this will probably shake out and we don't know when. But I find that it's good to start thinking early about what's possible and what's coming around the corner because, you know, the cannabis industry is no different than any industry where people, you know, we're kind of in an echo chamber. We're all kind of confirming our own biases and we're rarely looking at a much, much bigger picture. So you do that in a lot of other industries. I'm glad you could share that lens on cannabis. Well, Andrew, a few personal development questions before we close. Is there a book that's had a big impact on your life or your way of thinking that you'd like to share?

Andrew: Can I say two books?

Matthew: Sure.

Andrew: There I am again, just having to be different. One of them is "Moneyball," Michael Lewis. What a great book. I love it because it's a fun read, but also for recognizing a couple of important things. One is it's even the experts aren't always right and that there's always an opportunity for a new perspective and a fresh pair of eyes to bring another level of performance wherever you go. I found that really refreshing and it kind of supports where I go, which is I really think that I've oftentimes have a different perspective and that I'm bringing something to the table that can actually add value and help people do better for themselves. The second book, though, I love because it also opened up my eyes, but in a different way. If "Moneyball" opened up my eyes to understanding that the status quo isn't always right, there's another book and it's kind of obscured. It's called "The Great Game" and it's written by a former, a writer for the economist named Peter Hawker and it's this wonderful look at how Russia and Britain went into India and tried to conquer countries like Afghanistan. And what it showed me in my worldview is that we can get sidetracked by day-to-day issues, but behind the scenes, there's a bigger, usually a bigger thing playing out. It's just how we see it and encounter it. We don't always connect the dots. So for me, "The Great Game" was interesting because it pretty much says everything we're experiencing today, the U.S. in the Middle East, Iran assending, Russia coming in Turkey. This is a repeat of everything that's been going on for 200 years. There's the same players, the same objectives, everything one-to-one. And that's what I mean, is it's the old, you know, [inaudible 00:42:11] history doesn't repeat itself, but it does run kind of a thing. Actually, he didn't say that. But you know, the idea is when you look at business, when you look at opportunities, they may have a slightly different look and feel, but ultimately, it's coming from the same place and that sometimes you have to kind of get to the 30,000-foot level to understand why things are happening the way they are. "The Great Game," it's also like "Moneyball," it's got a lot of back and forth, spy crap, things like that. Really great book.

Matthew: I've heard of "Moneyball" but not the second one. That's excellent.

Andrew: It's obscure. I mean, hey, anything written by a guy who used to write for the economist is gonna be a little bit obscure. But this one's really interesting because, again, it's a historical look at why did India matter and why was Russia just galloping across and consuming countries until they got to basically Georgia and started to slow down? Why has Persia always mattered in this attempt to get to India and Afghanistan? You know, you start to realize that the place names that we read in today's mainstream press are the same place names that... And they called it "The Great Game." You know, Rudyard Kipling. It's the same thing going on, and on, and on, Russia trying to seize that space, you know, Western powers trying to seize that space and then the locals trying to survive as they're caught in this tug-of-war.

Matthew: Andrew, what's the most interesting thing going on in your field besides what you do day-to-day?

Andrew: In the field of economics, and I think what's happening as a revolution in data, and you could see this and you know, AI, you see this in a lot of different places, but fundamentally, a lot of people are starting to realize that there's a lot of great data out there. You know, what is Facebook? At the end of the day, Facebook is a data-harvesting machine that sells to marketing people. That's what they do. Data matters. But what matters more is asking the right questions. For the past few years in my field, the idea was as like taking Scrabble pieces, I, you know, I get all these Scrabble pieces together, throw them into a computer, by gosh, I'm going to get information out it. And that's kind of what the quant, what you hear quant funds doing. But the idea is computers can come in and pretty much we're gonna be at Skynet level of capability, you know. The reality is no. You can't just take Scrabble pieces, throw them up in the air, or have a computer sift through them and know what you're doing. We still come back to people have to ask the right questions. The machines don't know how to ask the questions. They know how to, if you define things for them, follow the rules. But actually being able to step back and say, you know, what should I be paying attention to here? That's, you know, that's hard. You know, so, for example, let's say I know that FedEx is based in a certain, you know, maybe they've got a hub and I know that, therefore, if I wanna know how FedEx is doing, there are different ways to triangulate on how their business is doing. I could look at how many trucks are moving or how many planes were moving. Or I could look at how much oil is being consumed. Or I could look at how many people are sitting down and getting a cup of coffee or are the warehouses... You know, when I was in Silicon Valley back in the heyday of the 90s, you could track whether a company was doing well or not by whether the warehouse hours were extended because if you've got overtime going on, baby, that must mean business is booming.

Different ways to get to that data, which you can't just grab the data and have it mean something. So what's happening is we're having sort of a zig to the zag. Past few years was grab data, didn't matter what the data was, our computers would figure it out. Now we're kind of swinging back in my field and saying, "Well, wait a second, actually you need to have, you can't just be a data scientist and assume that I can program a computer and it will find value." It'll find some value. But at the end of the day, you have to have the intelligence. You have to have the question people are in the background saying, "What if?

Matthew: I'm gonna ask you a Peter Teal question there, another California resident, what is one thought that most people would disagree with you on, that you hold?.

Andrew: The one thought that people would disagree with me on, I am an eternal optimist. I think that while I'm analytical and I catch gaps, I catch things that are moving up in town. What people tend to think of analysis is that it's criticism. You know, it's that old concept that when you're analyzing something, you're tearing it apart. And where I want people to shift their mindset is to say, analysis isn't that. It's looking at the way things are and imagining the way things could be, breaking down. You're looking at the cannabis market, comparing it to the alcohol repeal market and saying, "What's the same? What's different?" And so, where is it gonna go and trying to dream about where it can go and what form it's gonna take both today, tomorrow, and years in the future. I think where people would disagree with me on is when you talk about analysis is that it's inherently negative, tearing things apart. And I think that they missed that last part, which is in order to build them up. And I think they're not mistaken in a sense that most analysts aren't doers and they do just sort of point to problems or issues. And so, it's valid to come at an analyst and say, "I can only take what you're saying with a grain of salt." I want people to think differently.

Matthew: Yeah. And one thing that you're kind of pointing out is also a way a lot of businesses could die. And internet marketer, Noah Kagan's, he keeps a kill list and it's basically all the different ways that his business could just die. And that sounds depressing and scary for a lot of people, but then he goes on to mitigate those risks proactively. And what you're saying or have said in this interview may make some people in industry uncomfortable, but if they're the type of person that says, "Well, you know, where is Andrew right?" You know, "I disagree with him, but where might he be right?" And then they get ahead of it. Boy, man, you're really positioning yourself for success, so appreciate that perspective. Andrew, as we close, how can listeners connect with you, find you online and get more of your content?

Andrew: Unfortunately, my content is restricted to institutional investors. But feel free to email me at ac@southbayresearch.com.

Matthew: Great. Well, thanks so much for coming on the show and educating us, Andrew. We really appreciate it.

Andrew: Thanks, Matt. Thanks for having me on.

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 cannaninsider.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 cannaninsider.com/trends. Have a suggestion for an awesome guest on CannaInsider? Simply send us an email at feedback@cannainsider.com. We'd love to hear from you. Please do not take any information from CannaInsider or its guest as medical advice. Contact your licensed physician before taking cannabis or using it for medical treatments.

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Lastly, the host or guests on CannaInsider may or may not invest in the companies' 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.

Ep 282 – Breakthrough In Photosynthesis Tech Helping Hemp/Cannabis

han chen zeakal

With hemp in growing demand, scientists are hard at work determining ways to increase plant yield. Here to tell us about it is Han Chen from ZeaKal, a plant science company revolutionizing hemp cultivation.

Learn more at https://www.zeakal.com 

Key Takeaways:

  • Han’s background in cannabis and how he came to start ZeaKal
  • An inside look at ZeaKal and its mission to vastly improve cannabis crop efficiency
  • Problems in hemp cultivation that ZeaKal is working to solve
  • How hemp cultivation compares to other crops like corn and soy
  • Secondary metabolites and why they’re important to hemp
  • Hemp’s potential to produce a more sustainable plant oil
  • ZeaKal’s dynamic with other industry players in the hemp ecosystem
  • How drones are proving useful for data collection in hemp cultivation
  • Where Han sees his research and the hemp industry as a whole progressing over the next 3-5 years
Read Full Transcript

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 cannainsider.com. That's cannainsider.com. Now, here's your program.

Scientists are hard at work, increasing the yields from hemp plants. Here to tell us about it is Han Chen from ZeaKal. Han, welcome to CannaInsider.

Han: Thank you, Matt. It's an absolute privilege and honor to be on here with you.

Matthew: Give us a sense of geography. Where are you in the world today?

Han: Well, I'm sitting here in sunny San Diego, California, and fall has finally reached us.

Matthew: Okay. And what is ZeaKal, on a high level?

Han: So, ZeaKal, we're a plant traits company, and essentially what we're trying to do is improve plant photosynthesis. So, for those who don't know what photosynthesis is plants really enjoy soaking up sunlight and chewing up carbon. And after they do that, they make that carbon and energy from the sun into food, fuels, energy. In the case of cannabis, secondary metabolites like THC and CBD. What we try to do is allow our plants to soak up more sunlight, chew up more carbon, so that we can increase yields and also compositional profiles for these very important global crops.

Matthew: Okay. And can you share a little bit about your background, and journey, and how you got into the cannabis space, and then became part of ZeaKal?

Han: Right. So as ZeaKal, we're actually outsiders to the cannabis space. We're more just in the traditional agricultural side and, obviously, cannabis as a plant. We felt like our technology had huge applications for the sector. But if you rewind about 10 years, our history really starts in New Zealand. We are a spinout and joint venture of one of New Zealand's largest research institutes known as AgResearch.

At that time, the goal was, "How could we improve a very important pastoral crop in New Zealand called perennial ryegrass?" And what we were trying to do was to increase its energy content by increasing the amount of oil that's in perennial ryegrass. And through that project, when our grasses came back not only with higher energy and higher oil content, but they were anywhere between 24% to 50% larger, faster rates of growth, more yield, improved root-biomass architecture, we said, "Well, this is really unexpected and fascinating." And when we went back and we looked at how the technology was working in the plant, we discovered that, in addition to the improved energy profile, we were also improving the plants' photosynthesis.

And that was when ZeaKal really started as a commercial company in 2013, and we raised our first round of venture financing. Our primary focus at that time was to expand the technology into the major row crops, such as soybeans, corn, rice. And with the recent boom in cannabis investment, we saw a tremendous application of the PhotoSeed technology in this space. And we were fortunate enough that, in our last round of financing, that our lead strategic investor was Canopy Rivers. And Canopy Rivers really brought us into this space as a partner, and we're currently developing the PhotoSeed technology and hemp with them.

