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Ep 326 – How Contract Manufacturers Can Scale Your Cannabis Product

alex rowland newtropic

Is it better to produce your own cannabis products? Or outsource to expert manufacturers while you focus on your brand? Here to tell us is Alex Rowland, CEO of NewTropic.

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

Key Takeaways:

[00:51] An inside look at NewTropic, a leading cannabis manufacturer based in Santa Rosa, California

[1:18] Alex’s background in cannabis and how he came to start NewTropic

[5:56] Examples of NewTopic’s average clientele – particularly unlicensed brands looking to overcome California’s strict regulatory hurdles 

[7:47] How NewTropic helps relieve two of the biggest pain points for cannabis companies: financial resources and compliance

[17:05] Why removing the regulatory overhead of fulfillment allows companies to focus their attention on core competencies

[18:45] NewTropic’s extensive onboarding process and how the company’s team works to ensure all your needs are met as a client

[20:30] Alex’s plans to expand NewTropic across the US

[25:21] The requirements a company needs to meet before working with NewTropic

[30:16] Alex’s advice to new entrepreneurs on how to develop a successful business plan and pitch to investors

[33:11] Alex’s thoughts on the federal rescheduling of cannabis and where he sees the industry heading in the next few years

Click Here to Read Full Transcript

Matthew Kind: 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 dot com. Now here's your program. Should you be producing your own cannabis product or outsourcing that to expert contract manufacturers as you focus on your brand? Who'll help us answer that question is Alex Rowland of NewTropic. Alex, welcome to CannaInsider.

Alex Rowland: Thank you. I appreciate it.

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

Alex: I'm actually in Santa Rosa right now. Santa Rosa, California is about an hour North of San Francisco and it's where we have our facilities.

Matthew: What is NewTropic on a high level?

Alex: NewTropic is a contract manufacturer for cannabis products. What that means is brands, specifically cannabis brands in California come to us and engage with us to manufacture products on their behalf. This includes everything from pre-rolls, to package flower, to concentrates, to vape carts, topicals, tinctures, edibles, beverages. You name it, we're making it.

Matthew: To give us a little detail about your background and journey and how you got to this point in setting up NewTropic.

Alex: I appreciate it. It's actually rather a Securitas route. I actually came out of tech. I've been starting tech companies since the mid-1990s back in 1995. Actually, it was the first internet company I started and I've been involved in those tech companies out in the East coast until 2002 and then moved out to California. Most of those were enterprise software. Most recently in media we actually start a business back in 2009. That wound up in 2013, getting to number eight on the Inc. 5000 fastest growing businesses.

I've been around a lot of fast-growing tech companies, but I've been looking at cannabis really for probably 20 years as a market segment I thought would be very interesting to get into, but it wasn't until 2012 when Colorado and Washington was moving towards legalization. Then ultimately in 2015, when California started taking the same steps for the passage of MAUCRSA.

To me, all these markets were interesting, but they were simply that a curiosity until you have some regulatory framework to build a business model around. Once that happened in 2015, I decided to jump into the space. I was still working in tech so we sold off some of the companies we had in the space, the Canadian company. I went on a walkabout as I'd call it. I spent really the last half of 2015 almost all of 2016 driving up and down the state of California talking to operators, regulators, going to see dispensaries, grow operations, kitchens. Really talking to anyone who would talk to me giving us business. Trying to get an understanding as to what exactly was going on in the space and where I thought the business opportunity was. Really the net culmination for that was by the end of 2016. It was fairly apparent to me that manufacturing was a big weakness in the space and so we need to focus our attention on.

Matthew: Alex, you did all this due diligence with driving around California talking to operators. What was your key insights you had when you were doing that?

Alex: I think it was fairly apparent to me that regulators were going to focus on manufacturing. The regulators are really there primarily to ensure consumer safety when you launch new products like this new categories. That was going to be clear that cannabis was obviously [unintelligible [00:04:00] had a great deal of stigma and I think regulators were especially concerned about, so consumer safety was going to be paramount along with that. Obviously, tax collection is probably their second highest priority.

I think what we realized is that while there were a lot of people cultivating cannabis and a lot of people actually at that point in time even retailing it, the middle of the supply chain was radically underserved. The way it was really traditionally is most cannabis was flower and it was farms would walk into a dispensary with literally pounds of flower in Turkey bags and would sell directly to dispensary who would then go ahead and segment it out to consumers.

That was changing dramatically. All flower products would have to be pre-packaged and certified as safe by regulators, but B there was a proliferation of these new products coming out concentrates, topicals, tinctures, all these infused products that were going to require manufacturing expertise. The state of the art at that point in time, it was literally people's private kitchens, a converted garage, a barn here and there. It was literally a joke and we knew that given the regulatory scrutiny and the importance of delivering a high-quality consistent product nor to build brands that manufacturing is going to be the fulcrum of the market, and there's just nothing there.

We looked at that and said, initially we were going to go ahead and make many factoring expertise a core part of our business model. It became fairly apparent, I think early on back in early 2017, that this was a function that we were going to have to provide for other brands because most people were just not doing it well. I think that was really what we came to that conclusion in late 2016 and really said about the goal of producing or developing a very scaled high-quality manufacturing solution that all brands could share.

Matthew: Do you have an example of a NewTropic client and how they partner with you?

Alex: Yes. I think one of the interesting cases actually because I break it up into distinct quadrants, the clients what we really specialize in are unlicensed brands. Brands who are IP licensing organizations, these are companies who have figured out product-market fit. They've formulated some product, design the packaging, but now they actually need to go about executing on that. If you look at California, like most of the states there's a fairly rigorous, rigorous regulatory set of hurdles you have to overcome to get licensed and operating in the state.

Most brands right now are not going through that process. Certainly in the future not going to go through that process of building their own facilities. These are unlicensed brands and these are brands that are either pure startups and they've raised a bunch of capital or they might even be licensed brands and other states they're looking to get into the California market or they were in the old medical prop 215 market. They're trying to get back up and running.

There's a whole bunch of different scenarios, but generally speaking, the typical client is unlicensed, but they have either sales velocity already in the marketplace either through some other contract manufacturer or like in the case of [unintelligible 00:07:12] they had their own manufacturing facility. They're looking to divest themselves of that asset and move to this asset light model, but that is really typical. It's someone who is saying, "We're going to focus on sales and marketing and building demand velocity, retail channel. We want you guys to focus all the logistics around making sure our supply chain is able to scale to meet our demand, able to deliver products reliably at the quality that our clients would expect." That is really a division of labor. It's unlicensed brands.

Matthew: What are the clients come back in, they tell you is like they identify as their biggest one or two benefits? You have a lot of benefits there, but what is the thing that their biggest pain point or opportunity that you help them with?

Alex: I think it's financial resources and focused. I put those two at the top of the list. What we hear a lot is manufacturing compliant product in cannabis is enormously challenging. We still, we've been at this now for a solid year. We still understand and go through the pain and suffering of delivering compliant product in the marketplace to our clients exacting specifications and our level of quality that we require out of our facilities. That's enormously challenging to do.

What winds up happening is when you're a brand and you're trying to manage that supply chain, it's very difficult to focus on selling. Most of what you want and focusing on are supply chain logistics and how you actually fill those shelves. We allow brands to really get back to focusing on building that demand at the retail channel and let us focus on those logistics.

The second thing is something that we've seen over and over again with brands is lack of financial resources leads to gaps in their supply chain. What I mean by this is we've seen this over and over again, a brand will launch into the market, they'll do a great job of selling, they start to get some scale, and then they run into cashflow issues. They can't support buying additional biomass or packaging or whatever the case may be to refresh their inventory levels. Collections takes longer than they think to happen and they start to run into gaps financially and that leads to gaps in delivery to dispensaries.

I think as anyone can tell you in the market once you accept an order from a dispensary and you're unable to follow up that order with consistent delivery, the dispensary tends to drop you. Selling back into that dispensary is 10 times harder than selling in the first time. These brands going to come up great velocity at retail they have supply problems. Those retailers drop them and they disappear within months.

Matthew: It makes a lot of sense because people want it into a retail environment dispensary. They like a product and they get this totally disappointed when it's not there and these dispensers are not in the business of disappointing customers, so they want something consistent even if it's not an A+ in their mind, they say it's a B+, but we can always get it. I totally understand what you're saying there. How big a problem is this? You're obviously you sound busy, you have clients, but how many cannabis product companies are suffering from some of these issues you described?

Alex: I would say almost all of them. The funny thing is I think there's rare exceptions to this, but if you look at the vast majority of brands in the marketplace, there's a few that stand out that have stood the test of time. Mostly that's because they've gotten a robust supply chain in place and managed to stay on store shelves. That's about yes, building a brand and recognition with the consumers such that they're looking for that product but a lot of what allows brands to remain relevant and sticky is the ability to actually get their supply chain right and consistently deliver a broad range of products into the retail outlets.

That is a very rare bird right now. There's not many brands- even some brands that were very successful back in the prop 2015 days, before a lot of the testing requirements and regulatory hurdles were erected, they could manage their supply chain. They had enough cash and wherewithal to make it happen but these new regulations have really made execution that much more complicated and a lot of brands that were very successful have not been as successful now in this new market.

It's a rare exception, but we've got a line out the door. We started onboarding clients back in January, started shipping first product in March, and by May, it was pretty clear that we had essentially maxed out all of our processing cycles. We're still in a position right now where the 14, 15 clients or so that we onboarded, we're only able to execute on about 40% or 50% of their current order volume because we're just constrained by the capacity of our facility. We're doing a lot to help resolve that problem, but I don't see any shortage of demand right now.

Matthew: Are you going to build a second facility or expand your existing facility or go to Southern California too, or what is that going to look like?

Alex: All of the above. We've actually already expanded by adding a second facility so we actually have two facilities now in the Santa Rosa area. We have a third under contract that we're starting construction on in December. We have another facility in Santa Rosa that we're putting an offer in on in the next few days and a sixth facility down in Southern California in downtown LA that we're looking to put an offer in on before the end of the year.

Matthew: You mentioned Los Angeles, is this an opportunity since COVID-19 is still a thing, there's probably in the commercial real estate space some softness which translates into an opportunity for you, would you say that's accurate? Could you describe that a little bit?

Alex: It's actually commercial space is different than industrial space. What we're seeing is there's a lot of office space freeing up, but industrial space is still trading at a premium. This is because if you really look at what's going on in the broader economy, more and more people- people are still buying things, but they tend to be buying it more on places like Amazon, and they're going directly out to retailers.

What's that leading to is more and more of this industrial distribution space is trading at a premium, whereas a lot of retail and commercial space is going vacant. The facilities we tend to focus on are still industrial warehouses and distribution facilities so that market is still red hot.

Matthew: Sometimes building a manufacturing facility and operations, people bailed-out or companies bailed out, operations that are too small or the opposite problem, it's too big. Can you talk about finding that sweet spot there and how you look at that?

Alex: This is part of the reason why we focused on our specific model, but we recognized very early on if you're going to be a brand and you're going to own your own facilities to manufacture, there's this very difficult decision you face at the beginning. Either A, do we go conservative and build a very small facility to keep our capital investment low and to keep our overhead low and the expectation that we're going to grow more slowly.

The problem with that obviously is that if you're able to get a lot of sales done, [unintelligible 00:14:51] A, each of the unit you produce is more expensive because of everything's done manually, you don't have a lot of automation or mechanization in your facility, and B you're just tapped in terms of the total amount of product you can push out of a building. The other choice is you go ahead and get very aggressive and you invest substantial amounts of capital into these facilities and you essentially overbuild assuming that you'll be able to sell off that capacity through product sales fairly quickly.

You carry a lot of fixed overhead on a per-unit basis, but you can't make those units more expensive, but you're assuming over time that your sales will catch up and put you in a position where you're very cost-competitive. Neither one of these decisions is very palatable and I think it's part of the reason why more and more brands as they're getting into the market now are not looking to do either one of those things. They're looking to avoid that question entirely and just look to variablize all those fixed costs with a provider like us.

I think it's very, very difficult and what you're seeing is there's a lot of brands in California who overbuilt. They got easy to capital back in 2017 and 2018, they massively overbuilt their facilities. What they're doing is they're doing both. They have their own brands, and also moonlighting and selling excess operating capacity to third party brands. We don't think that's a great solution either because you're naturally conflicted. You're enabling your competitive products through your manufacturing capacity and it's not really your expertise, your expertise should be around building and launching your own brands on your own platform.

I feel like that there's all these bad decisions that have to be made given all those criteria and that's what we try to avoid. As we want a big centralized manufacturing, we think it's a much more efficient way to build and scale a brand to variabilize all that fixed costs on a per-unit basis, predictable unit margins, but also have a massive amount of capacity such that you can drive unit cost into the ground as fast as possible.

We don't want to compete with our clients if we're launching our own products, that would create a conflict with those brands. Every day we get up, our focus should be on how do we make our brands more successful so we make the NewTropic facilities more successful and that's how we've gone about it.

Matthew: Sacramento loves to make regulations and laws and so forth, and you have to comply with those. Can you give us a sense of what some of those are and how you take those off the plate of your clients?

Alex: Well, first of all, all of the regulatory overhead of handling fulfillment is now remote. A brand essentially sits entirely outside of the supply chain. Their job is to go to retailers and delivery services to sell their brand and to essentially open up those doors and get those retailers ordering products from us and then we go ahead and fill those orders. Everything from procuring the initial biomass to testing that material to bring it into the facility, processing it, extracting if necessary, packaging it, retesting it, hoarding it, or dating delivery to the retail channel through a fulfillment agent, all of that is handled by NewTropic. Essentially, the brand gets to avoid all of those regulations.

Matthew: That's great. Do you have a lab right nearby that does the testing quickly?

Alex: Given our volumes, we work with multiple different labs. Sometimes our brand partners have specific labs that they've got a good relationship with, that they bring to the table. Oftentimes we work with labs that are close physically to us and have more frequent pickup times. Sometimes it's a price point consideration. It really depends, but we've got probably seven or eight labs at this point in time that we're working with on a fairly consistent basis.

Matthew: Is there a single point of contact once you're onboarded? Do you work with a project manager or as an account executive or do you have software as the primary interface with NewTropic? What does that look like once you come on board?

Alex: I would say that in general, working with us is a very white-glove experience. There's a whole team that works with the client upfront. First of all, to vet the clients and make sure that they're going to be a good fit for our business model and that we believe that they've got the financial resources and the business acumen and the sales capacity to scale our brand within our platform.

It's a fairly lengthy process of vetting the clients and then onboarding that client and making sure all of the components of that product from packaging to design, all of those things are plugged into our model and we understand exactly what the supply chain looks like. That's really a three to four-month process. Once you're up and running, you work directly with an account representative. We're in the process right now of working to provide an online interface that'll help our clients track product as it moves through our facilities. Generally speaking, right now that is one or two different account reps that work on a day-to-day basis with you. 