Matthew: Okay. And what is the problem or inefficiency in hemp that you're trying to solve? You mentioned the increasing photosynthesis. I mean, how do you accomplish these things and an increase of efficiency?

Han: Right. So I'll probably answer that question in two parts. You know, photosynthesis, in general, has really been an area that we haven't cracked. So if you look across crops, the major food crops, the major fiber crops, they look very different than what they're undomesticated cousins would look like in the wild. You know, the tomato that you see today is gonna be very different than the tomato that was uncultivated. And that's through just generations, millennia of breeding. And breeding has really helped improve yields and agronomic qualities.

But if you actually look at the plant's profile, even with the most productive of crops today, their photosynthesis actually isn't very different than their undomesticated wild cousins. And so this presents a huge technological opportunity to improve yields in an unprecedented way, in a way that can't be done through traditional breeding. So you take hemp then, for instance, it's a crop that's been largely undomesticated. It hasn't had the generations of breeding that some of the other crops have. So from a genetic profile and maturity standpoint, it's still relatively nascent and at the beginnings of crop domestication. I think when you look at the industry leaders, that's very much what they're focused on in terms of their genetics, and their strategy, and their breeding.

So while hemp is behind, though, it has one advantage, which is it's being domesticated in what I'll call the golden age of biology. You know, the toolsets that we've aggregated now, especially over the past 10 to 15 years, have really accelerated breeding, and hemp will really benefit from that. So what might have taken decades in the past, we can now compress to a few short years. And then if you overlay on top of that the PhotoSeed's technology, which can change photosynthesis and also change hemp's composition to produce new co-products, such as oil, you're really gonna accelerate the domestication of this crop in a very meaningful way, in a very short period of time.

Matthew: So is hemp kind of jumping to the front of the line in many ways because there's a lot of profit to be made in farming hemp?

Han: I think so. If I look at where hemp is even today, and what we're seeing in terms of the uses of hemp, and the productivity, and the profit margins, it's already quite exciting as a crop. And this is with very little or no research into the production of hemp. We really haven't figured out, as I mentioned earlier, the genetics or even the agronomics, how we grow, and harvest, and really standardize this. So I think that the opportunities for hemp are gonna be very, very significant.

And I think the one advantage of hemp, as well as if you look beyond the CBD market, which is what the primary end market is for growing hemp, it's really a platform crop, if you will, for enabling what I'll call a photosynthetic economy, meaning that it has applications for renewable energy, has applications for more sustainable textiles, it has applications in energy storage and even construction material. And these markets are far larger than what the current medicinal and recreational markets are for hemp. And so we're quite excited as we domesticate it, that this can really become a crop that can be on millions of acres, and not just thousands of acres where it is today.

Matthew: So you're working in seven different labs. What kind of work is being done there? Any highlights you can give us?

Han: Yeah, so we like to kinda call these different labs our gene-to-field capabilities. So they do everything from the design of the PhotoSeed genetics, optimizing it for the crops that we're working in, and then being able to develop these genetics into these crops, and then testing them in the field. And, at ZeaKal, we've always had a very unique business model, which is we really believe in the public-private partnership. You know, we have our roots with our co-founders in New Zealand, from basic science that was being developed by the New Zealand government. We were able to take that research and commercialize it with them.

And because of the success of that model, we've continued to try to replicate that in our growth strategies. So we always find the best public research organizations or universities that have skill sets, expertise, and resources in those certain crops. And we partner with them to develop our products in their labs. And what that does is allows us to put our people into existing infrastructure and also access existing expertise and capabilities, which, really, from an investment and R&D standpoint, keeps our costs low while accessing world-class capabilities.

Matthew: Okay. Now, you mentioned working with soy, corn, and now hemp. Does hemp present any kind of unique challenges that those other plants don't, and maybe any unique opportunities too?

Han: It does. Hemp, because it's been a relatively undomesticated crop, it also means that a lot of the toolsets that we've developed for corn and soy, for instance, just haven't been developed in hemp. And so, at ZeaKal, we're, in some ways, recreating some of this from scratch. It's a great launch point in terms of what's been done in other species. But every time you go into a new crop, there's always something unique and something tricky about it that requires time to figure out and optimize. So that's one of the unique challenges that we've faced with hemp.

But at the same time, though, hemp has a much faster product development cycle than other crops like soybeans and corn, between six to nine months. We can really be testing the efficacy of our technology versus...you know, soy could be as much as three or four years. And so those accelerated timelines, just because of the nature of the crop, make it a lot more attractive for us. And also because hemp is really being domesticated right now in the U.S., and that's the market we're focused on, it's not so much for international export. It also allows us to really shorten our time to market and focus on a single market, whereas a lot of times with the global commodities, you're touching so many endpoints that the at the time to market, the regulatory challenges, can be a lot more significant, which can extend timelines significantly as well.

Matthew: Can you talk a little bit about what secondary metabolites are, and what's important to know about them in terms of hemp?

Han: Right. So, secondary metabolites, they're a broad group of organic compounds. They're not necessarily essential to the plant's survival, but they do offer properties that are very unique. Plants use them as a form of defense a lot of times, but for humans we often use these secondary metabolites for their therapeutic purposes. You know, they include terpenoids, flavonoids, in the case of cannabis and hemp these so-called cannabinoids. And, within the cannabinoids, hemp produces a very unique one called CBD. And I think the audience probably knows that there's just a huge boom in the CBD market right now for therapeutic purposes. And it's really being integrated now into a number of specialty foods and beverages.

And so this is a very fast-growing market. And with the legalization of hemp in the U.S., I think we'll see an adoption increase at a very significant rate as well. From our standpoint, the reason why it's important is because the production of these so-called cannabinoids and CBD is very energy-intensive. The plant has to go through a very long and difficult process to make these cannabinoids. And so, what we try and do is provide more energy, if you will, converting more of that sunlight and CO2 into energy in order to provide a stronger source for the plant to produce more of these. And so, for the farmer and the producer, what that means is that we want to be able to densify the amount of these secondary metabolized produce on a per-acre basis.

Matthew: Okay. Now, plant oils is a big business. I think about soybean oil, canola oil, avocado oil is becoming more popular now, and macadamia. What about hemp oil? What are some applications for hemp oil that we may not be considering? I mean, you talked a little bit about CBD, but what are some other applications of the oil you think might jump to the forefront?

Han: So hemp oil from hemp seed, right now, is a growing commodity product, and a lot of people like it for its fatty acid profile and its health benefits. At ZeaKal, we also, with our PhotoSeed technology, we're thinking about expanding oil production into different tissue types. So you mentioned soybeans, you mentioned canola, hemp seed, for instance. And while these plants are great at producing oil, the seed is actually a very small part of the total biomass being produced. So the analogy I like to make is, "Imagine that you're a real estate developer, and you build this beautiful high rise, but you only sell the penthouse and you leave every other unit empty." I mean, that's essentially, in some ways, how we're producing plant oils right now. We only harvest the seed, and the rest of the plant isn't really being used for anything.

So with our PhotoSeed technology, the way that we increase photosynthesis is that we actually produce oil in every single cell of the plant, including in the green tissue. So all of a sudden, you look at a very productive plant like hemp, which has very high yields from biomass standpoint, and we start converting more of that biomass into oil, and all of a sudden, on a per-acre basis, your oil production's going to greatly exceed oil seed crops. And so, for farmers, what it does is it's really creating a co-product and allowing more of that plant to be used, and we're converting more of that plant's value into a high-value product like plant oils. And we can start even tailoring some of the oil profiles so that you can start creating some very healthy oils like Omega-3s, or long-chain fatty acids, oleic acids.

And if you think about it for industrial purposes, plant oils are a great feedstock for producing jet fuel, for producing biodiesel. A lot of the green chemistries that we use come from plant oils, but they're just simply too expensive if we're trying to source some from food-grade oils from the traditional oil seeds. So hemp could become a great source of industrial plant oils that could be used for the chemicals and the fuels industries without competing with food.

Matthew: Now, I'm sure you're focused largely on outdoor growing, but I know there's a lot of startups in indoor growing space, probably most notably Kimbal Musk, Elon Musk's brother in Boulder. He funds a lot of different startups in that space, but I haven't seen any kind of really take off yet. Is there anything exciting in the indoor kind of crop area that excites you?

Han: No, absolutely. And I think indoor agriculture has several advantages. I mean, I look at the growth of whether it's hydroponics, vertical farming, indoor agriculture in general. And what they can control there is light regiments, nutrient regiments, and really optimize environmental conditions for optimum yield. And our PhotoSeed technology, to be honest, would produce even higher and better results if you are tailoring all of those environmental factors to work with the genetics. So we're quite excited about the indoor growth opportunity as well.

However, if you start thinking about some of the applications beyond the higher-value products, and then you start thinking about, "Well, how can we take a very high yielding biomass crop like hemp...?", especially with its environmental benefits of carbon sequestration, carbon-neutral, even carbon-negative impact, and its benefits on soil health, etc. That's one of the reasons why we're quite excited about making sure that, in addition to the value that we can create in the indoor cultivation, the environmental sustainability benefits are also going to translate into broad acreages as well.

Matthew: Okay. Now, talk a little about soil remediation, if you will. I know hemp is known for kind of sucking the nutrients out of soil, but sometimes you see some farmers let their field take a break, or maybe plant alfalfa or another plant that can kind of add nutrients back into the soil. Is hemp one of those plants where, every season or two, you should like take a break and let it recover? I mean, how do you make the soil recapture nutrients so the plant can be grown optimally?

Han: You know, that's a great question, and I think there's not enough data at this point to really understand how hemp will be part of a large rotation program with other crops. I think that's something that, as we continue to domesticate hemp and it starts getting established across broader acreages, is something that we'll know more of. In terms of the health of hemp, it actually uses less inputs than a lot of other crops. I think farmers will be able to save significant input costs in terms of using hemp, even compared with other crops like corn or soy. And I think hemp, because of all of its other kind of co-productizations, will give farmers kind of an opportunity to access other markets rather than focusing on a single one.

And so, if I'm looking at the overall strategy, hemp is so great at carbon sequestration overall. And because of the low input costs, its environmental footprint, like I said, it could be neutral to negative. And I think as farmers are looking maybe towards looking at agriculture as a source of creating positive climate impact and also as a source of carbon sequestration...especially if, you know, farmers in the future can get paid for the benefits of taking more CO2 out of the air and put into renewable products like hemp, then I think we're gonna see hemp be part of that larger rotation, definitely with a better environmental benefit. But it's impact on the soil, we'll still need to do more studies and measurements around.

Matthew: You talk with a lot of other industry players in the hemp ecosystem and agriculture ecosystem. What are they talking about? What are their care-abouts and how do you work with them?

Han: So we touch a lot of different companies, from the genetics and seeds players, down to the ingredients companies, over to biofuels, and now into the cannabis and hemp space. And what really appeals to each of them is different in terms of the focus, but I think there's a universal message across the board, which is, "We think yield is important, because the more yield that we get per acre is critical." We don't have any more farmland. In fact, that's shrinking on a year by year basis, the amount of arable land that we have. So anything that we can do through agricultural intensification to produce more with less is absolutely critical.

In a lot of the developed countries like the U.S. and Canada, set yield is not enough though. You know, what we're also now looking at is also nutrition and also the environmental sustainability. So on a per-acre basis, we want to make sure that we're not just producing calories, but that we're producing higher value calories, primarily in the form of oil and proteins, and then making sure that we're doing so while minimizing our environmental footprint.

So, for us right now at ZeaKal, we're very excited at the fact that we can offer farmers yield, we can offer the consumers more nutritious products. For example, in our soybeans, not only are we giving higher seed yield, but the seed has a higher protein content in the meal, and we're also producing more healthy oils in our soy product, and we're all doing this through just sequestering more CO2 out of the air without the need for additional chemicals or fertilizers. So that's all really exciting and has a really strong consumer message.

But as far as hemp goes though, I think, across the board, whether it's the leading hemp companies and leading cannabis companies like Canopy, or Aurora, or it's the large Ag-biotech companies, or its processors, the ABCDs, everyone is looking at hemp. You know, they think that it could be the next big new crop that's being domesticated right now, and they see so many different end markets for it that kind of fit well with their capabilities, whether it's genetics, or processing, or distribution. You know, it's just something that everyone is keeping their eye on, far beyond what just the major companies are focused right now in terms of CBD and THC production.

Matthew: Do you ever see any kind of players, growers, big Ag companies use drones to kind of collect data from their fields, or satellites? Do you have anything you could talk about there in terms of how they do that and how that helps them?

Han: Yeah. So drone technology and satellite technology fall under a broad category of what I'll call imaging or digital agriculture. So if you look at agriculture in the past, it's been really about large acreage. You know, you plant homogeneous crops, and you apply fertilizer or chemistry and a pretty homogeneous rate across your field, and at the end of the season you harvest. And I think where the industry is heading towards right now, especially as we have better interconnectivity, we have better imaging technology, everything is now WIFI-enabled...we're taking in so much data, and more importantly we're interpreting that data in a meaningful way.

It's that we're now gonna be treating every acre of land, maybe even every square foot of land, in a very different way, in a very prescriptive way, so that a farmer walking through his field, he's going to know which areas are the most productive. He's going to know which areas need more attention, and he's gonna be able to calculate a return on investment based on the differences that he has in his field. And farmers who have farmed for 20, 30 years, they kind of know it intuitively in terms of that land, and what areas are gonna be more productive and what's not, and that's just from decades of experience.

But what digitization with imagery being part of that is it allows it to be standardized, it allows us to quantify what he's always known, and to allow him to make better prescriptive decisions with that toolset so that he knows exactly the rate of fertilizer he needs to supply so that in the future, maybe rather than spraying chemicals broadly, he can do spot treatments where necessary. And over time that data is gonna become a very important profile for him to understand how the productivity is changing over the seasons, and it's really gonna help evaluate what strategies and techniques are working.

And if you look at the broader demographics of agriculture right now, the average age of most farmers is over 65. And, in the U.S., less than 2% of our population is farming. So with the aging population, such a small demographic, the next generation of farmers, they're going to be farming a very different way. They're going to be able to rely on these toolsets, and hopefully these toolsets will offer them historic memory, if you will, a dataset that allows them to kind of have a higher jumping-off point in order to continue that productivity, what they're inheriting from their fathers or grandfathers.

Matthew: Okay. You know, I was reading something, a publication from NASA, recently, and they talked about the solar output, and the solar cycles, and energy that's produced by the sun, and how we're kind of approaching this Maunder Minimum where solar output looks to be going into a valley. Do you know anything about that, and maybe its implications for agriculture in general?

Han: Yes. So it's interesting that you mention that, because we've been talking about climate change, and CO2, and greenhouse gases kind of causes global warming, and now it's talking about these solar cycles that could lead to a period of cooling as well. And regardless of what the reasons are, what we're really seeing right now is what I'll call climatic volatility. And so if, for example, we go through a period of solar cooling, and all of a sudden we can't grow corn anymore in Iowa, and Iowa shifts down to Missouri, and Missouri shifts down to Arkansas, we're going to need to have new varieties that are being grown. At the same time, if CO2 continues to rise, it's not just the impact of droughts, and hurricanes, and floods. We see rising CO2 levels change levels of insect predation, for instance, and that's going to need to require new tools to combat that.

So I think agriculture is obviously very, very complicated, and you're always dealing with the environment, and every growing season is gonna be different. And so what we have to start doing is to start looking at ways that we can climate-proof our crops. So if we need to have crops that have higher salt tolerance, if we start losing more and more agricultural lands to salinization, we need to be able to grow crops in soils of higher salt levels. If the daylight starts changing, if all of a sudden Iowa becomes a lot colder and our harvest window decreases, we need to find ways to grow crops that might have shorter growing cycles but with the same yields. Or we need to find crops to have better root architecture so they can find nutrients and water in deeper areas and be more drought resistant.

So I think we look at all of these factors. You know, we can't predict all of them, but what we do know is the climate volatility leads to yield volatility, which then leads to economic volatility. And so, if we're gonna be able to smooth out our production, especially since we have a growing pressure to produce more food in the next 30 years, then we really have to find ways to reduce that variability, and biology is gonna be a huge part of that.

Matthew: Okay. What are your plans to generate revenue?

Han: So in the biotech space, or the genetic space for agriculture, the traditional model has kind of been the so-called "Intel Inside," where the seed has been the hardware and the technology has been the software, and you'll typically charge a licensing fee based on the value of that technology. And that's a model that's been pioneered by all the large companies, Bayer, Corteva, Syngenta. So that's a model that we're looking at as well, as we develop the technology with our major partners who will one day be our customers. We want to become that software that enables a productivity gain on top of the great work and the other products that are being stacked into that seed. So that seed represents billions in investment and is full of genetic code that gives amazing properties. And what PhotoSeed tries to do is try to enhance all of those properties by providing more energy to the plant, higher yield.

And then the other part of the business model could be that as we grow is that we want our own distribution, we want our own hardware, so we might start acquiring germplasm or seed assets, if you will, and then delivering that product, our genetics, and the seed together to farmers and growers. And that's a decision that we need to evaluate as the these markets continue to develop and our technology continues to mature, because there could be very different strategies depending on which crop and how big of a footprint that crop is. You know, we might find in some cases that our customers are all over the globe, and that our customers are largely consolidated, and it may make more sense to do the licensing model. In other cases where the market is still fragmented and we're kind of building that market, it may make sense to own those seed assets. So as our technology matures and develops, and as these markets continue to evolve, we'll kind of make that decision when the time comes.

Matthew: Okay. And where is ZeaKal in the capital-raising process?

Han: So we just closed our Series C financing earlier this year. It was a $15 million round led by Canopy Rivers for $10 million. And then our current investors also finished the round off with their pro-rata shares. So that $15 million funds us for the next five years, and I think it kind of puts us at a very unique junction at that point. As we talked about earlier, at the end of this funding round, we would've brought several products kind of into commercialization. And, at that point, we're really going to analyze, "Is it better for us to partner in license, or to maybe raise further financing and build some of those fiscal infrastructure and capabilities to deliver our product to market?"

And, right now, the primary focus of the company... We're well-capitalized, but we're also very interested in ongoing strategic partnerships and investment where it makes sense, especially that helps us develop our technology across a broader range of crops, as PhotoSeed really works across any plants species. And so we're very open to looking at those collaborations and discussions.

Matthew: Han, I want to shift to a few personal development questions to help listeners get a better sense of who you are. Is there a book that's had a big impact on your life or your way of thinking that you'd like to share?

Han: You know, that's a great question. I want to take a little bit of a different answer than maybe a lot of what your other interviewees may say. I grew up a lot with comic books, and I grew up a lot with Japanese manga. And one of the ones that I grew up with that seems to have continued to influence my life, even adulthood, especially as an entrepreneur, is the anime and the manga, "One Piece."

It's a story about a young boy who goes on a journey, he wanted to become the king of the pirates, and it talks about his journey through this. And what I found really interesting is that, as an entrepreneur, some of those lessons I have from my childhood still really hold true and has become a source of inspiration. Because, for me, personally, the entrepreneur is really like the hero's journey where you kind of start off with this dream and you try to see this much, much bigger world than the world that you knew. And through this process it's all about building great friendships, building your team, and your team is on this journey with you. And you all have different reasons for why the company and the entrepreneur journey becomes personal, but you somehow come together, and you try to make this work, and you overcome these challenges.

And I've always enjoyed One Piece because it was always kind of the anti-hero, the heroes are the pirates who are trying to run away from the Marines and the World Government, if you will, and they're kind of looked at as these outcasts. And it's really funny to me, because the entrepreneur is kind of like that as well. We're kind of fighting against the tide, if you will. You know, I think when we start our companies, everyone tells us that it can't be done. You know, there's always 1,000 reasons why can't be done. And that was something that I experienced a lot of. I can't tell you how many times I've been rejected, either from a partnership or an investor.

Photosynthesis, you know, what we've been working on, there's been about $10 billion of investment in this area, and it really hasn't been cracked yet. And the fact that we've been able to make such great progress and crack a lot of what couldn't be done, I mean, it was kind of like a one-in-a-million shot. And so, just keeping that focus, that perseverance, and that's a lot of the lessons I took from my childhood, and it's really those two things have really been the cornerstone of why I think it's gotten me through a lot of the tough parts of this entrepreneurial journey with its ups and downs.

Matthew: Interesting answer. I haven't heard that before. What is the most interesting thing going on in your field right now, other than what you're doing?

Han: You know, there's so many great technologies going on right now. As I mentioned earlier, it's really the golden age of biology, the toolsets that we have today that allows us to make very precise changes. You know, as we start understanding the genome of plants, and how they function, and all that data now being compiled and annotated for us to look at how we can improve the functionality of plants, that knowledge wasn't there even 10 years ago. And I think PhotoSeed and ZeaKal are just at the forefront of that. But when I look at what people are doing now in biologicals, soil remediation, through healthier biomes, when I look at what people are doing with RNAi technologies with gene editing, it's all very, very exciting. So I don't think in any way that ZeaKal is the only unique story here, but there's a lot that we're all kind of working towards and very excited about.

Matthew: Okay. I'm gonna ask you a Peter Thiel question. What is one thought you have that most people would disagree with you on?