Matthew: Why focus exclusively on California?

Alex: From a regulatory standpoint, we're forbidden exporting product out of the state. If we're going to go ahead and start supplying Nevada or Oregon or someplace even like Massachusetts or New York, we have to build facilities in those markets to supply to those markets. We are driven to this decision from a regulatory team.

Matthew: Any plans to move outside of California and expand market or not right now?

Alex: No, 100%. We believe that ultimately what is going to be most valuable for our clients is for us to have facilities in every single adult-use market, such that you can work with us and we're going to share product reliability and consistency in every market in which you want to operate. Our goal is first we're looking to expand into Massachusetts. We're down the path on looking at a facility to get that up and running in that market and that'll be our first foray into the East Coast. We think New Jersey is obviously a very interesting market, Pennsylvania, Florida, Michigan, but at the end of the day a big chunk of what we are going to specialize in is not just the competency of producing high-quality product in our facilities, but it's also developing new facilities and get us facilities up and running in new regulatory environments.

Matthew: What about a potential client that says, "Hey, how can Alex and his team really understand the nuances of my business?" We look for a certain terpene profile or this or that and they can't do it as well as us. You probably see that type of thing. How do you help them get their arms around breaking down how the whole operation works?

Alex: I'd say in general, a lot of clients come in feeling like they've got a secret sauce and that their products is completely unique in the marketplace. I think we value and respect that IP. A big chunk of what we feel like our advantages over other manufacturers who are also brands in the market is you can feel very safe with your IP here. We go through the entire process where brands are asked to identify specific steps in their process that they believe are proprietary. We vet that process and once we essentially segment off that component of the supply chain that is proprietor the brands, we've got a whole mechanism or a whole protocol it gets implemented to make sure that we're protecting that IP from other brands that we work with.

That is something that I don't think you're going to see when you've got another brand you're working with and you're buying their excess capacity that they've got competing products directly in the marketplace. I don't think there's any way a brand could feel comfortable that IP is safe. I think that's true. I think brands are getting more successful at developing innovative delivery systems, innovative formulations that are unique to the marketplace. It's our job to protect that IP.

Matthew: There's a lot less upfront costs because there's no capital outlay for buildings and staff and so forth for the operations since you're handling that. That frees up time to allow your clients to focus on their core competency and for your successful clients that you see like, "Hey, this partnership's working out really well." What do they consider the core competency to be? Is it back to that? It's like, we know we're a brand and I'm a sales and marketing company. Is that really what it boils down to?

Alex: I think that's it. I think it's enabling the brand to focus on what is product-market fit because all brands, I think they'll start out with a specific product, but almost certainly within months or maximum years, they're looking at expanding the scope of their product mix to be able to boost the amount of revenue they can generate from each of the retail outlets that they've got access to. That means new products development. I think that's a process that almost every brands goes through and that's part of I think the magic of working on this platform is launching those new products is vastly more cost-effective. They're able to harness this customer data and having this direct communication with the retailer to start to look at if we're hitting this specific demographic what are other products can we add to our roster?

They're going to hit that same demographic effectively and then they can launch those new SKUs on our platform relatively trivial or at least vastly easier than if they own their own manufacturing system or they're looking to go ahead and outsource that with a brand new partner. I think the focus that brand should be on understanding product-market fit. Then once those products are developed and ready to launch, build a sales velocity and again, being able to rely on us to make sure that we can scale up to meet that sales velocity is absolutely critical and a big chunk of the reason why we think we're so valuable.

Matthew: You mentioned a little bit about how you vet clients before they come on board. They need business acumen, they need product-market fit. They probably need a certain amount of capital to know that they're in the game and can can partner with you. What else describes the ideal clients for people that are listening and saying, "Hey, maybe I want to work with NewTropic or my business would be a good fit." How can you help them get an idea if they are? 

Alex: I would say the number one thing we look for is natural sales talent and relationships in the business where we've had I think a great deal of success or with folks that have some history in cannabis. They have tight relationships with retailers already and they've demonstrated an ability to build sales velocity with those retailers in the past. That is of critical importance to us. I can't tell you the number of times we interact with partners that they think they've got a unique product offering or they've got a brand name or a celebrity name behind them and they think that's going to be sufficient to really be successful in California.

When I'd say that it's really about on the ground execution at the retail channel, working with those retailers, understanding what their objectives are, helping to meet those objectives, and constantly evolving their product offering to meet evolving consumer demands. This is not something I think it's viable in the short term potentially to outsource some sales just to get things kick-started. At the end of the day, brands have to be committed to putting resources on the ground the state to actually execute around building sales velocity.

Matthew: Now, I want to get an idea of the unit economics here. Is there a successful client that you don't have to mention their name, but you could maybe mention what their costs are and what they sell for in retail so they can get an idea of what a profit margin that's realistic might look like?

Alex: In general, I think a good way to look at this is and I'll just say, let's say you're trying to hit a $20 wholesale price for some SKU. What we aim at is a situation in which that products we're going to spend somewhere around 10% of that on third-party logistics fulfillment, basically getting that product from our warehouse onto the store shelf. Again, not the sales function, but just the actual mechanics of getting that product on that store shelf is about 10%.

Generally speaking, our cost of actually making it a $20 wholesale products is going to be about $10. There's some products like edibles that that might be more like $6 to $8. There are other products that might be $11 or $12, but across the portfolio you're looking at somewhere around 50% of wholesale toss is the actual cost of producing that item. What you're left with there is 10% is going to fulfillment and 50% to the raw cogs of producing that product. You're winding up with somewhere around a cumulative margin of 40%.

Generally speaking, our brands are going to wind up getting $4 of that and rating at $4 or about 20% of the wholesale price. That's I think a good way to look at it where there's a lot of this in an overhead generally in running our business. There's certainly a lot of sales and marketing to be done with a brand. We want to give them really the power necessary to build successful brands that can scale. We look at that as a fair distribution of the proceeds out of each unit.

Matthew: If you were just talking with maybe somebody that was starting out in the industry, you're given some really great ideas here to make your new brand successful too even if they're not ready to partner with NewTropics. If you let's say you have a new brand it's still in your mind, it sounds like you need to raise capital or have capital yourself. You definitely need the relationships with all the retailers and understand how they think. It's not just the relationship, but understanding how to create a win-win and then you need to have product-market fit. If someone comes to you with those three things you're like, wow, you're 80% of the way there or do you feel like add one or two things more?

Alex: I think we want to make sure the product is fully baked. We are not a product development shop. By the time the product comes to us, we're about operating scale not about product development. These products have to be fully formulated and ready for us. The packaging needs to be designed. We do tend to work with brands to make sure their packaging works better within our automation systems, so we can drop unit cost down. Generally speaking, the product should also be there. 

Matthew: When you're looking at business plans then, there is probably a few things that you touched upon this year, but is there anything that a business, someone is working on a business plan now should make sure they have when they're creating their cannabis business plan, when they're going to pitch investors, like what do you think a lot of people leave off? Because I want to help the businesses that are still early on, but might want to partner with you later on.

Alex: Yes. I think one of the most important things you've got to focus on right now in cannabis is understanding where price points sit in the marketplace for different products. I routinely see people come into the marketplace, they're making assumptions about what they think they can sell a product for and I'd say universally right now, two of the prime drivers that drive purchase decisions by consumers is how much THC am I getting for what price. While that seems a little antithetical to where I think the model will ultimately be, it's almost like walking into a liquor store and saying, "All I'm concerned about is how much liquor am I getting for what price."

I think the market will evolve from that, but that's fundamentally a lot of the purchase decisions are made that way. I think you've got to accept that as reality and regardless of where you're looking to play on the top shelf or middle shelf or bottom shelf in the marketplace, you have to have a very good understanding of where price points sit and what the specifications are the product within that price point you have to hit in order to be successful.

Matthew: You have your finger on the pulse of that, but how do other companies get their finger on the pulse of that? Do they work with like a headset or a BDS analytics or some other consulting company that provides that data?

Alex: I think that's precisely it. I think you can get access to data, that way that can be a little expensive. If you're just going through the initial product development phase, a lot of it's going out to talk to as many different people who are actively selling in a marketplace and retailers to understand where those price points sit. I think you can get a fairly good cross-section if you hit a few retailers in Southern California and a few in Northern California. You're going to get a pretty good sense as to where the retail price sits for these products and you're able to extrapolate from that where the wholesale price has to be in order to get on those shelves.

I think you can collect that data manually, you can collect that data through third parties like salespeople who are actively selling in the marketplace or market research firms like Headset or BDS. We also actually, we have a subscription to Headset. We actually, as we're going through this exercise with all our brand partners, we actually plug in our Headset data about the price points and who the market leaders are and the specific SKU category that a brand is looking to launch and we provide access to that data as part of our integrated onboarding process.

Matthew: How do you feel about one federal rescheduling of cannabis is coming? Do you think it's going to be soon or far or what's your general thought on that?

Alex: I think it's always two to three years away and it will be in two to three years. It's funny. I mean I think it's interesting. When I first got into this back in 2015, I think the- if I had to pick an over-under as to where people thought it would be, most of what I heard is, it was three to five years and here we are five years later and I think we're closer, but I think it's still difficult to predict.

Assuming Biden goes ahead and takes office on the 20th, it seems pretty clear that there's a lot of immense and behind the states act. Now, states doesn't allow for federal descheduling, but it does remove a lot of the impediments that really are, from my perspective, the most substantial headwinds to cannabis being treated as a real business and that is banking restrictions and [unintelligible [00:34:13] which is this onerous tax obligation we as dealers have a schedule one substance have to deal with.

If you can remove [unintelligible 00:34:25] and if you can remove the banking restrictions, part of what the cannabis business suffers from in generally is lack of liquidity in the financial markets to support these businesses. You go into a tech business or pretty much any other type of vertical market, it's federally legal. There are thousands upon thousands, tens of thousands of investors and institutions that can support those organizations in their growth objectives using capital. That is not the case in cannabis. The rates tend to be very predatory. It's a highly liquid market, so the terms can be very, very onerous beyond just the interest rates on [unintelligible [00:35:02] 

There have been cases right back in 2017, 2018 when equity was relatively cheap, that's not the case right now. Part of what we're looking for too, I think is, hopefully passage of states. I think there's broad Republican support in the senate, which is really the only thing that I think can hold it up at this point in time. As long as McConnell listens to his constituents and it can get through the senate, I think there's broad by part of support for the states act and I think that would be a revolution in terms of how we finance and scale these companies.

Matthew: You got a lot of moving parts in the business here in with people, process, technology. How do you see cannabis manufacturing and operations evolving over the next few years?

Alex: I think it's two things. Our number one competitor is the black market. People always talk about who's the company if they're out there. I don't think California can support 20 NewTropics. There's really only one of the company I think right now that is as close to our operating scale and ambition for the market. We compete with the black market, that's our number one competitor and it's the 800-pound gorilla. It's currently occupying probably somewhere around 80% market share in California and we're chipping away at it, but it's going to take some time.

The only way this really works is if we're able to drive the production cost through industrialization, mechanization, automation, every single type of strategy we can use to reduce costs, such that we're able to retail products at somewhere around a 20% or 30% premium over black market prices. I think consumers will pay a premium for legal products, A because it's legal, but B also because it's tested and they know it's safe, but they're not going to pay a 100% premium for that product, which is really what the market's asking them to do right now.

We have to figure out as an industry, how to through these steps and through the industrialization of this crop, drive these prices down to a point where we can compete effectively on price with the black market. Once that happens, I think you're going to see a very, very rapid transition of people over to that. It's going to take some time, but we're getting pretty close.

Matthew: Where are you in the capital-raising process, Alex?

Alex: We've raised, I think actually we just brought in some more cash today, so we're a little over $25 million in cash raised, predominant at this point in time as a debt. There's a whole host of different ways in which you can finance these businesses. Fundamentally, there's a lot of assets that we hold both in terms of equipment and receivables that we can finance against. We've definitely done quite a bit of work around capitalizing the business using debt. Fundamentally, we are looking to go out and raise a much larger chunk of capital where the businesses starting to gets to operating scale. It should be breaking even on an accrual basis here within the next quarter and once we do that, we think that we've demonstrated that the business can be self-sufficient, it ultimately needs capital to grow to meet all this market requirement.

Our goal is, we're continuing to raise a small amount of cash right now to bridge the company, but once we get done with that, we're looking to raise, probably I think our appetite is closer to $20 to $30 million sometime in the first half of next year.

Matthew: Is that open to accredited investors?

Alex: Only. Yes, we are not looking to do a public offering so we can only take a credit investor money.

Matthew: As we close in a couple of minutes, I'll get your contact information for people that are interested in reaching out to you about that if they're accredited. Before we do that, let's go over to the personal development questions. Alex, is there a book that's had a big impact on your life or your way of thinking that you'd like to share?

Alex: Yes, there's really two books. One is a book by Max Tegmark called Our Mathematical Universe, which I think is fascinating. It's a pretty dense read but I think it gives a really good perspective on the way things work at a very fundamental level. The other one is called a Radical Abundance, is a book by Eric Drexler, which talks about massive changes in terms of how the way the world works and what's underlying those trends and what's creating all this radical abundance in the way we get through a day-to-day [unintelligible 00:39:29] Those are two books I think it's been pretty impactful on me.

Matthew: What's the most interesting thing going on in your field besides what you do?

Alex: I think the primary thing that's fascinating for me is the diversity in product delivery systems. If you look at cannabis a decade ago, the only way of really consuming it, except for really fringe activity, it was you were smoking it. You were taking some flower, you were putting into a pipe or you're grinding it up and putting it in a pre-roll and you were inhaling it, and that was pretty much it. You've got an explosion in things like drinks, we're working with a company called CLICK for sublingual delivery. Another company called [unintelligible 00:40:12] who has a very unique way of actually consuming flower but in a healthier faction. There's a whole host of different work going on around the delivery of THC, and these are the cannabinoids and terpenes and flavonoids. That's, I think one of the most interesting things.

Matthew: What's one thought you have that most people would disagree with you on?

Alex: I think it's driven by those books. I think it's about abundance. I think we are entering an age in which exponential growth and a lot of underlying factors are driving us towards a situation of radical abundance. I think that's foundational and I'm also a big believer in minimal income for all people. I think there's a way in which we can solve a lot of our problems by a negative taxation system. I get into lots of debates around inflation with some economic minded people around me, but I think there's something to be said for helping provide a fundamental framework that allows people to operate a minimal income. Really unlaunched, I think a lot of the entrepreneurial aspects of our economy.