Han: You know, I think, at the end of the day, what ZeaKal works in is...we work in trade technologies. And, unfortunately, right now, there is a huge consumer kind of, I would say, misinformation, and a lot of consumers right now are very kind of anti-GM or GMOs, and this a very broad topic, and one that I think has gotten a lot of attention, and one that's being revisited right now. And we think that traits and biotech, and for lack of a better word, GMO, is going to become a very necessary part of the world, and for us to feed our future, and in order to provide the climate-proofing that I talked about earlier. And a lot of people, I think, will push back on that. You know, a lot of people still believe that GMOs are an unnecessary technology, that they're unwanted technology. A lot of this is based on entrenched money interests, a lot of this based on misinformation.

And so, I think when we started this, everyone else has said to us, "Oh. Gosh. This is all too hard. Why would you kind of pick this area?" But I think, as a team, we were very committed to this journey and we were very committed to this technology, because we knew that it was based in strong science, that we were building a safe product with an application that can really help combat climate volatility and climate change, while delivering better nutrition to everyone. And I think, hopefully, as this technology comes to market, and we can have a rational conversation around it, and people start looking at the benefits and what's actually being measured, the quantifiable benefits of the tech, that they'll take a very different approach to it and they'll see that this is not just like what a lot of other products are, which is, "Oh you're putting more chemicals into the environment," "Oh, you're putting more toxins into the environment."

You know, I think they would kind of step back and say, "Wow, this is the first product where I can see a benefit for me. I'm getting better nutrition, I'm getting healthier foods, and I'm doing this in a way that is helping protect the environment and helping to safeguard the world for the next generation, and that my purchasing decision is going to make a positive societal environmental impact." And I think ZeaKal and PhotoSeed have the opportunity to do that, you know? But most people, when we started this journey, they were just very concerned about it. You know, they disagreed me that this wasn't the right strategy. And I kinda said to them, I said, "This technology, if it works, I think we have an opportunity to win over consumers. Let's not let current consumer sentiment and misinformation hinder us from starting on this journey and commercializing what I think is going to be an incredible game-changing technology for the world."

Matthew: Yeah. I think there's a lot of room here. I mean, there is definitely... I'm pro-science, and I think there's a huge amount that can be done, and we're gonna need to have happen for the world's growing population. At the same time, I think there's kind of a cynicism with the public when they see like a cola manufacturer use corn oil or a partially hydrogenated oil, or a cookie manufacturer use that, and then you go over to Europe and they're using sugar. And some people are having like an inflammation response, and it's not just really well understood, like, sometimes how the ingredients impact us. I think that if there's these biotech companies that do the right thing, make excellent advances in technology, and also show that they're looking out for how the response can be measured in the body, it is welcome. There's a lot of room for it.

Because I just look at how different regions of the world, different geographies allow for kind of cheaper ingredients to be substituted in and how those effects are, at best, unknown. But other times, they are known, like there's an obesity epidemic in the U.S. And a lot of that, I think, has to do with finished products, making poor choices in terms of partially hydrogenated oils, and also some food scientists just leveraging technology to make food kind of addictive, where it's like, "Once I open a sleeve of such and such, like you feel compelled to finish it." So I think if there's like a sweet spot in there where there's biotech meets kind of like, "That's optimum growing," and then one that's like optimum pro-human, I think that would be the future, hopefully.

Han: Matt, those are all such excellent points. And I think what you're kind of revealing right now is the complexity of the issues, and really the complexity of our food supply chain. Because I totally agree with you, is that there's been a lot of irresponsible decisions made by industry, and unfortunately that's eroded public trust a lot of times. But I guess the optimist in me also believes that a lot of our industry leaders are making those mistakes in the past, just because we didn't know any better, are now also taking the lead on trying to fix those mistakes, and trying to provide the next generation of products.

I think as a society, what we need to do is we need to start moving away from this idea that there's a clear line in the sand and everything falls under one camp or the other. You know, it just seems to me that a lot of people say, "Well, if you believe in climate change, you have to be anti-GMO," and the two are really unrelated. In fact, I would argue quite the opposite. If we are going to fight climate change, we really need to put every single toolset at our availability, and to be able to use those tools to grow crops in a more sustainable way.

And to your earlier point, also, about in the U.S. we have obesity issues, you have diabetes issues. And if we look at global food production, there's really a tale of two cities, if you will. You know, in the U.S, we fought off starvation, we fought off famine, we fought off hunger, because there was a concerted effort between government, industry, NGOs to say, "How do we uplift the production of food in order to to meet this demand?" And if you look back at the pioneers that did this, Dr. Norman Borlaug... I was just at the World Food Prize, which was an event that was created by him. But Dr. Borlaug saved probably billions of people from death, from malnourishment, and we've made that kind of social contract to get past that.

And as a nation now, I think we need to focus more on nutrition rather than calories. But that's a very different story if you go to parts of Southeast Asia, Latin America, Africa, where it's very much still about calories, and they don't have the luxury often of substituting one protein for the other. And in cases like that, the issue is, "As we spread our misinformation about the value of these technologies and we prevent them from being adapted, we're essentially denying solutions that could be critical for the security of these other countries." And I just don't think that, as first-world nations that are trying to lead the world into more prosperity, that we can deny that moral right to them.

And so, our supply chain, our food chain, our consumers have to understand that there's different points of development for different countries, and that we have to make sure that we're making technologies available to meet those needs, and that we need every single toolset here. You know, we have 30 years, 30 growing seasons, to increase food production globally by 70%. That 70%, in terms of that gain, represents every single productivity increase from every single innovation in agriculture for the past 10,000 years. We have 30 growing seasons to make that happen.

So that's the need, that's the urgency that we all face. And so, as we kind of look at what needs to be done, we have to take a hard look at the science, and we have to start taking a hard look at what we need to do to meet this demand. Otherwise, the truth is, is that we're gonna see a lot of people starve, we're gonna see a lot of countries become destabilized, or who will have more issues with terrorism, or have large refugee migrations, and this is going to add a huge burden to every single country in the world. And we're already seeing the effects of that right now in terms of our current geopolitical climate, and all of that really stems from food insecurity.

Matthew: Yeah, I would agree with that, and also agree with you that you do have to make empathetic choices to help people get the calories they need so they can survive. No doubt. And I also think that, back to that Maunder Minimum point, it's going to be interesting to watch as this volatility increases, and what happens if South America experiences some crop destruction, and the impact on the Northern Hemisphere, and vice versa. So interesting times lay ahead. I'll let you get back to the hard work of the next 30 growing seasons, because we need guys like you in the lab to solve that problem. It's not going to be me. So I'm glad you're around.

Han: Well, we'll do our best, and we're only a part of the solution. But the message of hope right now is there's a lot of entrepreneurs out there like ZeaKal, and there's a lot of great industry leaders. You know, I look at the work that Aurora, Canopy, that they're doing right now. I mean, it's beyond the cannabis industry and the hemp industry. I think everyone's working right now to really change agriculture to bring in the next generation of crops that will allow us to produce the food, feed, fibers, and fuels for the next century.

Matthew: Great. Well, Han, thanks so much for coming on the show and educating us. How can listeners follow your work and connect with you online?

Han: Well, any a listener can find me on LinkedIn, so please follow us there. We're also on Twitter, so you can kind of see a lot of times we're at various conferences and upcoming events. So please follow us on social media. And if anyone wants to reach out, you can write to us at info@zeakal.com.

Matthew: And can you spell ZeaKal for us?

Han: Sure. Z-E-A-K-A-L.

Matthew: Han, thanks again for coming on the show. We really appreciate it.

Han: Thank you, Matt. It was my pleasure. A lot of fun.

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 cannainsider.com/itunes.

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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. Promotional consideration may be provided by select guests, advertisers, or companies featured in CannaInsider. Lastly, the host or guests on CannaInsider may or may not invest in the companies 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.

 

Ep 281 – Scared Cannabis Investors Are Presenting A Rare Opportunity

codie sanchez entourage effect capital

While many cannabis investors are feeling underwhelmed with publicly-traded cannabis companies, opportunities still abound for investors willing to look past the headlines. Here to tell us more is Codie Sanchez from Entourage Effect Capital, a private equity investment firm dedicated to investing in cannabis.

Learn more at https://entourageeffectcapital.com

Key Takeaways:

  • Codie’s background in cannabis and what led her to become a partner at Entourage Effect Capital
  • An inside look at Entourage Effect Capital and how it’s evolved since it was founded in 2014
  • New ways to invest in cannabis and opportunities that still remain untapped
  • How valuations for private cannabis investments have changed over the last couple of years
  • The vaping crisis and how Codie believes it will impact the industry long-term
  • How MSOs are responding to the Pot Com bust
  • The investments Codie is most excited about right now
  • Codie’s tips for entrepreneurs on how to pitch to investors
  • Where Codie sees the cannabis industry heading over the next few years
Read Full Transcript

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 cannainsider.com. That's C-A-N-N-A insider.com. Now, here's your program.

Many cannabis investors are deflated and depressed with the publicly-traded cannabis companies right now. But opportunities still abound for investors willing to look past the headlines. Here to tell us more is Codie Sanchez from Entourage Effect Capital. Codie, welcome back to CannaInsider.

Codie: Thanks, Matt. Thrilled to be here.

Matthew: Give us a sense of geography. Where are you in the world today?

Codie: I am in Washington DC, so the swamp itself.

Matthew: Okay. And your company has recently had a name change to Entourage Effect Capital. Can you tell us a little bit about that?

Codie: Yeah, absolutely. So, you know, we just went through a rebranding exercise, and for those of you that are, you know, very, very immersed in the cannabis sphere, you'll know that the name Cresco might sound familiar from another big guy out there. And so we changed it to Entourage Effect Capital. And as we were thinking about it, the reason why we did is because we have this very active role we take with our management teams. It's a reason why, you know, probably if you're an entrepreneur and you email me, might get annoyed because we say no to a million things and say yes to very few. But it's because we really can't do this aggressive value-add that we do to our portfolio companies if we say yes to everybody. And so in cannabis there there's a term called the honor effect, which essentially is used to describe sort of a method of endoccanabinoid regulation where all the compounds within the cannabis plant, or we're not sure that all but many of them work in concert to create a sum greater than any of its individual parts. And so that's why a lot of times people will say things like, "This product is full spectrum." So when we were thinking about investing in cannabis and how we do it, there's a word in venture capital called Keiretsu, it's a Japanese word, but it essentially means leveraging your ecosystem or your network to uplift the companies that you invest in. And we thought that's sort of modeled exactly what we wanna bring, this really aggressive backer behind you, not just monetarily so that were the most valuable names on our founders' cap tables.

Matthew: Okay. And you've been on the show before, but for new listeners, can you give a quick snapshot of your background and how you came into the industry?