Matthew: [laughs] I love this stuff, but you're right. It's not directly cannabis-related, so we'll end it there. Alex, we talked about a lot of things here, so just remind people exactly what kind of products, we talked about what's an ideal client for you, but just remind them of what kind of products you manufacture and can help them with?

Alex: We try to focus on the major product categories in the marketplace, but that's really packaged flower. It's, pre-rolls, it's solvent-based extracts, and the category of the word just now embarking upon right now is ingestibles. We're doing also [unintelligible 00:45:32] is another big chunk of it, but ingestibles. Ingestibles is somewhere around if you include beverages and edibles, it's somewhere around 18% of the marketplace give or take. Beverages are very small category but are growing announced size pace, and I think over the next decade, it could become a much larger part of the overall market. That's the one, call it fifth of the marketplace that we're not currently attaching revenue to and that's what we're going to be adding.

Pretty much, if you look at it this way, you walk into a dispensary, we're going to be manufacturing pretty much any product you see on the shelf. We'll be manufacturing for different brands, but we don't want a single product category to allude our focus.

Matthew: For accredited investors and potential clients, how can they reach out to you to learn more?

Alex: My email address is alex@newtropic N-E-W-T-R-O-P-I-C.com. We have a website, newtropic.com where you can go to the investor section and get access directly to us there, or you can email me or brian@newtropic.com.

Matthew: Alex, thanks so much for coming on the show. We really appreciate it and good luck with everything you're doing.

[background music]

Alex: Matt, I really appreciate the time.

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. 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 discuss as medical advice, contact your licensed physician before taking cannabis for using it for medical treatments. Emotional 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.

[00:48:11] [END OF AUDIO]

Ep 325 – Investors Getting in Early Thanks to the First Member-Managed Cannabis Fund

jeffrey finkle arcview

As the cannabis industry matures, new and innovative ways are emerging that allow investors to capture a stake in the growth of young cannabis companies. Here to tell us about it is Jeffrey Finkle of Arcview Ventures.

Learn more at https://arcviewgroup.com 

Key Takeaways: 

[00:52] An inside look at Arcview Ventures, the leading private investment network and market research firm in the cannabis space

[1:34] Jeffrey’s background and how he got into the cannabis space

[4:39] How Arcview’s new member-managed cannabis fund is giving investors access to deals with greater ease and flexibility 

[8:42] The requirements an investor needs to meet in order to join Arcview Collective Fund

[10:03] A breakdown of the different investor archetypes and how Arcview Collective Fund benefits each

[20:57] Jeffrey’s advice to entrepreneurs on how to successfully pitch their companies to investors

[25:33] Arcview’s process for follow-on investments and liquidity events

[31:03] Gaps emerging in the cannabis marketplace right now and where Jeffrey sees the industry heading over the next few years

Before you go, check out Matthew Kind’s favorite new cannabis smoking device.

Click Here to Read Full Transcript

Matthew Kind: 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 dot com. Now here's your program.

As the case cannabis industry matures, new and innovative ways are emerging that allow investors to capture a stake in the growth of young cannabis companies. Here to tell us more about it is Jeffrey Finkle from Arcview Ventures. Jeffrey, welcome to CannaInsider.

Jeffrey Finkle: Hi, Matthew.

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

Jeffrey: I am calling today from Port Washington, New York, about 25 miles outside of New York City.

Matthew: What is Arcview Ventures?

Jeffrey: Arcview Ventures was formed to manage the principle investing activities of The Arcview Group. I'm sure you know of The Arcview Group. I know Kim Kovacs has been a guest on your show. The Arcview Group, over 10 years, has been the nation's largest investor network serving the cannabis industry. We formed Arcview Ventures to try to put and get assets under management to not only facilitate the funding of the cannabis industry but to participate in it.

Matthew: Tell us a little bit about your background and journey and how you got started in this space, what you were doing before and how you joined the Merry Pranksters over at The Arcview Group.

Jeffrey: Sure. I started my career as an operating executive in the software industry, and through a series of acquisitions, ended up at Computer Associates, which was a very large software company in New York. I was originally from Boston and was really that transaction that facilitated my move to New York. From there, I got recruited out to start a venture capital fund focused on the web 1.0, a period where we were building the infrastructure of the web.

I operated that fund from 1999 to 2009, at which time I started to get involved in this new method of investing, the member-managed fund method, where I became the treasurer and founder of Angel Round Capital, which was the first member-managed fund in New York focused on the tech industry. I'll talk a little bit more about that, but I guess in summary, I spent half of my time as an operating exec and the other half as a professional venture capital and angel investor.

Matthew: Before we dig into all that's new in investing and specifically cannabis investing and what you're doing, let's go back to what's been up to this point. How have early-stage cannabis companies gotten funding up to this point?

Jeffrey: Early-stage companies have had a hard time. I think many of them got their first round of funding from friends and family, unlike the tech industry where raises are typically up to $500,000, $600,000, $700,000 just to get, in the case of a licensee, to maybe get their application in and to secure some real estate, in the case of an ancillary provider to write some software, if that's what the product is, get it out there, get in front of some users and get some early feedback.

Really, the next stage after that, the seed stage, has been even more difficult. There was a handful of investors and funds really focused on this industry in the early days, 2014 to let's say 2016 where they were providing seed funding. A lot of that actually has run its course as those funds now have exhausted their capital supply to do new deals and are reserving capital to follow on on the companies that they've done.

That's the way it's typically been done. Family offices did get involved, but usually at the later stage, not really at the seed stage. I think the industry right now is experiencing a supply and demand imbalance where there's certainly more companies looking for money than there is capital to fund them.

Matthew: Now with Arcview Ventures, you're offering something that's new and innovative and flexible for investors. Can you talk about that?

Jeffrey: Sure. At a high level, Arcview Ventures really has an ambition to put together a number of investing platforms to serve the industry, but the first product, and that's one that I rolled into our view in January, is the Arcview Collective Fund. It is uniquely member-managed. What that means is our members, who are essentially limited partners, are also part of the general partnership, and as such, they vote on how the fund is run and in which companies the fund invests. We do it pursuant to a committee structure that allows for participation not only in the decision-making process but in the economics of the fund or the carried interest.

It's a great way. The way to think about it is the perfect hybrid between a traditional venture fund, an LP/GP management company structure, and a loosely coupled angel network where individual angels are out making their own decisions. It fuses those two notions together, allows those investors to be part of the decision-making process, but instead of voting on behalf of their own pocketbook, they're voting on behalf of the treasury of the fund.

Matthew: Let's just backtrack for a second. For people that aren't clear on what carried interest is, can you describe what that is and how that's taxed?

Jeffrey: Venture capital funds get compensated through a management fee on the capital that is committed to the fund and what is called carried interest. Carried interest is the profit on an investment that is made from the fund. For example, if Arcview Ventures or the Arcview Collective Fund puts 250,000 into a deal, and five years later, that deal exits and the fund gets a million dollars for its 250 investment. It has $750,000 of profit. That profit is split between the limited partners in the fund and the managers of the fund. That profit is called the carried interest.

Matthew: I heard a story on where that name originated from. It was when royalty or wealthy merchants would finance a ship, let's say from New York to London. If queen Victoria sponsors it, she gets a 20% carried interest. If she ensures it's safe voyage to get from harbor to harbor, she would get part of that cargo as her carried interest, let's say. Is that true? Do you know if that's where that term came from?

Jeffrey: No, I haven't heard that story, but I think, in many ways, that's what we do as fund managers, is ensure the success of the companies that we're involved in.

Matthew: Tell me how many people are involved in this now in Arcview Ventures, limited partners, general partners? Can you give me a sense there?

Jeffrey: We started with 15 members on our first close, we're now up to 55. Each member is part of the limited partnership and the general partnership. However, not all members sign up for the committees that direct the way in which the fund operates.

Matthew: We'll get into maybe some of the archetypes of the different types of investors and participants in this because some people are saying, Well, I don't want to be on a committee, and some are saying, Hey, maybe I would like to do that. Or maybe people that are raising capital one understand that a little bit more too. We'll get into that.

Let's say I'm someone that's listening and I'm like, Hey, I want to participate in this. What does it take to participate? What kind of capital is required? Do I need to be an accredited investor? What does that look like?

Jeffrey: You do have be an accredited investor. We decided to make the capital commitment for a member fairly modest. It's a $75,000 commitment. It's called capital. We don't call it all at once when somebody signs a subscription agreement. To date, we've only called half the capital. We'll probably make additional capital calls the beginning of 2021 and then probably mid-2021.

The reason that we wanted to keep it low is that we really wanted to aggregate smart, thoughtful investors to be part of the membership. Even though some of them want to put more money to work in the industry, we give them the opportunity to do that. The 75,000 is the unit that they purchase in the fund. Certainly, some can purchase more than one unit, but to the extent that they have dry powder that they'd like to put into the industry, to the extent there's room in one of our deals, we open it up and let them participate in those deals side by side the fund.

Matthew: Jeffrey, what are the big advantages here in this model versus, say, other forms of early-stage investing? What's the big benefit here or big benefits for different people?

Jeffrey: You mentioned the different archetypes of investors. Here's how we think about it. First, there's the asset allocator. This is the person that's got 250, 500,000, a million dollars that they've decided to allocate to early-stage or growth stage venture in the cannabis industry. What they'll do is they'll look and see who the best managers are. They'll pick one of them, they'll subscribe to the fund. They don't want to be involved. They don't want to go to meetings. They don't want to do any work. They're less concerned about education and solely concerned about getting the best return that they can get.

They pick managers through that lens with that goal in mind. They'll read the annual reports. They'll read the quarterly reports. They'll go to the annual meeting. That's the asset allocator. On the complete other end of the spectrum is the experienced individual angel investors, we like to think of them as the go-it-aloner. The go-it-aloner is perfectly comfortable listening to a company's pitch, doing due diligence, and deciding on their own which company's cap table to go on.

In the middle is what we call the collaborative decision-maker. This is the person that understands that with a group that have varied and different experience than they do, that they can make a better investment decision. We initially focused on the collaborative decision-maker, but what I've learned is that the go-it-aloner, when they heard about what we're doing, they found it more interesting and a better program.

I would say this, what investors get out of this is really four things. The first is access to better deal flow because the 55 members as a group can source through their networks deal flow than any one individual. Now that we're on the ArcView platform, that is multiplied. The second is participation. Not only participation in the decision-making process. You're sitting at the table hearing the company's pitch and voting on whether or not those companies should advance but also participation in the fund economics.

The next I would say is education. As I think about our membership, say there's probably 20 members who have experience in financial services, either as an angel investor from the tech industry, an executive in a family office, a private equity investor, hedge fund managers, and they bring certainly the experience of how to invest in private companies, then I'd say we probably have 10 to 15 people that have direct experience in the cannabis industry on the operating side.

Then we have a bunch of functional business experts. For example, a woman who's a senior HR executive and a gentleman that runs and owns a consumer-focused market research firm doing primary market research. Education, there's cross-education between all of those people. I can tell you from my experience, doing this in the tech industry, that we had individuals in the first year that really wouldn't raise their hand and make comments but by year two were leading due diligence exercises because they learn from the others and they were moved along and they felt comfortable.

I would say then, the next reason that people engage, and perhaps the most powerful, is diversification. Because for a fairly modest capital commitment of $75,000, this fund will do between 20 and 25 deals. In order for an individual angel to get that kind of diversification, they have to put out about a million dollars given that the minimums in most of these companies are 50,000. Sometimes they're 25,000, sometimes they're 100,000, but on average, they're 50,000. To be able to get diversification across 20 to 25 companies just requires a vastly different financial commitment. 

Certainly, these are LPs will have a smaller interest in all of these companies, but it really does give them the ability to learn, see, and participate in a number of deals. I would say those are the reasons that investors find this a compelling program.

Matthew: That is a lot of deals. What kind of timeframe would that be over? You said 20 deals. That's a lot. That does make sense. That diversification is great for that amount of capital. They say, Okay, so I put in 25,000 or 75,000. I get a unit. It's not called all at once. It might be over at some period of time. Can you just walk us through what your expectations is of how much-- Let's say that 75,000 or that one unit would be called over, let's say, maybe six months or a year? Then what kind of the timeframe is on deploying that capital to 20 different companies?

Jeffrey: The capital will be called over about a two-and-a-half to three-year period. The investment period, so when most funds are set up, there's two periods they define, the investment period and then the harvesting period. Usually, the investing period is four to five years. I think ours is four. That is the period of time with which we can initiate a new deal. Then the harvesting period is the period of time that we can do follow-on deals in those deals we funded during the investment period, and of course, harvest those deals to exit. I think we'll put that money out before the four-year clock runs out, probably three to three and a half years from our inception.

Matthew: It's key to note that your money's not losing value through inflation like a melting ice cube. It's actually you're getting called as it's needed. You can keep it in whatever you need to until it's time to deploy. That's helpful.

Jeffrey: Most funds do that. They do it somewhat selfishly because if they take the money in early, the time horizon starts when it's called and that can lower their IRR if it's just sitting in a money market account at their bank. You don't want to really call capital too much in advance of you needing to deploy it but certainly enough in advance that you're not scrambling around to get a deal done.

Matthew: For people that are listening, IRR is just internal rate of return. It just means your return on the investment but also Jeffrey is saying in context of other investors looking at your rate of return or other managers just as they're like, how well is this fund doing? If you wait to deploy until it's needed, that return rates going to be hypothetically better. Moving on here, talk a little bit about the vetting process and what's that like?

Jeffrey: It starts with submissions to our website. Many of those submissions are actually pre-screened by myself or my partner or some of the members of the fund. Let's say on a monthly basis, 30 to 40 companies make it to the submission stage, if you will. We convene. The first committee we have is a screening committee. It's five of the most experienced investors among the membership. We'll parse through those submissions. We'll pick four companies to present to an evaluation committee. We usually do this on the first Tuesday of the month. We run this in monthly decision cycles.

On the first Tuesday of the month, those four companies will pitch. Could be in person, certainly not in the days of COVID. It'll be on Zoom. They'll pitch, they'll do a 10-minute presentation with a 10-minute Q&A. The evaluation committee, which numbers about 17 but I would say on an ongoing basis, we have 10 to 12 participants, will vet those companies.

After the Q&A, we'll have a subjective discussion about which two to advance to the full members' meeting? The full members' meeting takes place on the fourth Tuesday of the month. All the members are invited. It's not just for the committee. Those same two companies will present. This time, they'll present for about 12 minutes with about 15 minutes of Q&A. We'll do a hard vote. We'll vote which, if any, should advance into formal due diligence.

From there, we'll establish an ad hoc due diligence committee. It's usually five or six people. We'll assign the sections. We produce our own investment memo with defined sections. We'll assign the sections to those members of the committee. We'll do a kickoff call. We'll ask the company to open up a deal room and to fill out a two-page form of basic information. Then we'll perch through the deal room. We'll come up with our questions. We'll send the question in advance to the company. When we receive the answers, we'll schedule a conference call and go over the answers with the company. By the time we first engage in a formal call, we want to have something to talk about, not just ask sort of the first level of questions. We'll do that. Then oftentimes, we'll repeat that process as more due diligence is done and more questions emerge.