Codie: Sure. I came from sort of the institutional investing worlds of the likes of Goldman Sachs and Vanguard and First Trust, State Street, if any of those big names ring a bell. And what was interesting is I started my business in one emerging market which was exchange trade fund business, so as that was really starting to come out and dominate how we invest in markets now. And then I moved to a few other emerging markets, including the last one being Latin America. I've always been in sort of these emerging industries and I see a lot, a lot, a lot of parallels with cannabis to that. But I did get into cannabis mostly because of two issues. I mean, you and I have talked about this a little bit before Matt, but I'm Hispanic and I graduated early to do my thesis at the time as an investigative journalist in some of just the absolutely violently-ravaged areas around Juarez and El Paso and Agua Prieta along the US- Mexico border. And, you know, you see things there that you can't really unsee. And at the base of all of it is they were really related to the illegal drug trade. And that started to convince me early on that we had to make some changes to the drug policy there in. And then years passed by and I started to understand the language of finance, and what really was the final trigger was my fiancé is an active duty special forces, military man we could say. And we do a lot with the veteran community, and saw firsthand really the effect of opioid cocktails and how they were destroying families and honestly, you know, killing our veterans. And so, you know, I kept having this question of, "How do we trust these veterans to go to war and die for us and we as Americans say that we have this strong backing for our veterans, but we don't trust them to decide as adults if they wanna use a plant that all the early research shows helps with PTSD symptoms isn't addictive, and oh by the way, has never caused a single overdose ever?" And so when I put those two things together, I put my first money in the space into actually Cresco Capital, which is what we were formally known as in 2014 with a friend of mine who's the founder in Texas, and it was pretty incredible to see the returns and impact sort of cement together with this generational wealth creation opportunity and an ability to have a little purpose with those profits. So that's kind of how I got into the industry.

Matthew: Interesting. Well, I definitely wanna be with you and your boyfriend when the zombie apocalypse descends upon us.

Codie: Yeah, you do. He's a bit of a prepper, so I think he'll be ready.

Matthew: Now, is there any contrarian ways to left to invest in the cannabis space? I know when I got into this space it was kind of still gritty and there's kind of like the guerilla investments and just like all these things that are in gray areas. Is there anything left in the contrarian department, ways to invest?

Codie: Well, I would say much more today than even, you know, three or four or five months ago. And a couple of different, you know, statistics. I know there's two ways to look at it. One is, first and foremost where we've seen most of the money flow into cannabis has been in public markets, right? We've seen a lot of money flow into the Canadian LPs, the Canadian companies. We've seen a lot of money flow into these sort of SPACs and RTOs on the public basis. But what you gotta remember is private companies outnumber public companies 80 to 1. So we have a heavy bias towards private. There's something like 30,000, 35,000 private businesses across just the U.S. which kind of tells you how nascent this industry still is, and there is going to be this continual progression towards consolidation and towards sub-sectors underneath consolidate into main players, which for us is good because our portfolio companies theoretically get acquired or make acquisitions. So the first contrarian way, I think, is a lot of people talk about it, but not very many people do it, is still investing on the private side. And second, which I think we're gonna talk about a little bit today more, is distressed. I mean, I think right now is probably one of the most interesting times I've seen since 2014 to invest in the cannabis space, which, you know, for people listening, maybe they're screaming at me right now because given the correction we've seen in the markets, that might be bizarre. You know, for those of you that don't know, the capital markets have had that serious downturn with, you know, anywhere from at the low end, 20% of reduction and valuations to 80%, 85%, 90% reduction evaluations on the largest, even publicly-traded cannabis companies. So, you know, you'd say, "Well, that doesn't seem great." But we think that this is actually a really positive thing. One, it actually makes companies go back to being rational. Two, it is always about the price that you can buy investments at. So there's a saying that investors use, which is, "Fortunes are made in the downturns and collected in the rallies." And so our belief is right now is one of the best times to invest in cannabis because for those people who have money and can do a creative M&A or tuck-ins, so buy companies and add them to what they're already doing, and double down in a distressed market, there's probably no better time to do it than right now.

Matthew: Yeah. So you mentioned distressed a little bit. I mean, valuations get more reasonable terms, get more reasonable. But what are you seeing out there in terms of, you know, distressed markets and how you're capitalizing on them and how you see other investors capitalize on them? And do you see startups, you know, making concessions that maybe you were asking for but weren't getting before?

Codie: Yeah, it's a great question. I mean, we've seen shares, you know, public company shares come to 52, 53-week all time lows. And so what that means for companies that are out there raising right now is that it's not a particularly fun time to be an entrepreneur raising. Now, my heart always goes out to entrepreneurs because I've been one, I've raised capital, I've sold a company before. It is a grind. So, you know, we are there for you and feel that portion of it. The opposite side of it is for companies that have real business models, that have actual revenue, that have reasonable expectations, this should be a good time for you. You're going to have to lower evaluations. I mean, there's sort of like four questions we ask our founders to ask themselves right now today, which is one, do you have 12 to 18 months of runway? Two, do you have a real handle sort of on your finances and cash management? Three, are you right now today profitable with the money that you have currently? If you aren't, can you get to profitability? And four, do you consider yourself a top performing company in whatever you're doing, your space is. And by top I mean top 15 to 25%. And if you answer yes to those four questions, you are sitting pretty to raise right now. If you didn't answer yes, it's time to go out, in my opinion, and think about raising, probably not at great valuations, but get in with investors where they will be able to help you get to the next level. And as an investor, what we're starting to see is, you know, listen, we don't want to take advantage of any companies ever. So what we would do is make investments where we say, "Your valuation right now is too high. It's not a substantiated by the market. It's not substantiated by a revenue. And there is no premium right now that you get for being a cannabis company from a valuation standpoint." However, what we will do is say, "Listen, you're gonna come down on the valuation and what we're gonna do is set some terms so that if you hit all of those revenue numbers that you say you're going to hit or all of those milestones, we'll give you an opportunity to claw back some percentage of the company."And so then it's a win-win because we can actually move forward with cash. But the message for entrepreneurs today needs to be, you've got to revise down your valuations because down rounds are coming, and you wanna be the one with cash on hand when the market is ripe for acquisitions.

Matthew: Okay. And what do you think? How do you think WeWork has played into market sentiment? Because, I feel like we had Lyft then Uber and now WeWork. And WeWork seems like there's been a mental transition in investors'r's mindset where it's like everything was about, you know, venture capital and growth, growth, growth, growth, growth, forget about profit, what is profit? It's so far back on the back burner that we don't even think about it. It's gotta be about this geometric growth. And then all of a sudden the terms of WeWork just seemed so agregious overnight and investors kind of flipped. Where do you think that has affected sentiment and is this kind of a phase transition or just kind of a blip on the radar?

Codie: Yeah. I mean, I think investors that listed on public exchanges a few years ago had a great time. They were able to raise a ton of money incredibly fast. But the problem that they made, or the decision that they met that I don't agree with was that they put out really high expectations. And so those expectations were not being met in the cannabis space. It's really not dissimilar from the same problems as you said that WeWork has had, or you could say Uber, Lyft, Slack, Peloton. I mean, we've seen it sort of across the board that there's a move away from a market share focus and towards earnings and cash flow. So there's two things happening there. One, I think that's, again, rational and reasonable. And two, that's why in cannabis, there's a unique differential. For WeWork, you have the SoftBanks of the world with, you know, hundreds of billions of dollars that can inflate these private company prices. In cannabis, you don't have any of those institutional investors able to invest. The largest cannabis funds are less than $300 million in assets. There's no lending, there's no leverage on the space for the most part. So the interesting part in cannabis is I think you want to be a private company now where you can be long-term thinking in your growth and execution, and as investor, you wanna be on the private side because capital is not a commodity in cannabis. So while we have the SoftBank throwing around way too much money on these companies making WeWork valuations crazy, in cannabis we don't have that issue. So entrepreneurs do have to be scrappier, but investors are compensated much more for every dollar they invest in this space, in my opinion,

Matthew: Are some investors cashing out or taking some chips off the table right now when they're seeing the opportunity to do that or what's your kind of feel about that?

Codie: Yeah. I mean,we certainly see it on the public side. And I think it's easy for market participants to really overthink the downturn. It has been, it has been painful seeing that the valuations sort of plummet like they have, and yet for me, it's really relatively simple. You take a product which is consumed by tens of millions of people if you have the black market and you convert the product to the legal channel. So if the base level is if that's what we're doing without any innovation, without any financing on top of it, without, you know, anything else besides that, this industry is going to grow sizeably. So the part that's fascinating to me and really useful for investors is there's a big arbitrage opportunity happening. On one end, you see public stock prices really sort of fall in, and on the other end, if you were to walk down Abbot Kinney let's say that, you know, famous street in Los Angeles and you were to walk, you know, let's say you sit on one of the sidewalk cafes there, and I was to say to you, "Hey, tell me, you know, look at all the people passing by and what do you notice? What do you notice about just what commonalities are there?" And you were to watch for two or three or four minutes. What you would quickly see is people have one of two things in their hands. They have a coffee, okay, that's pretty standard, or they have a MedMen bag. And you'd see these little red bags everywhere because the truth is that consumers have not stopped consuming just because public stocks have felt a downturn.

Matthew: Right. How do you think the vaping crisis has affected the industry, and will vaping make a comeback?

Codie: Yeah, I mean, you can't talk about it I think without saying that sort of a tragedy it is that this is even happening, and that it seems to be hurting, you know, our young people more than anybody else. But my opinion there is that is really, that sits squarely on the shoulders of federal legislation, because if we had guidelines on this industry and tracking and we did not allow the amount of black market stores to be out there, we wouldn't have this. That said, it is far from a deathblow. You know, don't get me wrong. We were very concerned initially about what was going to happen, and as we saw sort of gut reaction and overreactions by States like Massachusetts, you know, outlawing vapes. But we've seen across the industry 20% to 25% decline in vape sales on average while sales of cannabis-related products up overall. So consumer goes into the dispensary, they may not buy as many vapes it looks like, but they're replacing that with edibles or flower. And so, you know, the long-term growth rate of 20% that we see in 2019 and we think we'll continue throughout the few, you know, oncoming years hasn't changed. So we're actually revising our estimates up of what we think the total sales will be for consumer products in the U.S. in cannabis to 13 billion from 12.8 billion. And that's because we're seeing higher sales in California, Oregon, Massachusetts overall.

Matthew: Yeah. I wonder often how much bigger the legal California market would be if taxes were lowered further, because it seems like it's still thriving from all estimates, the black market is, just because it's so much cheaper. I mean, there's no regulation in the black market, so you could be getting pesticides and all these other things that you don't want and you don't know, you know, what conditions the plant was grown in. But, I mean, do you have any sense on how much bigger the California market would be if, you know, if there was no black market or it was reduced to 80% or 90%.

Codie: Yeah, I mean the estimates all say that 60% to 70% of the cannabis market in California is elicit or is black. And that's huge. To me, that's got to be underestimated it because how do you even report on that? I mean, I know that there are, you know, 3000 stores that are in California as illicit enterprises and only about 800 legal ones. We actually saw this last month that California licenses went down, they contracted a little bit, which is actually a good thing because for the first time ever, really since legalization happened the state is going after illegal enterprises and they're no longer re-issuing temporary licenses to those that didn't get up and running properly. So you're actually seeing a contraction which we think will be good for the market overall. If Weedmaps actually does take off all the illicit stores, I think there's a big bump towards the end of the year when that's supposed to finally go through. And so overall, it seems to me like we have a lot of room to grow in California. But, you know, we have to have legislators that allow us to do that. I mean, I know they kind of funnily in California, they said that we should have $1 billion in tax revenue from cannabis this year. Now, I don't know where they got that number. It sort of just seems like they liked the idea of having that many zeros, but when in essence they only were able to get about $280 million in revenue. And when they dug into the numbers, the reason why is because of the amount of illicit activity that still goes on in California. So I'm sure you saw that they just allowed for tax deductions in California, sort of maneuvering around 280E. And I think if they continue to allow that to happen, we'll not only see cheaper products for consumers, but we will see a lot more volume.

Matthew: Yeah. Now, we've talked about a lot of sobering issues here. What makes you most optimistic about the future of the industry?

Codie: Yeah. I mean, I think first and foremost you've always gotta look to the consumer. You know, right now in the global economy, everybody is talking about all the varying data points and what could happen with a slowing global economy. And, you know, we have, you know, sort of 2% growth in the U.S. which is very low. We have the industries overall sort of stalling, maybe going up slightly towards the end of the year, a lot of contracting industries. Literally, the only industry in the U.S. is growing with double digit growth is cannabis. So, you know, that U.S. shoppers spent $9.8 billion on legal cannabis retail last year. So if we think about that going forward, the consumer is always the most important part for economic growth and for industry growth. So that's what I look to first. Not to mention, we're starting to see more and more legalization happening. I think we'll get more allowances around tax and safe banking, potentially even the States Act. And I do really think we're going to start seeing more of these black market clients convert as the prices come down and maybe even with some of the negative press surrounding vaping. So, I mean, I'm obviously biased, I'm in cannabis. But I think when we're starting to talk to investors, you're seeing for the first time institutions are getting interested because they don't see the crazy exuberance we saw in the market previously, and they're looking at these same growth numbers. And history doesn't always repeat, but it rhymes and it tells us that this leads to investment returns.

Matthew: Okay. Is there any recent investments you made that you're excited about? I mean, I know it's hard to kind of highlight one or two because they're, you know, obviously you invested in them all for a reason. But is there one or two that you think has a particularly good story you'd like to talk about?

Codie: Sure. I mean, I, you know, I don't wanna call any of my babies ugly. And so we support all of the portfolio companies. We have about 43 now, but I'll just talk about some of the recent investments we made so that way I won't be picking favorites. Let's see. Well, you know, let's, we're talking about California. So let's talk about some California companies. There's one in particular called Cann, which is C-A-N-N, and the website is drinkcann. This one I think's fascinating. It's run by two guys who are former Stanford grads, Bain consultants, and it is a little bit like a white claw if you could imagine, but with THC in it. So, a spiked seltzer with THC but be beautifully designed, like the ingredients are all, you know, whole foods quality. You absolutely cannot taste anything to do with cannabis in it whatsoever, and it's microdosed. And so it's, you know, 2.5 milligrams. And the idea is that we replicate this social aspect of drinking. So you can have two or three or four of these little cans and taste delicious. You might wanna sip on them just like you would, you know, any sort of seltzer water during the day. But it turns out that they have cannabis and them and the brand is just killer. You'll have to check out the website. The guys are super creative.

Matthew: That sounds good.

Codie: Yeah, so that's one. And then the other one I'll highlight that I think we're gonna fit a lot, or maybe I'll highlight due to be equal opportunity, but Urban Leaf and NorCal. NorCal's the big guy, they've been around for awhile. Their management team is killer. They're a dispensary and branded product display in California and the North, and then in the South and they're kind of starting to meet in the middle is Urban Leaf, and I just love their model of cannabis consumption buses. So they ship people in from old folks homes, from the beach in these branded buses to their dispensaries. And because of that, they have the highest, one of the highest grossing dispensaries in the country. So they're just retail machines. Yeah. If you're ever in Pacific Beach or Ocean Beach or Mission Beach, you'll see these big, huge black sort of party bus looking things and they're just waiting there to shuttle tourists back and forth. So I love seeing that innovation in the space.

Matthew: How about for startup founders that are listening? What can they do to make sure that their pitch really resonates with you as an investor or other investors?

Codie: Sure. Well, let's talk about it in a little lens of this market in particular. And, you know, I've written a decent amount on this. So if you go on LinkedIn and check out any of the articles I've written, I try to make it easier on entrepreneurs to fundraise. It's never fun. I don't think any entrepreneur I talk to ever says they're having the best time ever getting told no constantly. But, you know, one thing I do kind of say to them as I joke that only your mom really wants to fund your dreams, that investors want to fund your future revenue. And so the real focus that I see missing in the cannabis space is a focus on the financial aspect, really, understanding what is it going to take from a cash perspective to get to your growth and projection goals. How are you managing to that? Do you have a strong understanding of what happens if some of those licenses or regulations change and your revenue gets cut in half ,by 50%? Are you prepared for that? And are you being really realistic on the margins and the unit economics and the cost that you're gonna have to acquire customers? And so, you know, you can have a great idea in cannabis, but if you really don't know how to back it up numerically, I think you get in trouble in this market more than ever. So make sure that you're leading with like very detailed financials, very detailed projections and how you got to those assumptions. And remember that, you know, you cannabis is typically the decks I see are less about you creating the next Facebook, you know, YouTube, Instagram, whatever, Space X, and really you're taking a business plan and saying that you have some unique spin on it, but you're not really recreating the wheel. And so focus a little bit less on the dream and a little bit more on your revenue potential and why this is a unique opportunity.

Matthew: Okay. And what do you think is one thing that's gonna surprise people about the cannabis industry in the next year that they're not ready for?

Codie: Well, I'm actually pretty optimistic on regulatory changes, not just in regards to legalization. This surprised the heck out of me. But, you know, Gavin Newsom, who's the governor of California, just passed eight laws in Canada, I'm sorry, in California that were all pretty positive for cannabis industry overall, lessening a lot of regulation. Let me tell you one thing about California. They very seldom lessen regulation.

Matthew: Right, right.

Codie: So yeah. I mean, so a perfect example is they've eased the burden of product testing somewhat. And so they basically allow companies to retest products to correct for small errors or discrepancies rather than destroying tested products. So you've seen some, you know, there's been some news articles about companies in Canada having to throw away tens of millions of dollars of product because of either the way that it was grown or it didn't meet their specs. And so California is kind of addressing that small issue. They're starting to address 280E on a state by state basis. And so what I actually think we're seeing is states finally stepping up to the power that they have internally to help create really vibrant cannabis industries. And it's not all of them, but I mean Maryland's now allowing edibles, Massachusetts is potentially going to roll back their vape ban, Chicago, many more sort of municipalities and counties within Illinois have agreed to have cannabis, you know, some portion of the cannabis value chain represented in their counties. And I don't think I was positive on this happening. And with this legalization push, what you're essentially doing is just adding automatic sales to an industry where nothing else has to happen, but these regulations decrease and these companies gain profitability.

Matthew: That's interesting. Codie, I'd like to transition to some personal development questions to help listeners get a better sense of who you are. With that, what do you think is the most interesting thing going on in your field besides what you're doing? So if you had to do something else besides investing but stay in the cannabis industry, what do you think you'd focus your time on?

Codie: Yeah. I mean there's a couple of areas we are looking at pretty aggressively that I'd love to fund somebody. And so, you know, for one, when you look at some of the most valuable portions of other industries, it's not always necessarily the, let's call it plant touching or the retail branded products or the dispensaries or retail. For instance, in alcohol, one of the most valuable portions of it is the distribution of alcohol. And in cannabis, we don't really have strong distribution roll-ups. So I think there's something really interesting about who could do that well. Same thing with delivery. We see a lot of problems with the people who are doing the delivery right now. Could that be done better and more intelligently? In tandem with that, the biotechnology that we're seeing in this space is fascinating. I think it's a either a zero or a 10 X, but more maybe a 100X. But if we start to get biosynthesis creating THC and CBD as have, a lot of guests you've had on the show talk about, I think that we have a completely three standard deviation event that changes the industry a lot. So we invest in things like that as a hedge to make sure that we have a balanced portfolio, which is why, you know, I don't like to ever invest in just one company. So I think I would be doing some variation of those, not to mention something in Europe, because Europe is definitely about three to five years behind the US and I think also ripe for investment.

Matthew: Now, Codie, you're one of the few guests I have on the show that travels more than me and you go to a lot of interesting places. So if there was for some reason you couldn't go back to all the places you love again, which place would it bother you the most? Which city would have bothered the most that you couldn't return to?

Codie: Well, I have two, Matt, because I just, I do love to travel, but there's this place that I'm even hesitant to say. If you weren't from California, you won't know it, but it's called Sunset Cliffs in California. And it's right by Ocean Beach. It's tucked away on the other side of Point Loma across the Bay from downtown San Diego, and it is the weirdest little hippie community right on the beach. And I think it's a little bit of a throwback of what it must've been like in some of these coastal communities in California for decades. So that's one where I'd be sad if I could never go back there because I'd like to, we have a place there, so I wanna keep that place forever. But then for maybe more exotic climbs, there's a place in Brazil called [inaudible 00:31:20], and it's about an hour up the coast from Rio. And it looks like if you were to take sort of maybe New Orleans, like that French colonialism architecture and plop it down in the middle of the Amazon alongside a Bay with tiny islands that kind of look like they're from maybe the Philippines or Thailand. And if you were to put that all together, that's [inaudible 00:31:43]. And so I spent some time there and it's just one of those places where you could forget the rest of the world existed.

Matthew: Oh wow. Great answers. I hadn't heard either of those before. So, well done. Codie, what kind of investor is a good fit for your fund?

Codie: Sure. Well, you know, the thing about the private market is we have to have accredited and qualified investors. So there are sort of minimum requirements you have to have. But in tandem with that, I really think what I've found for our type of investors are these are investors that are curious about the space overall. We do have some investors that are really passive, but a lot of our investors are family offices, trusts, holding corps that really want to figure out how to make their mark in the space too, and we do kind of a unique, I think, job of educating and keeping our investors updated on the space. We offer co-invests where they get to sit down and speak individually with a lot of our portfolio companies because our belief here is that these companies that, you know, maybe can't go and own their own company right now but could privately invest in them, they'll be the future acquirers. And so our investors are typically those that wanna do more in the space than just singularly invest.

Matthew: And what kind of entrepreneurs or established businesses do you wanna hear from that's a good fit for your investing style?