Then at the end of that, each member of the committee will write their section. Whoever's leading the exercise, because we do appoint one of the committee members to lead, will craft the document into one cohesive piece of work. We'll then send it out to our membership for vote. If the vote comes in yes, and we have a double test by the way to create a yes, we'll then fund out of our treasury. That's essentially our process.

Matthew: Now, can you think of any entrepreneurs that have done a better job than others and why or how they did it differently? Is there any that come into your mind? Because I've heard a lot of pitches. Some entrepreneurs and founders are just so well prepared, they have a very clear vision. Then they do this like-- I didn't realize this until I saw some of this in action is that some of these people that pitch, they've done some legwork ahead of time where they're talking to someone like you or maybe one of these other partners. They're saying, What are these meetings like in general? What do they look for? How have other companies done well or done poorly?

They've kind of given themselves a real advantage by asking these questions. Then the majority of entrepreneurs don't ask any of those questions at all. They just come in with their best pitch-- they can do well, too, they can do very well, but some entrepreneurs give themselves a better chance for success I'll say by doing that kind of work. Can you comment on that at all?

Jeffrey: Well, I think that's true. I think presenting entrepreneurs should surely take advantage of all that's available to them. There are certainly guides on the web. I will tell you this. Oftentimes, we will open up our meeting and allow entrepreneurs to guest, to watch the way in which our membership vets companies and the kinds of questions we ask. Then even sit in for the rich discussion after the company leaves to see what we thought of them and what our critique is? We're open that way. We encourage that. Look, I could talk for a very long time about mistakes companies make when they pitch. That's a whole nother subject.

If you're a pitching company, you really should take advantage of everything that's out there. I think most pitch decks I see have advisors, many of whom have been through the process before. I Imagine that they're advising really for that purpose to help demystify this whole fundraising process.

Matthew: We talked a little bit about the archetypes but review there's options to be passive, there's options to be more involved. In your experience, it sounds like there's kind of a lifecycle where some people start out and they're just listening and observing and being more passive. As they get comfortable and marinate in the wisdom of other people that have been through the process many times, they jump in and say, Oh, I see this. I can add value here. Maybe my background from this industry could be helpful. Maybe I'll lead this committee meeting or do this or that. Is that accurate, or what would you say about that?

Jeffrey: Less experienced investors who are joining to learn, to put money to work but also to learn, generally are guarded with their input at the beginning until they feel comfortable. I would say - I've been doing this for a long time - that we have maybe 20 to 25 really engaged members, that want to sign up for committees, that are on most of the calls. Then maybe there's another 10 that are somewhat active because life gets in the way, family events get in the way. Their job, if they're still working, gets in the way, and they can't always be present for the meetings.

What I've seen over time is that does ebb and flow. Sometimes you're available in the winter months but you're not as available from May to July. That's fine. We can incorporate that. With a membership as deep and as large as ours, we still have plenty people to participate and do some work. I would say this. We understand that this is not a second job for our members. To the extent that it feels like a second job to them, to the extent it feels like an obligation, it means we're not doing our job. Because it's really something they should enjoy and participate in and should be a hobby, not an obligation. We're very aware of that. We make sure that no people can engage that we can cover and we do.

Matthew: Now, what about in the instance where the committee and the members have invested in a company, they really like what they're seeing and they want to do a follow-on investment, what's the process like there? Is there capital just for that or how does that work?

Jeffrey: We left it pretty open. If there is an open round and the fund is going to commit, let's say $150,000, to that deal and there's a room in the deal, it's first come first serve. Whichever members want to take a piece, it's open to them. The only rule that they need to follow is to not to front-run the fund, that we get the first piece that's available, to the extent that we want to take that piece and up to the amount we want to fund. Everything else that's available is on a first-come-first basis. I would say out of the 11 deals that we've done, I think in six of them, we've had fund members go side by side.

Matthew: That's cool. What's kind of your estimate in terms of follow-on investments or second investments in later rounds? What percentage of investments would get a follow-on investment would you say?

Jeffrey: Historically, funds will reserve one-third to 50% of their invested capital for follow-ons. My experience, it ends up being just about under a third because some companies, you won't want to fund any further. You'd rather take your loss. Some companies won't need any more funding, that's certainly more rare. Some companies will get acquired early. Then some companies will do so well that the follow-on around will just be priced at a level that earlier stage investors will be uncomfortable with. We do that. We reserve $0.33 cents for every dollar invested. Then we'll free that up over time as we get visibility into each company and whether or not we're likely participant in a follow-on route.

That's not uncommon. I think that's pretty common how most seed early-stage driven growth capital funds think about it.

Matthew: Liquidity events. Everybody wants to know. How do I get my money back, Jeffrey? Will it ever come back? Is it all going into a hole? What do you tell them when they say, how long? How long before I get my money back?

Jeffrey: Listen, when you're an investor in early growth and seed-stage funds, and I would even argue growth stage funds, you have to have a long term view. I tell people, think of this as seven years. Now, that doesn't mean in year three, companies that you invested in year one won't start to exit. Certainly, companies that you invest in your four, at the end of the investment horizon, may not exit for three years later, so year seven. While you'll get liquidity along the way, and certainly every time there's a liquidity event, we don't recycle the capital, we we pay it back to the LPs, you have to really think of this as long term.

I think in the cannabis industry, and particularly with what's likely to happen on the East Coast. Today is a very important day. It's election day. I know that this won't be aired until sometime after today. With New Jersey on the ballot as a non-binding referendum with just tremendous support among the voters in the state and even support in the legislature, it is likely to go, which will pull New York, Pennsylvania, Connecticut. I see this whole emergence of the East Coast, it's very likely to see some consolidation as companies from the West come East and look to grow in geographies that they haven't in the past.

My feeling is that we'll see exits sooner than we saw in tech, but my advice to people is to have a seven-year horizon.

Matthew: The biggest benefits here are pretty much access to deals, diversification, a great peer group, and then this platform to participate in on many deals. Did I miss anything there or did I cover them all?

Jeffrey: I would add something. I said access, participation, education, and diversification. A sub-point of that is the ability to do institutional-level due diligence. Just to give you an example, one of the go-it-aloners who eventually joined the fund had done four cannabis deals on his own. The comment that he made to us was, "I could never do the level of due diligence alone that I could do as a participant in a due diligence committee for the fund." I would say the ability really to vet these companies deeper and leverage the experience of the other members of the fund to make a better decision is also a very strong reason people do this.

Matthew: Do you see any gaps in the cannabis investment marketplace emerging now?

Jeffrey: Well, I've talked about this a few times. In 2012, in the tech industry, there was something that was framed the Series A Gap. That was simply created by a number of dynamics. One, crowdfunding had just titled three, had just gotten approved. Angel investors came out in mass. All these new Angel groups popped up. A lot of early seed stage, companies got funding, but at the same time series A funds shrunk. They shrunk because the SBIC canceled their co-matching fund program. A lot of the funds from the 2008 to 2010 who were active became zombie funds, they had exhausted all their capital, and there was this huge gap. Even well-performing seed companies couldn't find series A capital.

I think something like that, although a little bit different is happening in the cannabis industry. A lot of the seed funds that were $15 to $25 million that were vintage, '13, '14, '15, and '16 have also now exhausted their capital and many of the high performing ones are out raising growth capital funds at the $100, $150 $200 million level. That's creating the seed gap. Where will companies go to find capital?

There are probably four or five active seed funds. When I mean real funds, I mean, professional managers that have held out their shingle and said, we're in the business of seed and early growth venture capital. There's few of them and there's not really a lot of capital. I think our timing is pretty good, and certainly from the vantage point of Arcview Ventures because we're doing this member-managed fund. We're also going to build a $30 million seed fund, which will be marketing in Q1 of 2021. With Entourage Effect Capital as our partner, we think we're really well-positioned for the seed gap that I think is imminent.

Matthew: This is really interesting stuff. I love how technology, Zoom, and all these different things, people in different geographies are coming together. This is really a marriage of you're on the East Coast. Arcview is based on the West Coast. The finance industry, the tech industry, and now this emerging cannabis industry coming together. It's fun to see how these different skill sets come together to really craft and to galvanize this industry.

With that, I want to move to some personal development questions to help listeners get a better sense of who you are, Jeffrey. With that, I'd like to ask, is there a book that's had a big impact on your life or your way of thinking that you'd like to share?

Jeffrey: Yes. I think on the business side-- On the business side, I'd say there were two books that have had an impact on me. One is Zero to One by Peter Thiel. I imagine in asking this question you've heard that in the past.

Matthew: Oh yes.

Jeffrey: The other is The Hard Thing About Hard Things by Ben Horowitz from Andreessen Horowitz.

Matthew: Great books. Those are all famous.

Jeffrey: Yes. I'm sure they come up as favorite books often. On the personal side, I think a great book is The Untethered Soul. It's a journey about discovering who you are and really enriching yourself in the path to happiness, which I think we're all on. Great book. Those three books, as I think back over the last 10 years, have probably had the greatest impact.

Matthew: What's one thing you see in the world that people are under-appreciating in terms of the impact it will have on society, apart from cannabis?

Jeffrey: I'm an advisor to a telehealth company that's focused on men's health. I was shocked to learn this unbelievable statistic that the rate with which testosterone levels are dropping in males is incredible. It's over 1% a year. As you play that hand out since I think-- The last statistic that I heard was from 1988 to 2004, those levels dropped about 18%. As you really start to play that hand out and get 10, 20, 30, 40 years from now, the effect on reproduction, on families, on what defines manhood, I think is all going to change. I think that's going to have an enormous effect.

This entrepreneur is really on a mission to solve that problem, but I've never really imagined and really understood the extent of that decline and its impact.

Matthew: Now, clarify your thinking a little bit there. What do you think the impact is?

Jeffrey: Difficulty in reproduction and the ability to replace the population.

Matthew: I think also there's other waves driving that, other smaller waves, just the difficulty for many to household form to have enough income to provide for a family of four, or five or more. Real wages in the US haven't increased since the '70s mostly because of globalization. There's a lot of tricky things happening there. Also, the cost of higher education for kids, maybe I want to have only one or two kids, people are thinking things like that. You're right, maybe it's a perfect storm of downward demography wave like we've seen in Japan.

Jeffrey: You think this is the universe's way of self-correcting?

Matthew: [laughs] It could be. Interesting stuff.

Jeffrey: It's a scary stat, whether it will mitigate some of those issues or not. Again, I was shocked to learn, and I do think this will have dramatic impact on life going forward.

Matthew: You're in the tri-state area there, and one thing I'm thinking a lot about lately is, what's going to become a New York City? Will it be able to get out of this doom loop where no one really wants to come back to the extent that they were there before? Prices go down. There's not enough to cover the tax base, all these terrible things can happen. What do you think the roadmap is for New York City to come back? Will it not come back in a generation, or what are your thoughts?

Jeffrey: I don't think it's a generation, but I do think it's multiple years to get back to where we were. The scariest is storage are boarded up for what they think is likely to happen after the year results of the election are tabulated. I know more people who are not going into the city. I have kids who live in the city, have actually left the city, not understanding what might happen tomorrow. Absent that, if you just look at the restaurants and how many have closed and you understand how many people are employed by that industry, I think that's the big thing that you notice when you walk down the street in New York.

Just seeing how many just couldn't make it this early. We have the winter in front of us, and I think it's going to get worse. I don't think it's generational, but I do think it's a couple of years. I do think it's not going to be really till late 2021 where it's going to start to feel the same. Then certainly a year or two after that until it is the same. Also, New York is a real travelers destination. It makes most of its money from travelers, not residents. That's certainly not going to come back anytime soon.

Matthew: Well, thanks for that Jeffrey. As we close, how can listeners find out more about Arcview Ventures and connect with you? This is only accredited investors I guess at this point but also maybe startup founders that want to pitch the investor group.

Jeffrey: Yes. Go to our website, www.arcviewventures.com. On the top menu, if you are an entrepreneur, you'll see how to submit for financing consideration and you'll learn all about what we're doing at that site.

Matthew: Okay. Jeffrey, thanks so much for coming on the show. We really appreciate it and good luck with everything you're doing.

Jeffrey: Matthew, thanks so much. I enjoyed it.

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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 guest to you. 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 at 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. Promotional consideration maybe provided by select guests, advertisers, or companies featured in CannaInsider.

Lastly, the hosts 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.

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Ep 324 – The Cannabinoid Science Nobody is Talking About

kevin chen hyasynth bio 1

We just reached possibly one of the largest milestones in creating pure, consistent cannabinoids in a lab. Here to tell us about it is Kevin Chen of Hyasynth Bio.

Learn more at https://hyasynthbio.com 

Key Takeaways: 

[1:32] An inside look at Hyasynth Bio and its work creating biosynthesized cannabis compounds

[3:05] Hyasynth Bio’s first product, an ultra-pure CBD oil created using cultured cannabinoids

[7:44] How Hyasynth Bio is improving CBD production in terms of both speed and purity

[9:12] Why multinational companies are gravitating towards biosynthesized cannabinoids for better consistency and supply chain performance

[13:14] 

[16:55] How biosynthesized cannabinoids are paving the way for international cannabis brands and which products Kevin believes will go global first

[21:23] How cellular agriculture is giving us better access to rare cannabinoids

[27:48] Why cellular agriculture is easier to automate and how this might influence prices in the cannabis industry

[32:21] Hyasynth Bio’s strategy to profit primarily through intellectual property licensing

[36:24] Where Hyasynth Bio currently is in the capital-raising process

Click Here to Read Full Transcript

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Matthew Kind: 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 dot com. Now here's your program.

Our guest today is on the cutting edge of research where laboratory science meets cannabis. As you're about to hear, we have reached what is possibly one of the largest milestones in creating pure consistent cannabinoids in a lab. I am pleased to welcome back Kevin Chen of Hyasynth Bio. Kevin, welcome back to CannaInsider.

Kevin Chen: Hi, Matt. Great to be back.

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

Kevin: I am based in Montreal, Canada. A little bit further north from you, but not too far.

Matthew: Okay. We were just talking about pumpkin. What is it about pumpkin this time of the year, everybody wants pumpkin spice, pumpkin latte? I'm not making fun of them because I'm one of those people. What is that?

Kevin: [chuckles] Not sure. Like I was saying, maybe it's a genetic thing or same as the reasons why birds like to fly south this time of year, maybe get some kind of psychological attraction to [unintelligible 00:01:16] into pumpkins, the squashes around this time of year. I've got some squashes that I'm going to cook up myself later today or next week sometime. I'm a pumpkin fan too. Why not?