Codie: Well, first and foremost for entrepreneurs, what I really wanna see increasingly is an ability to execute on the set plan and transparency in everything that you're doing. And this market, it really shakes out who the good entrepreneurs are and who the not so good entrepreneurs are. And the really great entrepreneurs are the ones that we have constant communication with because they're, everybody's always going through challenges in your business. I mean, you have to be kind of a sociopath to wanna be an entrepreneur because it is so hard building a business, and only in this day and age do we actually think it's a sexy thing when in fact it is, you know, a little bit of a masochist that you have to have inside you. And so one, we want an entrepreneur that has that relentless dedication to execution and then it's also super transparent about what is not working, because we can often help absolutely change the trajectory of a business when we get the heads up early enough about what's going on inside of it. It's largely why we required board seats and all of that. So there's that. The second aspect would be we are looking for businesses that fall into a few different verticals. One, we're largely not doing cultivation unless there is a moat around the business or industry, such as we might do a cultivation license in Germany because there's a very limited number of them and they have a unique path to market for instance. But we probably wouldn't just do one broadly. I am very interested in companies in the lab space, in companies in the beverage space, like the one we just invested in. And I'm really interested in distressed companies right now. So, you know, increasingly we're looking to add companies into our portfolios and we're looking to do that at valuations that are attractive. And so if somebody out there is having a company where everything's not going perfect and that scares them from going to get investments, that shouldn't be the case. We can come in and help a lot of times and we can do a lot of things with turnarounds and tuck-ins to our portfolio companies that really can make something that's not doing great by itself, really powerful when paired with another company with strong operators.

Matthew: Codie, as we close, can you let listeners know how to find Entourage Effect Capital as well as, you know, startups, investors and where to find you also on social media, just all the ways that people can get in touch with you?

Codie: Yeah, isn't the internet fun these days? We're just about everywhere. I mean, entourageeffectcapital.com is our website. I would say I'm most active on LinkedIn and Instagram, probably the company as well. So I am at Codie Sanchez, C-O-D-I-E is first name on both of those. And if you are an investor that wants to invest in the fund, feel free to reach out on any of those platforms, same with entrepreneurs. And if you are an entrepreneur, keep a thoughtful eye on sharing your actual financials and how big of a company you are, etc when you send. That will get you quicker up the chain.

Matthew: Great. Well Codie, thanks so much for coming on the show and educating us. Again, we really appreciate it and good luck to you in e verything you're doing.

Codie: Thanks Matt. Love the show. Thanks 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. Learn more at cannainsider.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 cannainsider.com/trends. Have a suggestion for an awesome guest on CannaInsider? Simply send us an email at feedback@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.

Promotional consideration may be provided by select guests, advertisers, or companies featured in CannaInsider. 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.

 

Ep 280 – Cannabis Consumers Are Demanding Price Transparency

dan nelson wikileaf

Where do you start the search for your next cannabis product? Here to tell us how customers are starting their cannabis search (and what they’re searching for) is Dan Nelson of Wikileaf, the industry’s leading price comparison platform.

Learn more at https://www.wikileaf.com 

Key Takeaways:

  • Dan’s background in cannabis and how he came to start Wikileaf
  • An inside look at Wikileaf and its mission to help customers save money while making informed purchases
  • Consumer trends and the types of products that are gaining traction
  • Differences and similarities between Wikileaf and Leafly
  • How Wikileaf creates perceived value to attract buyers without cutting price
  • Dan’s advice to entrepreneurs on how to go to market to ensure the best chance of success
  • Wikileaf’s ad policy for brands looking to stand out in a crowded market
  • Where Dan sees dispensary offerings and consumer preferences heading in the months ahead
Read Full Transcript

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 cannainsider.com. That's C-A-N-N-A insider.com. Now, here's your program.

Where do you start your search for your next cannabis flower product? For most of us, it's online. Our guest today is Dan Nelson of Wikileaf and he is here to tell us how customers are starting their cannabis search and saving money. Dan, welcome to CannaInsider.

Dan: Thanks for having me, Matt. Appreciate it.

Matthew: Give us a sense of geography. Where are you in the world right now?

Dan: We're here in Seattle, Washington. That's Wikileaf technology's headquarter, but we have offices up in Ottawa and then a dev team out in India as well.

Matthew: Okay. And what is Wikileaf on a high level?

Dan: So Wikileaf is the first price comparison platform. We've got a little over a million people using the site to price shop and to find dispensaries in their area, also to research strains and find strains that they like in their area and do a price comparison at that level. We have a little over a million users using the site and we're in 25 States plus Canada and we've got about a little over 4,500 dispensaries on the platform.

Matthew: Wow. Dan, can you share a little bit about your background and journey and how you got into the cannabis space and then started Wikileaf?

Dan: Oh, yeah, sure. So, I guess the best place to start that story would be back in late 2007, early 2008. So, back then, I was actually running an interest rate comparison website. I focused on the savings side, so not anything to do with really mortgages or credit card, but more to do with money market accounts, CDs, online savings account, anything that was federally insured by the FDIC or the NCUA if it was a credit union. And back in 2008, if you can recall interest rates, the environment or the landscape was a lot different than it is today. You had, you know, one year CDs yielding 7%, 8%, 9%, today, you know, you're lucky to get a 1.5% percent on those same products. So, the search volume for these products was through the roof. And I started the interest rate comparison site to sort of highlight where these products were and where the best interest rates could be found.

We focused more on smaller regional banks and credit unions and some of our, most of our competitors focused on just the large national banks. So, that's how we carved out a niche for ourselves. And the site was doing really well. Again, interest rates were sky high, so they were just extremely popular. And I actually got into an arrangement with Bank Rate who was a publicly traded company at the time, and I embedded their interest rate tables into our high traffic pages on our site. And we had a rev share program where they charged the banks $8 per click. They would send me $4 a click and then they would keep $4 a click. So we split the CPC 50/50. And the site was just doing really well. We were ranking well for all the key terms and we were able to convert our traffic into leads for the banks. So the site was doing well financially and it allowed me to kind of pick up and travel the world in my mid-20s and run the site remotely.

So, from 2008 to 2011 I was abroad, I was in Europe traveling, I went to Asia, I went to Africa. My brother was actually playing professional basketball in Austria at the time. So I kind of made that my home base. It was kind of a central location in Europe and I just had a bunch of buddies from high school and then from college that were coming out and spending stints out there and in Greece and in Germany. So, I was able to connect with them. So the site was doing really well and it allowed me to basically travel the world. And then when I came back to Seattle in 2011, I noticed something very interesting had happened and that was that dispensaries were popping up here in Seattle.

I'm not really sure why my friends didn't clue me in on that, but it was a very interesting thing to see when I got back. This was circa 2012, so, the only...it was all medical at the time and Washington and Colorado were the only States that allowed for it. So, I got my medical card here in Seattle and started shopping around and seeing what these dispensaries kind of were all about and quickly noticed that there was a massive price disparity from one dispensary to a next. So, I was in the South, like union area, which may not mean anything to you, but it was...there was a high density of dispensaries in the area. So, there was about four or five dispensaries that weren't any more convenient to me than the other. So, I was kind of just trying to figure out what was gonna be my go to, if you will.

And I quickly noticed that, you know, I could get one gram of OG Kush for 20 bucks down the road here and then see that same gram of OG Kush, you know, at another place down the block for just $10. So, it was kind of like, how are people pricing these products? You know, what's the rhyme and reason here? And that was sort of the initial sort of aha moment or a concept of Wikileaf where I was gonna...I wanted to bring all of this pricing out in a transparent way for people to be able to shop based on price and see what these prices are in these dispensaries that were kind of reclusive and didn't do much marketing or advertising. So, I took a lot of the framework that I had used for the interest rate comparison site and sort of changed it for this new emerging market of cannabis. And that's essentially how the Wikileaf idea was born.

Matthew: Cool. So, visitors that are looking, when they find you, are they usually saying, like, hey, where can I get the best deal for blue dream in this zip code? Or is that how they come across your site?

Dan: Yeah, there's a lot of people looking specifically for strains that they like. That's the majority entry point to the site. But then there's also people that are just looking for dispensaries in their area and sort of want a general lay of the land. So, right now if you go to wikileaf.com and click on the dispensaries button there, you'll immediately get thrown into your market. We'll pick up your location, we'll spot out all the dispensaries that are in your area and then we'll run, we have an algorithm that runs an average pricing for one eighth of an ounce, which is the most commonly-purchased increment of cannabis. So, you can kind of see how on average people are charging for an eighth of an ounce in your immediate vicinity and get a sort of a general lay of the land in that way.

But the way that we're actually shaping our product here for Q4 and Q1 of next year is that we're actually trying to bring that price comparison down to a granular SKU level. So, what we're seeing is that people are now starting to have favorite products. And in the beginning of the cannabis industry, it was kinda like you pop into a dispensary, you kind of asked the budtender a couple of questions and they sort of show you what you should purchase. But now what we're seeing, probably as any industry matures, is that people now are having favorite products. They're having favorite strains, and they're specifically searching out dispensaries that have these strains. And we want Wikileaf to help facilitate that search and allow people to find out who has which products in their inventory in real-time, and be able to run a price comparison at that SKU level so they can find the best deals in their area.

Matthew: Yeah, I could see that. That's very helpful. And how many visitors do you get to your site a month?

Dan: Right now we're a little over a million people using the site every month. And like I said earlier, we have about 4,500 dispensaries to put in front of those million people. And of those, we have 1,600 what we call live menus where we're pulling inventory from their POS via an API sync or some other live menu workaround like that, so that we can have real-time information so that people, when they see a specific strain or a specific product in a dispensary's menu, they can be sure that what they're seeing when they go into the store, will be the exact same thing as what they saw online.

Matthew: Okay. That sounds like a lot of complicated technical work. I'm glad I'm not doing it, but and, like, once you get it done, I'd love to be a consumer. Are most of the people searching, I mean you probably have the most traction in the Pacific Northwest I'm gathering because you started there or in California. Is that pretty fair?

Dan: Yeah. California, Washington and Colorado are huge for us, where that's where the majority of our users come from. But we do have a growing, we do have a lot of emerging, what we call emerging states and emerging markets. For instance, Oklahoma is a very, is a quickly growing one for us. So, we're about...Oklahoma's about our fourth or fifth most trafficked state. And, you know, if you look at the population there, it's obviously not that high. So, we're getting a lot of traction Oklahoma and they're using us to sort of be that forefront of their, their cannabis shopping and navigation experience.

Matthew: So, what's kind of the typical path that someone who lands on the site? What do they do? What are they checking out after they come and they're looking at how the strain will, you know, what experience it'll evoke, they're comparing prices. What else do they do?