Matthew: Maybe it's nesting or something. I can't figure barely. Well, Kevin, as I mentioned, you've been on the show before, but please remind us what on a high level does Hyasynth Bio do?

Kevin: We're a biotechnology company. Our main focus is on creating strains of yeast that produce cannabinoids. Instead of growing up plant having soil and adding water to that, you just have a big steel tank, you add yeast, which looks the same as baker's yeast to that big steel tank, you add some sugar and some water, let that grow for about a week, and then at the end of that, you extract pure cannabinoids from that yeast culture.

We do that by modifying the yeast cells themselves so that they have the ability to produce cannabinoids. That's genomic engineering. It's synthetic biology, it's about looking at the genome of a yeast and the genome of a cannabis plant and then taking all the genetic parts and the cannabis plant that are related to cannabinoid production and putting those into a yeast's genomes that these on its own can produce cannabinoids.

By way of analogy for anyone that's confused right now, this is the same way that we produced insulin for the past 50 years or so, where insulin is always coming from an engineered bacteria or engineered yeast. It's actually human gene for insulin that's been put inside of a yeast or bacteria genome. Then what these pharmaceutical manufacturers will do is just cultivate that bacteria, that yeast, and then extract pure insulin at the end of that. We're doing the same kind of process, but for cannabinoids, for all kinds of great reasons that we're going to talk about today, too.

Matthew: Okay. I've been banging the drum about this. This is the third time you've been on the show. In a couple years, I've been up to your lab in Montreal and I've kept on thinking, "Wow. If this really, really works, it's going to be huge for the cannabis and hemp industry, and all these other industries that we'll discuss." It sounds like you've made your first sale. Can you talk about that and what you sold and why it's important?

Kevin: Yes, definitely. I'll start with what we sold is CBD and CBDA, if you want to make a distinction between the carboxylated and the non-carboxylated form, that's more of a finer detail. At the heart of it, what we've done is successfully taken our yeast strains from our lab, handed them over to manufacturer, we gave the manufacturer instructions on how to produce the CBD using our strains. They follow those instructions, and at the end of that, we ended up with some ultra-pure 99+% pure CBD and CBDA.

It was, I would describe it like a pretty small batch, we're going to have a few small but important customers around the world with this batch. The key thing that I want to emphasize with it is that this is the first time we've taken our yeast strains out of our own hands and actually done-- We've essentially operated the business model that we want to scale up with almost where we're trying to take advantage of manufacturers that exist all around the world that can do fermentation, enabled them to use our strains of yeast to do the manufacturing of these key ingredients and have them do that consistently, robustly, and cost effectively. We can actually make these cannabinoids into products that are available worldwide and that are available with the right quality and consistency, the same as how insulin available worldwide.

Matthew: It's analogous to how Coca-Cola back in headquarters, they syrup exactly right to a specification that can be duplicated, and then they ship out small amounts to the bottlers. The bottlers, they understand the spec, and then they make their cola on-site to add the water that's to spec, the carbonation, the bottle, it's all done at the edge, where you're getting the formulation, just what it needs to be there, by your standards, or by the customer standards, by both. Then when it's time to scale up, you send them essentially the recipe in the strain in a small form that can be expanded greatly on-site. Is that right?

Kevin: Yes, exactly. That's a perfect analogy and also a good analogy, because I would say large brands like Coca-Cola have taken interest in cannabinoid-related products too. That's exactly what we essentially want to do here, so we have this level of consistency that starts to look more like that consistently that Coca-Cola has where you can get it anywhere in the world, it's always the same look, the same taste, the same brand. We want to have that be something that people can rely on and that brands can rely on.

Right now, if you imagine doing that with cannabis or hemp growth operation, to some extent, people have tried to do this in the cannabis industry and there's so many fine details about how you grow the cannabis plants, what genetics are involved, how much lighting or water or different fertilizers, pesticides, that all go into that process that it's incredibly hard to replicate that. On top of that, you have to deal with the local regulations around each of those, like cannabis growth operations you might want to operate around the world. That's going to add another layer of complexity. That makes it very difficult to actually for any larger from a company or larger brand to really want to invest in that, because there's so many of these risks and so many unique cases involved.

We really, really wanted to focus on how generic our process can be and how robust it can be and how it can be this thing that people can actually rely on. That makes it a lot like the way that Coca-Cola might manage their manufacturing practices, or any multinational brand that has that crosses borders, or that has a nationwide supply chain, because that's ultimately where we see these partners going is that cannabis has always been on its way to becoming part of that mainstream and it's come close, but it's not there yet. Right?

Matthew: Yes. Well, we mentioned the purity, but the thing that one of the other variables I'm focused on is the speed. Let's talk about how much faster this would be to get these cannabinoids versus growing them indoor or outdoor, the plant and the harvesting, curing, and extracting.

Kevin: We highlighted that in our press release stuff about this, just because it is one of the most important aspects of this and to give some experience to this, our process runs in one week. That means that by the time if you started to grow some cannabis plants and I was growing my yeast, on day 1, we said like go today, then like at the end of this week, I'd have a few hundred milligrams or a few grams of yeast or maybe two kilograms, depending on how large a batch I try and run with this stuff.

At the end of the week, I have my first product and then you will have your first maybe seedlings at the best. That's one of the key things here is that we're operating on a weak batch process. That's a huge improvement in efficiency. That changes the way that supply chain works as well a bit. With plants, of course, you're waiting like three months to grow these plants. Then at the end of that, you have to do your processing. For us, it's like this one-week turnaround. Every week, there’s new batch. It's going to make a big difference for how much you can make and how fast you can make it.

Matthew: Right. Okay. I said curing early, but that's not necessarily what needs to be done for extraction. Still, there's a huge amount of time delta here that we'll be able to be capitalized on in the future. It's not just about speed in growing cannabinoids, these big multinationals or even small companies too, they really need the lab cultures because it provides something they just can't get from extracted cannabinoids. Can you talk about what exactly, why they're gravitating to these lab room cannabinoids? What it does from what itch it scratches?

Kevin: I'll clarify a bit with the language there. I think lab-grown is a nice one way to put it. We also like to use the word cultured cannabinoids or biosynthesized cannabinoids. I think biosynthesized cannabinoids is the most popular word right now. I don't like lab-grown as much, because then it sounds like we're growing them in the natural lab and that's not-

[chuckling]

-really what we're doing. In some sense, we're still doing agriculture, it's just a different kind of agriculture. It's agriculture inside of cells. Then you can use the word cellular agriculture, which is another fun topic.

Anyways, [chuckles] your question was about like why our company, why people gravitate towards this stuff? I spent like the past six years looking at industry and to some extent, I've been doing everything that I can to get people to start gravitating toward this stuff. I think what it boils down to is a bit of those hard metrics of like, where it's coming from, how it's being made, and what that means for the end consumer. What I mean by that is that we can have a supply chain that is always going to have product available, that's a part of you always using what you always want.

We saw that issue in Canada, where medical cannabis providers would run out of supply suddenly of the strain that somebody was using. If you can imagine if you're using one dose of one particular kind of strain, it's working really well for you for whatever condition you're dealing with, and then suddenly, they're out of stock. That's totally unacceptable from a pharmaceutical supply chain kind of thing. Like if the world ran out of insulin, that'd be the biggest in the world. That's like millions of people that are suddenly in trouble. We can do that with this technology and has been done with technology before. That's one of the things that I think is key.

Other things that are a little bit softer as far as what attracts people to things are getting into the sustainability and the efficiency of it. Sustainability in the sense that like, we care about the planet, we should try and make products in environmentally friendly ways. We know that cannabis cultivation is very not friendly for the environment, in the amount of greenhouse gas [unintelligible 00:12:06] that you have, the [unintelligible 00:12:06] control, you have to put into your process. We're really targeting that as an interesting thing.

That ties into what kind of companies are people building nowadays and what do people care about from that consumer lens, whether you're a small brand or a big brand, maybe small brands here, but it's more because they want to have like an edge over their competition and looking for these kinds of things that are like, "Oh, this will be the way that this will go and the way the future is, therefore I'm going to want to use the cultural cannabinoids or the biosynthetic cannabinoids."

Even the major brands of today I think are tying on and getting behind these sustainability organic green technologies and that's what we are. That's what we provide with this industry. It's not as relevant as maybe like you could argue that producing biofuels using a yeast might be another way of more directly addressing an environmental issue with biotechnology. That doesn't mean that we can't just incorporate a random sense of sustainability into our pharmaceutical manufacturing and enter into manufacturing of consumer products as well.

Matthew: Some of these large food and beverage companies and other types of companies, they want that purity, consistency, and scale. They can't really get that through plants because even if they have a mother plant, the seedling or the clipping that they take off, the mother plant may be grown in a different environment every time. The conditions, environmental conditions are different, so the outcome may be different. We're really talking not like a mother plant, but a mother culture here that is essentially identical or cloned and reproduced over and over again.

This is the moment where you feel the multinationals are like, "Okay, this is-- We have a mature industry that's ready to give us cannabinoids and we can start looking at it as an ingredient."

Kevin: Yes, definitely. You're exactly right about that analogy of having a mother plant and the conditions except-- I guess in our case, we have like-- [chuckles] Trying to tie into that analogy. We do have a mother culture, we have seed cultures that we store and they're all super consistent and then you grow that seed culture into huge volumes and it is still consistent. There's no genetic or environmental version, or at least you have control over all of the environment that goes into your steel tank. There's no airflow concerns or humidity being in half the greenhouse being different from the other half the greenhouse somehow.

All of these things are easily controlled and consistent across our batches. That's definitely true. You could imagine like not just large scale multinational brands that people are familiar with, but also large scale ingredients suppliers that are starting to catch on to this as well, where they can see this as a process they can incorporate into their own manufacturing facility and then have a new product line, which is like-- Essentially, what it boils down to is an ingredient supply ecosystem where we're providing the technology to enable this all to happen.

Then there's manufacturers who are able to produce the ingredient at large scales and move that into the larger brands who are their main clients and purchasers. That's all like with the way pharmaceutical ingredient supply works is it's like there is a lot of different parties involved. It starts with this. It starts with this like having some kind of foundation to stand on and one that doesn't rely on the cannabis plant.

I'm reflecting back on some earlier stories from the cannabis industry where people really wanted to have special genetics or special strains. Maybe those strains were tied more to their name or their brand, rather than their actual chemical composition almost. That's going to go away. We don't need that kind of thing and it's not very useful from a pharmaceutical standpoint either when you're talking about like, "What's the actual ingredient here? What's actually giving us the benefit?" Then we have the cannabinoids, of course, and that's what we focus on.

That's another really big change of mindset is that it's less about plants and strains and greenhouses and indoor grow versus outdoor grow and tan trim versus not having trim, whatever. All these things just start to fade away and we can focus on what's actually helping people and what's actually the active ingredient of the product and how we can use that in the best possible way to treat whether it's a skin condition or epilepsy or I guess to some extent like [chuckles] an alternative to like alcohol on a Friday night, let's say. [chuckles]

Matthew: The big story here and the reason I get excited about this is that it finally paves the way for an international cannabis brand, or CBD, or hemp brand. We almost couldn't be more fragmented or decentralized industry than we are. I like all the small mom and pop businesses, I think they're fun. I enjoy that. At the same time, it would be great if there was like one brand that the whole world understood was cannabis, because I think that would really catalyze the adoption of cannabis, especially away from other traditional medicines and different, maybe even cannibalize alcohol, if we can get more cannabis out there.

I mentioned Coke, but I also think about like other brands that wouldn't exist if there wasn't some way to standardize them. McDonald's, Adidas, that's not food or medicine, but the shoes are essentially the same all over the place. Now we have this opportunity. We have enough countries that are legalizing, at least if not, THC, then nonpsychoactive cannabinoids. What's your guess? Which type of product will go global first, or at least be on multiple continents with one brand? Will it be a supplement? Will it be food? What will it be?

Kevin: Yes, that's a good question. Definitely, it's exciting times internationally in seeing who's developing which regulations. [unintelligible 00:18:44] made the point where it'd be really nice to move some of the dial there with regulations in different countries, or how people you can look at this stuff where they can look at our products and say like, "It's not coming from cannabis. We're trying to regulate cannabis." That reminds me of the whole development of the Canadian cannabis regulations where there was years of tasks forces and figuring out how to grow the plant and how to regulate that process and all that kind of--

Again, starts to fade away a bit when you start to think about like, well, fermentation. We have fermenters, we understand that. We can call somebody tomorrow and ask them how to produce things in fermenters. They'd have 50 years of expertise in that. Then in cannabis, it's a lot from the ground up kind of thinking or maybe the most experienced cannabis growers were obviously doing it illegally for a very long time. I'm excited for what that might look like on a regulatory standpoint worldwide. As far as what product do we actually-- What do you think is going to be worldwide? That's a good question.

I think there is A, pharmaceutical products is like once you get an approval somewhere, then getting that to track around the world is not too challenging to some extent. If you want to think about what are global barriers to like how we make cannabinoids available to people who need them, that's one thing that to some extent already exists with companies like GTB Pharmaceuticals, but from a standpoint of less, less pharmaceutical and more into like the consumer range, it seems like cosmetics are one of the more perceived as acceptable areas where you might have a skincare product that has this stuff in it, as opposed to one that somebody has to consume, or really, for example, again, that ties into some of the different regulatory and maybe even emotional perspectives on cannabis or on cannabinoids in general as well, because you're not going to like rub something on your skin and then get high or something like that. [chuckles]

That's not how people normally think about using cannabis. Therefore, we would have like some fresher perspective from if the stricter governments around the world to try and like enable these kinds of products to exist. The other nice thing that exists already is how the perspective of CBD like Europe, for example, is still complicated, but a lot more open to allowing CBD oils to exist in the health and wellness and nutritional supplement area. To some extent, CBD oils might be like the first one that really starts to become more available anywhere in the world.

Matthew: Yes. Similar to maybe like a five-hour energy drink, there might be something you see everywhere. That's a small little container that you drink or in some way, that's just instantly recognizable that'll just be around everywhere. This is interesting. There's also another benefit to the lab-grown cannabinoids in that it's easier to experiment with rare cannabinoids and not that they're actually rare. It's just that they're not widely adopted at the moment. Can you talk a little bit about cellular agriculture with rare cannabinoids?

Kevin: Yes, definitely. That's one of the super interesting things that excites me a lot about the technology is that with the cannabis plant, we know that there is 150 cannabinoids and there's the main ones which are THC and CBD. Does that make sense? CBG as well and it's slightly different one, but either way, there's ones that Canada has produced in large quantities and ones that are pretty soon very, very small quantities. Some of the latest research and some clinical trials, they're starting to investigate what is the potential of these more rare cannabinoids? That's an area where if I take a THCV or CBDV as an example, like that might be 0.0001% of a cannabis flower.

If you wanted to extract a gram of that, you might need like 100 kilograms of cannabis farming. That doesn't make sense as like a process. There's just not enough there. With a engineered yeast, we can actually, well, we have yeast strains that produce THCV and CBDV, and we've done that successfully and clone that pathway and network-- To figure out how to get a yeast to produce these unique compounds is a matter of like engineering, just looking at these genes, how to assemble them properly and then you have your yeast strain at the end and that takes months of time, not years. It's all about like having a breeding program for cannabis that you're going to just breed strains until you get the right one.

We know exactly what we're changing and exactly what we're doing and our process for producing these rare cannabinoids will be the same process that as what we use to produce the CBD and the THC that we'll make as well. At the heart of it, we've got the ability to clone these strains that produce these rare cannabinoids. We've already done so in a lot of cases. Now that we've done that, it's the same process as what we'll use to produce CBD essentially. We can do the same thing and have large scale quantities of these rare cannabinoids suddenly available for-- ultimately, for human consumption when you go through all the steps to prove them out. But first for researchers, of course, so that they can actually figure out how good these things are at treating different conditions.

That's to some extent, a lot of the ways that people talk about cannabis and how it's useful for so many things is coming from where there's some activity in these rare cannabinoids or in combinations of cannabinoids that right now you can't really get access to by growing just cannabis plants.

Matthew: How do you think cellular agritech culture will affect the global supply chain for cannabis and hemp? I'm just thinking that if we can grow cannabinoids, if we can use biosynthesis or cellular agriculture for cannabinoids, that can be done in more of an urban environment, or at least it doesn't have to be done in a rural environment like outdoor farming for hemp, anyway. Do you think if there's any other ways that it might affect the global supply chain?

Kevin: One of the funnier ideas [chuckles] that I think about sometimes is that a lot of the products that are made using industrial fermentation are exist in the background a little bit. Citric acid is one of the biggest ones where it was in all your foods, it's a common product, it's vitamin C, it's everywhere. That's made using fermentation. A lot of people don't really realize that, or you think it comes from oranges or something like that, but it's actually a fermentation process that's used to make that. In some ways, we want cannabinoid production to start to fade away in that direction, to where you're aware of where it comes from, or maybe actually I'll flip that around. [chuckles]

Historically, these things have faded at the background a bit. Nowadays, people care a lot more about where their parts are coming from and that's probably why cellular agriculture and licenses just become really important because we don't just want to buy a piece of meat in the store and accept that as just normal. We care about the cows and the farmers that are providing this to us which is different today than it was maybe like 10 or 20 years ago or whatever.

What I mean by what we're going to do with cannabinoids is that we're going to remove some of that drama around cannabis production and having that be a big event or having that be a headline news about, "Oh, this cannabis group is opening here," or people getting upset about the smell of cannabis plants because their neighbors growing them or controversy around like the pesticide use around cannabis and how it's making people sick. These things start to fade away and what people get in the end is that they have CBD that's available at a pharmacy maybe the same way that you might want to look at aspirin and you can buy it like on your way to work.

You can buy small jar of CBD oil and it's not a big question of, "Oh, I'm not going to take this and get sick later today," or, "Am I contributing to global greenhouse gases significantly by buying this one CBD oil thing," or, "Do I even know if there's CBD in the CBD oil that I'm buying?" All these things that exist, those are problems that are at the forefront today and those are going to start to fade away. Then we have this really nice and established and reliable ecosystem of manufacturing.

Matthew: Well, it seems like it may be correct me if I'm wrong, but cellular agriculture seems like it lends itself to automation, much more so than plants being grown. Even when I visited your lab, you have things spinning and you have things in refrigerators, all this stuff going on that I can't even describe, but it looks like, "Hey--"

Kevin: A good memory. [chuckles] You got a couple of things done already.

Matthew: Right. I was like, "Okay." These things tend to be smaller than plants, at least when they start out. All these things, these combinations that are being created of cellular agriculture can be done in an automated way. That further brings down the price, if all these experiments and all these initial cannabinoid creations done in an automated way, once it's dialed in. Do you think that's accurate? Do you think that cellular agriculture is really going to bring down the price a lot?

Kevin: Yes. I think automation definitely plays a big role in this. When you look at a fermentation facility, it's maybe a few people who sit beside behind the computer for their days watching the main factoring process go, and it's way different from a cannabis production facility where you have like people trimming plants and moving the plants around and there's always staff handling these things. Again, yes, it's much easier to manage one steel tank where you have all control every single input and output in there than it is to control like a field of Canada's plants that is going to grow and some of that's going to change and it's going to be pests or whatever.

In terms of costs, there's definitely going to be a difference there and that's an interesting one just because we-- fermentation is also-- it's not a very cheap process. [chuckles] I wouldn't put it that way. A lot of the most expensive ingredients on the planet or the most expensive pharmaceuticals on the planet are produced by fermentation. I don't want to say too much about trying to bring down the cost of CBD but there's definitely some cost benefit when you get to the right kind of scale. Let me think about what else I could say on cost. In the end, like cannabis, you do have some floor cost about how you have to handle the plant, how you grow it.

One of the complicated things about cost that's being talked about right now in cannabis is the price of CBD in the US where everybody's like, "Oh, it's so cheap, it's everywhere, no problem." Yet, there's these issues of CBD remediation where there's too much THC somehow in your hemp grow, and therefore we have to remediate it. There's issues from the FDA that are saying like, "Well, half the CBD products on the market don't even have CBD in them."

There's things like that that are starting to come out. Yes, it's easy to grow hemp, and you can try and do that, and then have this low cost, but the cost of CBD, of high quality CBD of CBD that people can actually rely on, maybe that hasn't changed as much. There's still a need obviously for technology like ours to address the cost issue and the supply issues.

One of the other exciting things about cost is when you start to get the price of your ingredients into a range that is also suitable for having this be ingredient in other kinds of products already exist. I remember one of my conversations with a food manufacturer a few years ago, which went like this, where they were super excited about getting into CBD and having products that have CBD in them and making that a new thing for them. They make and sell bars, maybe they pay like $2 for the ingredients, they sell the bar for $4.

If I'm asking them to put like, "Oh, pay an extra like $5 for a gram of CBD to put into your products." That suddenly exceeds what they understand is the cost and how it ends up actually a grocery store shelf or whatever. The cost of ingredients for them is really, really important. If it's fundamentally past a certain point, then they can't commercialize products. That's where we might be able to with fermentation, we can definitely start to break those barriers and get the cost ranges that start to make sense for these kinds of ingredients. The same thing about scale again, and so on so forth. Those are my comments in cost, a bunch of thoughts there. It's an interesting one.

Matthew: Just describe a little bit of how you envision making money here. Is this through intellectual property licensing, or some other royalty agreement? What does that look like?

Kevin: In the end, it'll be a combination of those things. It might depend a bit on who our partners are, how regulations need to be handled, and these kinds of things where it might make sense for some markets for us to get into just purely by licensing, it might make sense for others for us to get into by having a partner and their billing or facilities. I'd say to some extent, we have some options there as far as like how we might deal with each situation.

The heart of it, what we're looking for here is really the ingredients companies or those brands, or those retailers and distributors who understand the market, who have products that are out there now, and maybe they have like a market share and some other sectors, and they're curious about like, "Oh, maybe I could add CBD to my products," or, "Maybe I'm well positioned to take in the supply and commercialize like a CBD product around the US or in Canada or around the world," wherever.

Then they might want to start talking to us and see what that might look like, what commitments do they need to make to have as partner with them, and what it takes to get manufacturing online so they could start to do that kind of work. [chuckles] It'll be a little bit complicated. In the end, we have these kinds of options and choices to make. It'd be exciting to have these conversations with these different partners or investors.

Matthew: You've achieved this milestone here in selling the first lab, cellular agriculture CBD, just for people that are listening, and they're like, "Okay, what are the milestones should I look for, Kevin, to see that this is all really happening and that this biosynthesis is going to become a larger and larger part of the cannabinoid market?" What's the big one or two, maybe three things that you'd say, "Okay, look for this, and then you'll know this industry is getting traction?"

Kevin: Look for me flying overhead in a private jet that I own.

[laughter]

No, I’m just kidding. That's good. The milestones, for years, it's always been a bit of the same, I would say, where we decided to get into this. We knew that the advantages of doing this process are that it's somewhat traditional, there’s these facilities worldwide. You can take your process from your lab, put it somewhere else, and somebody else can run it for you. We've done that at least at this level to show that it works. We'll do more of that, we'll do some larger scales, that'll be one thing to watch out for.

The next thing is to prove that, of course, we can have partnerships around our technology and have ways that we can get access to the market. Does that make sense? We've done that with our relationship with Organigram, which is another big Canadian cannabis producer. Now we're looking for more partners around that and seeing who might be our best partner in maybe by country or by application and say like, "Okay, well, we're going to partner there for this product line."

One of the exciting things that's coming up now, too, is also the idea of product diversity and having a range of cannabinoids that we can make and demonstrating that. That's going to be another really interesting one, where we start to show a bit more of our ability to diversify products. With those three things, we've covered the bases a bit as far as like, here's the advantages, we've proven that these advantages make sense and that they work, and that it will be about growing the business. Of course, we're a startup, we're looking for more investors all the time a bit. That's something else that we can talk about, too.

Matthew: Where are you in the raising capital process?

Kevin: I would say we're always fundraising. There's a way for you guys, a way for people to reach out to me directly to say like, if you're sending whatever. We are looking for more capital, of course. It's going to focus on the commercialization of our technology and seeing who's around that, that can support that.

Matthew: Okay. Well, Kevin, since you've been on the show a few times, I have some different personal development questions for you.

Kevin: Cool. You should change them up, because otherwise, people will get bored.

Matthew: You're right.

Kevin: Then one day, they'll know everything about me after a few times.

[chuckling]

Matthew: They might just clone you. We don't need Kevin anymore. We can [crosstalk] What other technologies do you see on the horizon? The public may not be totally appreciating how that might dramatically change their lives apart from what you're doing in the labs, or anything else you just see, anecdotally, we're like, "Hey, this is going to have a big impact." Then people really don't understand it.

Kevin: One of the most exciting things to me is all of this other agriculture and biosciences field is interesting to me. You start to move the bar about like looking at your daily life and the [unintelligible [00:37:43] that you eat, or that you buy in the store or that you have around even today and seeing like, "Okay, well, maybe all these materials can be made using keys or bacteria or something like that."

It seemed that reality is coming up really, really fast. There's one of my favorite other companies is called Perfect Day Foods, and they're producing milk using yeast essentially, and people in the US can buy their ice cream. I can't buy their ice cream because they don't have international sales yet. [chuckles] If you're in the US, you can buy some of this interesting yeast-based ice cream, which is super exciting. I see that's right on the horizon here, that's pretty much here now. What's on that horizon is a bit more of that what else can be made and how else can biosynthesis play a role in our lives?

Matthew: Well, you mentioned ice cream, do you have a favorite comfort food?

Kevin: [chuckles]

Matthew: Your go-to? I forget that concoction that cheese curd they put on fries and stuff there in Montreal, it’s really good. What’s it called again?

Kevin: That's called poutine.

Matthew: Poutine, yes. That is really good. It sounds gross, but it's really good. What's your favorite comfort food? I don't want to put words in your mouth.

Kevin: That's pretty high on my list. I would say that the poutine element, for sure. My favorite comfort food is Chinese food actually. My dad is from Singapore originally. We grew up eating Chinese food all the time. There's a specific restaurant where I grew up, which is the one that we always go to. That's maybe my ideal comfort food spot, in my brain, that's like, "This is the one."

Matthew: I was truly impressed by the food options in Montreal. I don’t know if that's the French kind of legacy there and culture or what, but I was like, "Hey, this is really good food." Every place I went, it seemed like it was really good food. You're in a good food city.

Kevin: Definitely, yes.

Matthew: All right. Last question here. What is your favorite tool? It can be a software tool, physical tool, doesn't need to relate to what you do day-to-day. It's just you'd be bummed if you could never use this tool again.

Kevin: Let me think for a second. Maybe my favorite tool right now is my coffee grinder. I think making coffee at home and working from home, it's been a good experience, one of the silver linings of the current situation. I'll give it that. [chuckles]

Matthew: That's great. That's definitely a ritual I couldn't live without. I'll tell you what my favorite tool is. How about that? I recently got a big Berkey water filter. It's just amazing. They've been around for a long time but it purifies the water. It takes out chlorine and all the things in there and also takes out the fluoride and arsenic and all these things. I've just been amazed at how much different just drinking water it is with it. I don't have any relationship with them, but it is truly a great tool for just having pure, clean drinking water around the house.

Kevin: It's good.

Matthew: You don't have to go for water bottles and stuff like that.

Kevin: Totally. Montreal just has a bunch of scandalous things around lead in the pipes and other kinds of stuff. I think the city is actually supposed to send me a water filter for my own water but I already had my own, but I would say plus one to that, for sure. Water filters are great tools. [chuckles]

Matthew: Kevin, we learned a lot today. I feel like this was a combination of a science course and a business class wrapped into one. As we close, let accredited investors and also companies that may be interested in learning more about your cannabinoids and how they might partner with you or work with you somehow, how can these two parties work with you, accredited investors and who are interested in investing and also businesses?

Kevin: Yes, definitely. I would say our website is the best place to get started. Head over to hyasynthbio.com. You can scroll through the little animation that we've got on our website. People seem to like that a lot and then we've got a few contact forms at the bottom which people can choose whichever one they feel like they fall into. Then that'll get sent over to me and leave a bit of information about yourself and what you're looking for and I'll do my best to help out.

Matthew: Kevin, thanks so much for coming on the show yet again and educating us on what's going on. This is a fast-moving industry and I watch it very closely. Well done with your business and keep us updated.

Kevin: Likewise and really glad to be back and glad to hear CannaInsider keeping up the good word and I'll happy to be back again sometime in the future, of course.

[music]

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 here. 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 for using it for medical treatments. Emotional 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 company's 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.

[00:43:59] [END OF AUDIO]

Ep 323 – How Cannabis Retailers Are Leaking Data to Competitors

nicholas paschal alpine iq

Just as oil powered the old economy of atoms, data powers the new economy of bits. Here to tell us how to leverage our cannabis business data and market more effectively is Nicholas Paschal of Alpine IQ.