Dan: Yeah, so the number, what you exactly just said. So, the number one instance of people using Wikileaf is coming through from a strain that they're looking to read up on, they're looking to learn how it's affected other users and then they're looking to see you know, where this is nearby and potentially even run a price comparison and see where they can purchase. So that's the number one use case. The number two use case is people that just wanna find a dispensary in their area and they wanna make sure that they're getting, you know, a decent price. And that's how we showcase the landscape using our average pricing algo that we attached to the one eighth of an ounce increment.

Matthew: Okay. So, for each strain that you have the typical effects, and I mean, what is the effect most people are going for? You can probably tell that, you know, by looking at your data, like, what do people want right now?

Dan: Yeah. So we can see through search volume what people are looking for. It's usually creativity. People wanna be, you know, focused. People wanna be able to use cannabis and still sort of proceed about their normal lives. And we see that through people filtering for cannabis strains for creativity, focus, energy, these sorts of searches.

Matthew: Yeah, that's a funny thing to search for, like, I want cannabis to make me more creative, which is kind of a funny thing, but it's like, it's inside me but I need something to unlock it, which is...The whole thing is kind of crazy, but it does work.

Dan: Right. Yeah, yeah. It's interesting.

Matthew: Can you give us an idea of what people want in terms of the different products? Like, what they're most interested in right now in terms of vape, flower, edibles and so forth?

Dan: Yeah, I mean we see that vape is the quick, sort of like the surging product that people wanna use. It's a little more discreet. It doesn't come with the smell that flower does. You know, you can kind of take one or two pulls and be fine. You don't need to, you know, smoke a full joint or anything like that. There is a bit of a scare that's had a bit of a pullback on vapes with the whole I guess the black market that's sort of tainted the vaping scene in general. But it's still the quickest growing product line I would say in the cannabis industry.

Matthew: Yeah. It seems to be recovering. Like, that scare seems to be fading a little bit as people understand, like, oh, this was kind of black market stuff that got into the mix somehow. How has the market changed in a way that surprised you over the last couple of years? Have you ever scratched your head, like, wow, I didn't expect this to happen and yet it has?

Dan: Yeah. Well, really the CBD, which we kind of just touched on a little bit earlier, the CBD market has been the biggest sort of like wow moment for me, seeing how much that's caught fire in the industry, seeing how that there's, you know, just CBD only stores now that are popping up in places like Texas where you wouldn't imagine maybe cannabis, you know, succeeding in that state. But we're seeing a lot of CBD in States like that really catch fire. And also, we can see that the search volume for things like CBD oil, CBD tinctures, CBD gummies, you know, all this stuff is going through the roof. So, we can tell that it's definitely growing in popularity. And I think the whole side of the plant that is non-psychoactive, that doesn't, you know, ''get you high,'' the trending popularity in that has been the biggest, sort of a, I guess, eye opener to me because just, you know, growing up being, you know, 37 years old, you sort of only think of cannabis in one sort of vein. And now it's, you're seeing that there's a lot of other applications that consumers are keen on and it's exciting to see.

Matthew: Yeah. So, you mentioned that you're connecting to get real-time data on products so people can walk in and know, like, hey, I wanted this vape cartridge and there it is. So, like, there's price certainty. So, you're connecting with, like, the point of sale systems, it was like MJ Freeway, Flowhub. Any others?

Dan: That's exactly right. Yeah. We have partnerships with MJ Freeway. We have partnerships with Flowhub, Green Bits is extremely big here in the Pacific Northwest. Cova, we've got Corona coming online. They're another Pacific Northwest company. So, yeah, I mean, just connecting with the big ones and it's still a fragmented market, the POS sort of landscape. But what we're trying to connect with all the big ones and we've got all the majors under our belt. It's just sort of picking off the ones that are kind of growing market share in new states that we need to still sync up with.

Matthew: Yeah. Because if you show a product that's actually not available or not available at that price, then you've got an angry, angry, customer on your hands, right? And they're out. So, you just gotta be, it's gotta be real.

Dan: Yeah, that's exactly right. And we've actually had an instance of that back a couple of years back before we were connecting with point of sales and the menus were all updated by the budtenders or the dispensary managers. And we had instances where yeah, someone drove a very, very long way over an hour drive to get a specific strain they were looking for. They found it on Wikileaf. It was a great a price, and then they got to the dispensary and it was no longer there. So, that was a bad sort of experience for us. But it also showed us that, you know, people are using the site the way in which it was intended, and now we just need to get our data on point and we'll be providing a very valuable service to people.

Matthew: Is it hard to get these dispensary partners to talk with you, and, you know, get them on the horn and get the technology all set up? I mean, what does that take?

Dan: Yeah, I mean, it's a bit of a...it's a bit of a rigamarole. Yeah. I mean we have to find the right time of day to touch these people. We have to know when their shops are busy, when their shops are not busy, when the dispensary manager is gonna be in, you know, who that dispensary manager is. So, we have a dispensary onboarding team that handles all of that and they're doing a phenomenal job. We've integrated with, you know, 1,600 dispensaries in under a year. So, I mean, if we continue at that rate, you know, I think we'll be in a very, very good place throughout 2020.

Matthew: Yeah. Okay. So, most listeners are familiar with Leafly that's also there in Seattle. How are you similar or different or how do you compare yourself in your mind?

Dan: I mean, there's some things we do that are similar, but I still think that we are the number one price and product discovery vehicle. Leafly kind of, I think, is very strain and review focused almost kind of like a Yelp kind of model, where we're as a product finder and a product price comparison vehicle, and strains and reviews is also an important element of that, but it's not, like, our focus where I think that is probably likely with Leafly.

Matthew: Now, like, do you see at some threshold there is a transition in the customer's mind where it's like, if the price drops below 10% of what they think it should be, or 20% that, like, that gets them off the fence? Like, is there some trigger or is it totally variable on geographies?

Dan: No, there is a trigger and we can see that the dispensaries are actually leveraging this. So, they'll have things like, you know, 20% off wax Wednesdays and you'll get a flood of people in specifically for wax because of that 20% discount. And dispensaries update their deals and their about section on our site specifically highlighting these daily deals throughout the week so that they can drive in a surge of customers that are specifically looking for that price break for that product at that time.

Matthew: Okay. That's interesting. Any other best practices for dispensary owners out there listening where it's like, hey, you know, I'm sitting here as Dan, you know, CEO of Wikileaf, but if I was forced to become a dispensary owner tomorrow, I would do X?

Dan: I think you really would want to, I mean the biggest thing is driving, you know, boots into the store, right? Everyone needs customers. So, that's number one. So, that's what we're doing with our million, you know, million plus people using the site every month is trying to, you know, showcase which dispensaries those million people should use. But I think the other thing is gonna be big, is gonna be business insights and data intelligence and finding out really which products are selling well, which strains are selling well, who, you know, your dispensary neighbor across the street, what's flying off of their shelves and how can I leverage that and how can I stock my shelves correctly. So, I think that's also an important aspect moving forward for dispensary owners.

Matthew: Now, what if you had a cousin that moves to Seattle and he says, Dan, I know I wanna be in the cannabis space and create a brand. What do you think I should do so I can get my brand into dispensaries and get people to care about it?

Dan: Yeah, that's a good question. I mean, I think I would just talk to people, talk to people that have built successful brands, talk to people that have been in the cannabis space for a long time. Learn what's worked, learned what hasn't. And just go from there. I mean, it's all a learning process. You know, it's a brand new industry. We're all kind of learning as we go. And just having the conversations with the right people will get you, I think where you need to be.

Matthew: Yeah. Now, do you offer ads for brands that want to stand out a little bit, they wanna, you know, make themselves get above the fold or do something on your site?

Dan: Yeah. So, we are unrolling a beta program for brands that we're working on right now actually. And what we're allowing brands to do is to be able to showcase all of the SKUs that they offer. And then through our point of sales syncs with our dispensary clients, we're actually able to allow the brands to show customers in real-time where their brands are right now, who has those brands in their inventory and how are those retail outlets pricing those products. So, that's the brand side of the equation that we're building out right now. And we'll be having that beta program roll out here in the next coming weeks and months.

Matthew: Okay. And if you were to look down the road, you know, maybe the next five years, how do you think consumer preferences are gonna change?

Dan: I think that like I said earlier, brands, specific products, and strains are gonna start getting more traction based on the quality and the price of those products. Just like in any other industry where, you know, as time goes on people start to get loyal to certain brands and products, I think you'll see that that same phenomenon exists in our space too.

Matthew: Okay. And where are you in the capital raising process? Can you tell us about that?

Dan: Yeah, so we just actually finished our $6.8 million Canadian round. We also listed on the CSE with that raise.

Matthew: Cool. Congratulations.

Dan: Thank you. I appreciate it. So that'll sort of allow us to just execute our operations that we've had planned out for the next 12 and 15 months. And, you know, we'll be obviously, the big part for us is rolling out our advertising network and our product suite where we're actually gonna be bringing in revenue from the dispensaries and from the brands. So, we think that this raise got us the appropriate runway to reach breakeven and profitability.

Matthew: Great. So, Dan, I like to ask a few personal development questions to help listeners get a better sense of who you are as a person. With that, is there a book that's had a big impact on your life or way of thinking that you'd like to share?

Dan: Yeah, so when I was traveling three years abroad, you know, I didn't have much access to technology, to TV, to even my phone or my laptop at all hours of the day, like you obviously have here in the States. So, I did a lot more reading then and I think ''Pillars of Earth'' actually was, is my most favorite book. It's the book that I recommend to, to everybody. It's not really, I mean, it's a fiction book. It doesn't have much to do with work or anything like that, but it definitely allowed me an escape when I was sort of abroad and just provided some much needed entertainment during that time, I think.

Matthew: Okay. What do you think the most interesting thing going on in your field is besides what you're doing?

Dan: I think that the CBD space is extremely interesting and something that I didn't foresee catching fire like it did. You know, I had touched on this a little bit earlier, but like, just growing up it was always kind of cannabis is, you know, THC, gets you whatever ''high.'' And then just seeing that there's all these other chemicals and all these other sides to the plant that have very real value for people has been very interesting to see, and CBD specifically. I mean, when we have the guys look through search volumes for, you know, all the CBD products under the sun and we see that these things are going up and to the right, it's very interesting to see that just consumers are super keen on this side of the plant.

Matthew: Who living or dead would you most like to smoke a joint with?

Dan: I think that hands down would go to former president Barrack Obama. I know he's dabbled in the past. He probably doesn't now, but that would be quite the experience.

Matthew: Okay. Dan, as we close, how can listeners find out more about Wikileaf and also find your stock ticker symbol?

Dan: Yeah, so we're trading under Wiki, W-I-K-I. I'd say head to our blog to keep up on news and then just going to Google news in general and searching for Wikileaf should keep you up-to-date with all the developments of the company.

Matthew: Well, Dan, thanks for coming on the show today. We really appreciate it.

Dan: Thanks Matt. I appreciate you having me.

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