Learn more at https://alpineiq.com 

Key Takeaways: 

[1:02] An inside look at Alpine IQ, a data analytics and marketing platform for cannabis companies

[1:27] Nick’s personal background and how he got into the cannabis space

[7:24] Why it’s important for companies to take protective measures with their business data

[11:18] How Alpine IQ not only offers analytics tools but also helps businesses determine the best ways to act on data

[18:32] What companies can expect during Alpine IQ’s onboarding process, from integrating apps to ensuring compliance across the board

[21:36] Alpine IQ’s audience feature and how companies are using it to generate ROI

[31:45] How streamlining analytics tools using Alpine IQ can provide incredible value for cannabis companies

[35:35] Alpine IQ’s journey achieving product-market fit and how the company got its first customers

[39:26] Where Alpine IQ currently is in the capital-raising process

Click Here to Read Full Transcript

Matthew Kind: 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 dot com. Now, here's your program.

You may not have heard, but data is the new oil. Just as oil powered the old economy of atoms, data powers the new economy of bits. Today's guest is going to tell us how to leverage your cannabis business data and market more effectively. I'm pleased to welcome Nick Paschal, co-founder of Alpine IQ to the show.

Nick, welcome to CannaInsider.

Nick Paschal: Hi, Matt, thanks for having me on. I'm very excited.

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

Nicholas: I'm in good old Dallas, Texas, the land that's very flat and dry around here.

[laughter]

Matthew: Compared to Colorado, you're right. What is Alpine IQ on a high level?

Nicholas: Alpine IQ is really a customer data platform and a semi Marketing Cloud. Our goal is really to protect you from breaking promotional compliance, segmenting and personalizing customer journeys, and overall sinking of your in-store and online operations.

Matthew: Okay, that's a lot and important stuff, and we're going to dig into that. Before we do, can you share a bit about your background and journey and how you got into the cannabis space and started Alpine IQ?

Nicholas: Yes, for sure. Stepping back, when I was 13, I played video games, and eSports was not as big as it is today, and out of playing Halo professionally and traveling, I forced myself to learn technology in order to pitch sponsors and try to get people involved in eSports. Over time, that really just laid the foundation for me to jump into the startup game and be more of an entrepreneurial. I started a couple of startups, failed, learned all those lessons, and all those things are very necessary and had my first breakthrough startup in 2012. I've since sold that company three times now. Funny long story, but not relevant to cannabis.

Then my younger brother actually was working for Tilray for a number of years on the retail team. This is all public knowledge, but they were going out trying to get into retail and buy up different chains. Part of that was we were just talking, actually playing video games again, that's how we stay in touch because he was living in Seattle. We were talking about what's inside of all these data rooms? How are these retailers managing things, and especially across provinces in Canada, and we would later obviously work in the US as well.

I started tinkering around with data management in the space, and really found that there was a really great solution there, so we started building out a product alongside the retail team there. Then over time, just eventually had a proof of concept, went through beta, got the green light from a lot of very key players in the space, and then we started to go to market in February 24th, so right before COVID hit, and that was pretty crazy timing, but it's been a journey so far.

Matthew: Wow. You said you played video games professionally, specifically Halo, the Microsoft game, is that right?

Nicholas: Yes. [laughs]

Matthew: That's pretty crazy. I've never met anybody who could do that. Now also, you mentioned eSports, and people that are listening are like wait, what does eSports mean exactly? What is that fantasy football? eSports is now bigger than regular sports, I think. What does eSports mean to you?

Nicholas: For me, it's how millennials were raised, essentially, I feel like, or at least my parents [laughs] growing up playing games and then getting into Halo. That was really the first one that popped off outside of the PC World and went mainstream. At the time, it was on USA as a live event that they were streaming, and that was really the kickoff and eSports being gaming tournaments and live streaming online via companies like twitch which didn't exist at the time. All of those were just very natural progressions to me in that sport, and coming from MLG, which is Major League Gaming, was kind of the first thing that I was in related to that. It really forced me to be an entrepreneur because nobody really believed in gaming being a big industry from people watching it tournament style.

Convincing brands and sponsors of that was a big step, and putting together decks and websites for team members, and then that eventually led to 3D. I got really into particle effects, which led to me actually working on Halo, because one of the guys from Bungie saw my work on YouTube, and I got basically hired and had to move overnight from Arizona with no car when I was 17, so it's pretty crazy.

Matthew: Wow, that's nuts. How old are you now?

Nicholas: I just turned 30.

Matthew: That's quite a long journey then. That's really interesting. I know, in South Korea, in other places in Asia, that the eSports have gone to a whole another level. In fact, I don't think most Americans or North Americans are really aware to the extent they're filling arenas. You're watching people play video games on a big screen and stuff. I think that is someplace where things are headed, especially now that we've got Oculus 2 out there, it doesn't need to be connected to a PC and you can join events virtually and it's really becoming quite immersive. Do you have any thoughts on that?

Nicholas: Yes, I think the cordless VR stuff is pretty huge. I think that the barrier to entry, though, is still the price point on that. It's one thing to get a VR headset, but then you also have to get the PlayStation or build a workstation that's powerful enough to handle it. Yes, eSports is growing immensely. Even here in Dallas in Arlington right next to the Cowboys Stadium, there's a whole indoor arena just for eSports and gaming events, which launched, I think it's the biggest one in the country, if I recall correctly. It's just growing crazy. Especially in, like you mentioned in Asia, there's huge Superbowl stadiums that are just constantly sold out for games like League Of Legends and some of the more popular ones.

Matthew: Fascinating stuff. For listeners that are just not as immersed in data, and specifically, cannabis data as you are, how can you orient us so we can evolve our thinking to catch up to where you're at, and to think more critically about our business data what it is and how to use it?

Nicholas: Yes, so I think really the bottom line is that you're at risk of owning your customer if you have leaks in what I would call your data network or your data infrastructure. At the end of the day, if you don't have trust and confidence in your customer data, or inventory data, or machine learning derived pieces of information to help you grow your business, you're just going to have a lot of downstream problems occurring for both the customers in their journey, and loss of man-hours related to like your internal staff, either on a brand side or maybe a retail side. Some of the other things people don't realize is you're going to bleed customers to competitors in different ways that are subliminal.

Just to back up, a couple of months even, there's so much money getting poured from cannabis into silvery businesses. It's smart money, it's Silicon Valley money, these guys know what they're doing when it comes to data. Those in silvery businesses, you have to be careful with their intentions long term, especially when you have what I would call some conflicts where LPs and some of the big players that are your direct competitor as a retail operator or brand, are collecting that data downstream or have the ability to anonymize it and use it in exchange for maybe free access to your point of sale, which is a very common thing in cannabis.

Just being able to control your data long term and your data network is so critical. When these CPG brands get into this space in a big way, in a couple of years, your data, if you're giving it away for free or you're not governing it correctly, is going to end up powering their rapid penetration into the market. You should be owning your customer, you should control your data, you should have data breach clauses, and really speak powerfully about that for your business.

Matthew: When you say the leaks, I just want to be clear like data leaks so you're using maybe some sort of SAS software, or have an API that links your database to a third party for whatever reason it might be to accomplish something. That might be used in a way that you might not approve of but might not be aware of.

Nicholas: Yes, exactly. It's kind of the same argument that's very public with people like Facebook and TikTok right now, is you don't really know downstream just by using a couple of cool tools how they're going to be able to capture the customer in a way that you didn't really realize upfront. That might not just be, I don't want to pick on tech providers and your stack, a lot of people don't have that intentions. There's also leaks in a sense where if you connect your Mailchimp up and then you're doing SMS campaigns on a platform and the opt outs don't speak together, then that might open you up for problems down the road with compliance.

So just little things like that, that add up especially with such a new space where these tech providers are brand new and all the kinks aren't worked out, and everybody's just trying to work together.

Matthew: You know sometimes I see a lot of tools relating to data, and it lend themselves to analysis paralysis because the data's so overwhelming. It may be beautifully presented, but it's not clear what the actions are, like, "What's actionable here and what's my priority of action?" If I'm going to take some action, which one should it be first? How can you help us understand your data management platform and how to analyze the data to do something powerful?

Nicholas: Yes, for sure. I would say the first step is that you need to clean it and connect it all together. You need to get all your integrations. In this space, especially pre-COVID, most of that is being looked at as, "I just have to connect my point of sale. I can look at my transaction data with a couple of different providers or maybe that powers one or two marking tools."

The problem is if one of those pieces of data changes. Let's say that you have a customer wallet and their phone number changes or they change their address, what do you have to do with that person, and is that going to affect when they walk in to the store, if they're going to have the right information on the point of sale that they would have in the customer wallet that might be provided by somebody else? So just like cleansing, de-duping data. That's a big piece and mapping it together across all these destinations and sources of data.

In Alpine IQ specifically, we wanted to make it really simple to have key metrics. We have a managed service. If you don't understand data science, you don't want to look at a bunch of graphs all day. You just want actionable things to do as of business that would make a difference on your bottom line, we have that as an add-on for a lot of people.

In the dashboard, when you first get in there, we're super agnostic. What happened was, we made this data management platform. Originally, we were going to connect to a lot of tech vendors in this space, specifically in marketing and audience creation, and they didn't really want us to get into their business and power or anything. It was this gate-capped environment, so we ended up just making our own, what I would call Kroger brand of cereals, to match those. You have the option in Alpine to either use another provider for each piece of your technology stack, or you can use our own pieces that we've built specifically because we know that those are the highest ROI generating pieces, things like SMS campaigns, loyalty, wallets, personalizing stores screens.

The ability to attribute ROI across all of those tools, is probably the biggest difference in Alpine versus other things out there. What I mean by that is, when you connect your email provider, like maybe Mailchimp or Klaviyo, and then you have Alpine SMS campaigns, and you might have AdBlue banner ads doing retargeting and geosensing, it's very simple in Alpine to look at a couple of graphs and have a couple of stacks there that tell you, "Mailchimp sent you this much revenue versus Alpine SMS versus AdBlue banner ads." You can really break it out and split it out in one place so you're not looking at these detached different analytics tools on a hundred dashboards. It's all just going to be combined and nice. That's the first thing, it's just combining and being able to look at it in a clean way.

There's a couple of stats that we generally like to move the needle on, both from the managed service and what I just tell anybody to do, is look at the deviation of the member club average ticket size, so your loyalty club purchases versus your non-loyalty member purchases, and try to rise that percentage up, both through dynamic discounting and promotions and just targeting the right people at the right time is a big deal. We even have pieces on our system that map out the audiences you create for SMS or for Mailchimp, and then showcases that on a Google map of where those customers live so that you can decide on physical world promotions and events that might be relevant to specific audience.

Matthew: SMS is really a popular way to do promotions because it comes right up to your attention, unlike an e-mail or something else. There's some litigation right now for people that say they have opted out, which goes exactly to your point of like, "Hey, you've got to make sure you have clean data." When someone opts out, maybe in one database you have hyphens in their phone number and another part of the database that doesn't have hyphens, so your software thinks those are two different numbers, opts out one and not another. The next thing you know, there's a lawsuit because you texted someone that opted out.

Nicholas: Yes, the TCPA lawsuits are definitely a big thing in this space. We have a lot of customers actually come to us after those happen and still run SMS and are very excited about what they're generating there. You have to make sure that you're TCPA compliant in Canada, you also have CASL, in California, CCPA. You have all these different things that you have to look out for, not just for text messaging but e-mail compliance and all these different privacy policies.

Cleaning the phone numbers and cleaning records and de-duping them is a big step to honoring opt outs. In Alpine, we actually have a page that we give every customer that they can link to from their website, and you can opt out GDPR, CCPA compliance, and it connects all of your tools together. If they opt out of our page, then it'll automatically tell like Mailchimp, "Hey, they're opting out," and SMS campaigns will stop. To be honest, a lot of those TCPA lawsuits arose because customers were exporting SMS files from vendors and then switching vendors. There's edge cases there where, if you download a CSV file of all your member club people and you have opt out dates, and then they happen to send a couple of text messages in between the time you're transitioning and somebody opts out, when you're on the new vendor, that's going to send a text message. They're going to get upset and they're going to think they already opted out when the new vendor has no idea. You just have to be really careful transferring things. We try to help people through that as best as we can.

Matthew: We talked a little bit about the dashboard and what you see when you log on. Let's say I'm a business owner. I've committed to Alpine IQ. I've connected up as much of my business as possible, to it. What kind of insights will I be getting? What's actionable there that would draw my attention if I was looking over your shoulder at the dashboard?

Nicholas: As far as onboarding goes, typically we can get that done in a day. We just take you through an onboarding call. We make sure all your data points are connected, all those API keys are good to go. We'll map all the stores together, if you have multi store operations. The first thing you're going to see is, you're going to see a data network. When you log in, you're going to see all of your ingestion points of data pulling in, in real time, the accounts of people coming in, and then our system's core which is cleansing of that data, making sure it's compliant, and then shooting it back out to other third parties or our own in-house tech stack, which would be like SMS campaigns or one click review widgets for SEO boosting.

It's pretty simple once it's all set up. You're really just getting reports day to day, or those are also e-mail directly to the right team members where the data is relevant to them. That's a big difference for us, and yes, ease of use and simplicity is really key in this industry, especially when you're trying to connect up four or five different providers on average for every retail store.

Matthew: Okay. Let's say I'm a cannabis retailer. I've got Alpine IQ. How do I cleanse and sync that data? Is that happening automatically? Am I prompted to cleanse somehow and sync? Because I know that's something that you have mentioned in the past and it's important, but I don't know if everybody knows what that means.

Nicholas: Essentially, after you connect your, let's say you have a website, so you connect your website to our system, which basically tracks page views, what was put in cart, what videos did somebody watch, like maybe those were edible videos specifically. Then you might connect like a rest API, your point of sale, you have email providers, you have, e-commerce like I Heart Jane. All those things, once they're connected, Alpine is basically going to look at data from all of those places coming in real time. Then in some cases, there's a four-hour delay for certain point of sale systems. For the most part, it's really quick, and there's even a timer on the homepage that says, hey, at this time, we're going to run the next cleansing of your customer records and then sort them into very specific, granular audiences that you can use. It's pretty easy to see that it's running, it's constantly going to be going and protecting your entire data network.

Matthew: Okay. Very cool. Audiences, let's talk a little bit about that and what that means. What's an audience and how do you see retailers and brands using the audience feature to generate ROI?

Nicholas: Right. Audiences really are, most people in this space would say, okay, an audience is somebody that has previously purchased edibles or some kind of like generic category. With our system, we have a full segmentation and filtration tool. We generally give you a ton of different audiences that are pretty configured based on what we know is going to be used most, things like top 20% spenders across all of my stores. You might generate these audiences. you can select different traits. You can say, I want to target people that are top 20% spenders that visit at least three times per month and they have over 700 loyalty points, and then you can analyze those and use those people in campaigns down the road if you want to.

Matthew: Okay. Let's just, if you were to just hypothetically put on the hat of being a cannabis retail brand, how would you optimally run things from a digital perspective here? I think of Alpine is like this old time switchboard where the operator is plugged into everything else. It's plug plugged into all these other systems and stands there looking at them all. Now that you're at the switchboard and you have full visibility into all the different systems, how would you run your cannabis retail brand and leverage Alpine to do it the most efficiently and optimally?

Nicholas: I would use a lot of different tools. Right now, the incivility business side of things in the tech space is growing so fast. There's so many vendors in the space, and it's even after taking demos and seeing sales decks, which we did looking at people through Tilray. It was what is working over here? What's the best tech stack? How do I combine these things together? Really I would start with my base set up, my current point of sale. I would install website tracking. I would connect together my eCommerce setup, and that way I can look at everything in a consolidated place. Then I can switch out vendors. I can change out SMS campaigns to target different audiences that are more granular. I'm saving capital, but not sending SMS to the wrong people at the wrong time. Or maybe I'm a high tourism zone and text messaging people at daily deal to come into the store today is a bad idea to just blast a 40,000 members when like 500 of them live anywhere nearby to do that today.

It's like all these little optimizations I would do. I don't know if you want me to give some examples of upgrading campaigns or anything, but--

Matthew: Sure. Yes, I love examples.

Nicholas: Let's say you have 30 stores. Because really, we built this looking at Tilray, we knew it was going to be a very large thing. We went backwards on building it for big enterprises, and then that helped even single store operators obviously. Then they have trust to, as we grow, it's going to work. Let's say you have 30 stores in Colorado. We'll use that top 20% spenders that visited three times last month as an audience example. All you would need to do in our system is create an SMS campaign, and you can use all these little personalization tools, it's drag and drop really simple. You can say like, Hey, first name. that would relate to, Hey, Nick. It'd say, Hey Nick, happy Tuesday. I hope you liked the white widow you bought last week. White widow could be taken automatically from our system as the highest price item from their ticket on their last order.

You're not saying, Hey, I hope you liked the papers you bought. You can get really granular with that. Then you can give them a recommendation. You have a new string called Durban poison that we think you would really love. That recommendation is based on machine learning currently available inventory days of stock and things of that nature.

Now I have one SMS campaign I can send to 40,000 people, but it's going to be different for every single customer. Which is also going to help me not get blocked by carriers when I'm sending SMS because it's very personalized. We can even link a coupon in that SMS campaign that goes to a page that has a barcode to easily scan it at the tail or something else. When this is sent to a customer, there's an SMS campaign I'm talking about. Alpine would automatically add that discount to a customer wallet alongside any arcade style points, discounts, or anything that they're familiar with. This could even go to use the discount for pre-ordering on something like iHeart Jane because that's connected to Alpine. All this stuff is speaking together.

When they come in the store to pick up their product, after ordering on iHeart Jane, in that example, they can scan their ID at the door or be in a waiting room, depending on your state or province. Then we even 10 power things like store screens by saying, Hey, Nick is in the queue. He's about to walk in the store. I want you to put mostly edibles or Durbin poison content on all the screens in the store. Then the bud tender that handles him, I want you to give him a tablet recommendations list of products that are he's most likely to buy based on the white widow purchase and all of his order history and what other people have bought with the same order history in the store.

Then in the customer's brain, everything about their interaction with you is amazing. It's personalized to them. They feel like you understand them. The higher ticket prices come from that, the loyalty comes from that, and that's when you really start to get the boost. Then on top of that, when Nick leaves the store, he's going to get a text with his points, his wallet, that's going to have promos and recommendations in it, and that's going to drive him back to the store again.

Then on top of that, he might get a text message because he's a top 20% spender from Alpine to go review you at the exact store that he just visited in your 30 store chain network, on Google, Facebook, Leafly, Weedmaps, those types of things. All of this that I just said in that example, is completely automated with Alpine. You basically make an SMS campaign, and all of that stuff would automatically happen as the customer interacts with you. There's nothing really, you really have to do after that single day set up and creating a couple of campaigns. At the same time, that SMS campaign could sync to MailChimp, and MailChimp could send out an identical piece of content to that same person.

Matthew: Interesting. That really makes the prospect feel or the customer feel like, "Oh, this retailer gets me. We're in sync here." That makes a lot of sense.

One question about the customer journey. If you're watching videos and let's say all the videos relate to edibles, is it say like, Hey, this person's watched 700 minutes of edibles videos. They get like a tag or some way to know that this person's interested in edibles, but do you have something that says like, Hey, they're super interested in edibles. They're like, they're a 10 out of 10. Or is it just like Edibles?

Nicholas: No. Yes, so typically what we see in the space is just a simple tag for a basic category. I studied machine learning pretty heavily at MIT. My favorite topic, for sure. I probably bore everybody about that. Essentially, our system has got all sorts of brain power in the back end that's saying, okay, Nick is likely to visit within six days based on his propensity with my brand. I want to send a text message out when he's likely to come to the store within two hours. All those things are not necessarily like I wouldn't consider them tags. It's basically like a machine learning derived trigger to send a SMS at a certain time, or a trigger to push a discount when we know that they like edibles, like you said. They can always change interest. It's not like I walk into a kiosk, I tap, I like edibles. That's the only thing I get. If I go from edibles and I start buying a ton of concentrate or tinctures, which is very different type of buyer, generally, tinctures buyers are completely separated. Then I'll start getting different recommendations based on that. I would compare that mostly something like the Netflix recommendations that you get for TV and movies. If you start watching romance stuff, romance videos and TV shows are going to be more prevalent in your feed.

Matthew: I wonder why mine only suggests the Hallmark channel, Nick, any ideas?

Nicholas: I said romance because I'm thinking of my wife's recommendations.

[laughter]

Matthew: It is funny. It's like, how do I break this? I got to watch, like Rambo movies for a week. You can change the profile I'm under or something.

Nicholas: Yes, I got pop patrol for sure on all of mine for my kids.

[laughter]

Matthew: There's a lot of people listening here, and I can totally understand the situation. Because you start with one software platform, or you start with like one software SAS company to do something specific. The next thing you know, you integrate with another one because it integrates with the first one and they both do maybe one or two things well, and then before you know it, you have three or four and you're using all of them, and it feels like it's going well. Then someone like you comes on and it goes, well, it's like you have a body without a heart and a brain. You've got these parts that are not connected in a way that makes sense holistically. There's this sinking feeling like, Oh no, my date is leaking. I don't understand my customer journey. Are they even getting an optimal experience? How do I benchmark that? There's all these questions that start to swirl. What would you say to someone who's in that position?

Nicholas: [laughs] Call us.

[laughter]

It's a very simple workflow that we use often, and has really good success at jarring revenue, is to connect these things up. Do you dupe them have trust in my data, and be able to swap out and not have vendor lock on some of these downstream tools. Just getting that foundation together, even if it's rudimentary and bare bones for now, that's great. If you have a lot of tech providers already, there are ways to cleanse it out.

In some cases like let's take some TCPA lawsuits, if you have dirty SMS data and you're worried about that, there's ways to cleanse that. However, some people do choose to go back and say, "You know what, I've got to restart my member club. This doesn't work." We've had that happen before. It happens. People are learning as they grow right now. Our job at Alpine is just to stop that from the get go and just get you online and with a good solid foundation. Then let you have the freedom to use any tool you want without freaking out that you might lose a piece of data when you transfer. If I try this for seven days, it's going to break my entire network of other tools trying to work together, like on discounting or on other things.

It's not just that. It's also like in the future. Let's say that legalization happens in a bigger way, and all these blue chip tech providers can get into this space and you can start running Facebook Ads, and you can start running some of these key platforms that work so well in a normal environment. If you don't have your foundation set up with Alpine, you would click one button and say, I want to send all my cannabis audiences that are cleansed to Facebook Ads, and that same audience goes to MailChimp and your SMS campaigns. It's all just working together. It's not really that daunting of a task with the platform. It definitely is setting it up blind.

Matthew: People are like, "Wait, you can do that?" Yes, if you have your customers' emails, you can upload them to a Facebook ad campaign, and they can just push the ad right to you. That's a good point.

Nicholas: Yes, they have your most active contact information. That's where all the privacy stuff has been coming up lately, but it definitely works, and so does stuff like Google Ad words, or even something as simple as like doing an Intercom chat on your eCommerce store. Like how do you trigger SMS or in store screen display is based on if that person made a chat with you, and what was that chat about? All those types of events get funneled into Alpine and then it powers your downstream situation.

Matthew: You mentioned earlier in the interview about how, when you were getting started, you went around and talked to different companies, individuals, and got the green light. I think you said. What was that early incubation period like? Were you just trying to see if people wanted this or if they saw the need, or were you showing them a prototype? How did you get that product market fit?

Nicholas: Originally, we made a deck. We modeled the framework base layer off of some blue chip providers that are very large and do most of the Fortune 500 that isn't cannabis. That was really our foundational layer. Then we connected a couple of APIs and tools together for a few retailers, and then just started working backwards from there and did every single integration. I remember just speaking to entrepreneurs out there that might be listening. It's just like when you get into to this industry, it's so gate capped, and it's not generally early retailers or brands, they all want more tools to do their jobs better to connect everything. There's a lot of blocking going on between tech providers that don't want to release APIs, or they feel like somebody is going to be competitive to them downstream.

Honestly, it's funny because we didn't want to be competitive to these people. They just said, that's what we think you are. Then we turned around and said, all right, if you're not going to support these people on prevent vendor lock, then we're just going to build our own solution for it. We have like two or three vendors, minimum per type of marketing channel you might use, like SEO generation, and then we'll have our own version of ourselves that comes with the platform. It was very difficult. It was extremely difficult to get in touch. I remember sending probably 20 integration emails to people and saying, Hey, we're new. A lot of people don't have API support teams, and they get their time wasted a lot by kids coming into this space, thinking that they can just make it a tech play overnight and they just don't let them in.

It took getting the retailers and some of these brands to say, hey, like we need this. We got to find a new point of sale, or we got to find a new vendor for this other process because you're ruining my downstream chances of being successful. My example I always give is like these people doing blocking in the space, it's not beneficial to anybody and not even themselves. If you look, Apple isn't going to come into the space and block you from getting on the app store. You can go as a developer and sign up in two minutes, pay 90 bucks for a year, have unlimited API access and drop an app after it goes through an audit. That's not possible in cannabis right now, per se, in certain situations, but a point of sale, like Stripe, largest online transactions, huge API, well-documented, you can sign up as a developer in two seconds and power their customers with amazing tool sets for free.

All the excuses in the space of like, "Oh, we don't have enough money for this. We didn't budget this into our original tech play," I feel like those are just excuses and really like-- Just to give you an idea. We have three engineers. We have three engineers. We have done 24 POS integrations. Not one of them has taken more than 24, maybe 30 hours to do without talking to anybody. Most of it is probably six weeks of just back and forth on email, just wasting 10 team members time trying to get in, and that's it. It's unbelievably daunting just to get in.

Matthew: Well, so this is a very cool product mission control. It was put on. I think it was like mission control or the switchboard of your business. It was put on my radar because people said, "Hey, this is really a interesting software solution." Well done to you. Where are you in the fundraising process right now? Have you raised capital? Where are you?

Nicholas: Yes, so like I said, I sold my previous business a couple of times. Long story, but basically I took cash from that and then self-funded and have a great team of people working with us. In May, a couple of months after we really started selling publicly, we took on a small private round, and then in the future, we're very conscious about conflicts of interest in the space, and I want data to be owned by the retailer or the brand, and it's collected by you, so like, why shouldn't you own it? Your customers really don't deserve to be anonymized and sold to third parties, so especially at large competitors.

We're always looking for finance partners and to expand our growth, but we're looking at another-- doing like a larger, I would call it a series A strategic in the next couple of months.

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

Nicholas: Yes. I get the book question a lot, and I'm an avid reader, for sure. My favorite book, at least in the last couple of years, is definitely Sapiens. I believe it's Sapiens: Brief History of Mankind. I can't even describe how amazing this book is, but just understanding the growth of human psychology and where we're headed. It's just a very good foundational book, and it dives you into that whole process of how we came to be psychologically today. I would recommend that, so it's Sapiens.

Matthew: Great. Besides what you're doing at Alpine, what do you think the most interesting thing going on in the cannabis field is?

Nicholas: Oh, this space is so fun, honestly. I talked earlier about gatekeeping and stuff and how difficult it is to get in, but it's super fun. The people are great. There's pioneers everywhere, and as long as you jump those fences, it's amazing to work in it. The coolest stuff that I've seen is just-- I like seeing the transition of the customer education side, understanding what plants actually do to them, and the new research coming out about those different things. Also some of the more advanced stuff, like people trying to DNA splice and use CRISPR to change the effects, that's pretty crazy, but we'll see where it goes.

Matthew: Yes. Well, let's end on a Peter Thiel question here, Nick,. What is one thought that you have that most people would disagree with you on?

Nicholas: I like his book too, by the way, I forgot what it's called.

Matthew: Zero to One.

Nicholas: Zero to One. Yes, that's a good one. Can you rephrase that?

Matthew: Sure. What is one thought you have that most people would disagree with you on that you believe to be true?

Nicholas: After I worked on Halo, and then I went to-- I ended up doing feature films and working on those in commercials and stuff like in visual effects world. You remember the Sonic the Hedgehog that came out. It was last year and everybody freaked out because he looked just non-menacing at all-- he was just terrible looking. From a design perspective, he was just like way too cute for what the historical version of Sonic was.

I'm just convinced that re-skin of the character was just a publicity stunt plan from the beginning.

Matthew: Oh, really? Just get people talking about it.

Nicholas: Yes, absolutely. Then they ended up changing that character and they bought themselves another eight months to change the character's design, and then release the movie again.

Matthew: I've heard this marketing tactic that says you can't tell your customers what to think, but you can tell them what to think about, and maybe that's what they did there.

Nicholas: Yes, exactly. Oh yes, absolutely.

Matthew: Well, Nick, as we close, are investors welcome to contact you if they're interested in possibly investing later.

Nicholas: Oh yes, absolutely. We're definitely in the process of looking for strategics and smart people to work with. Can I get my information out-

[crosstalk]

Matthew: Yes please, for accredited investors, go ahead.

Nicholas: Nick, N-I-C-k, @alpineiq, like brain IQ, .com is my direct email. Feel free to email me if you're an investor, just have some questions, need some help on data, we're here to help, and love to talk to people in this space. [unintelligible [00:44:32] Alpineiq.com has some great ways to connect with us, and somebody will help you.

Matthew: Awesome. Nick, thanks for coming on the show and educating us. You've got a really great company. Cool things happenning for you. I hope you'll come back and tell us how things are progressing.

Nicholas: Yes, man. Thanks so much for having me. I really appreciate it. It's been a good time.

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 guest, learn more at cannainsider.com/iTunes.

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[00:46:18] [END OF AUDIO]