What you will learn in this interview:
- How to present your cannabis deal so it is attractive to investors
- How to become an investor in Troy’s network, The ArcView Group
- How some investors are making 16+% loaning money to cannabis businesses
- Where the cannabis industry will be in five years
Whether you are an investor looking to allocate funds to promising cannabis startups or you are a cannabis-focused entrepreneur, this interview is for you.
Troy Dayton, CEO of The ArcView Group, helps us understand where the cannabis investment market is right now. He provides examples of several entrepreneurs that pitched to his investor network recently. Troy also describes some opportunities that are not being full taken of advantage by entrepreneurs where there is tremendous need. Lastly, Troy provides his prediction of when cannabis will no longer be federally illegal. You won’t want to miss this episode.
Matthew: Hi, I'm Matthew Kind. Each week I'll take you behind the scenes and interview the insiders that are shaping the rapidly evolving legal marijuana industry. Learn more at CannaInsider.com. That's C-A-N-N-A Insider.com.
What are the five disruptive trends that will shape the cannabis industry in the next five years? Find out with your free report at CannaInsider.com/trends. That's C-A-N-N-A insider.com/trends
Now here's your program.
What is like to have cannabis entrepreneurs beating down your door everyday vying for one of a handful of opportunities to present to the most qualified cannabis investors in the world? we are going to find out the answer that question to day with Troy Dayton, CEO of the ArcView Group. Troy sits at the crossroads of cannabis investors and cannabis entrepreneurs. His vantage point and visibility into the business of cannabis is renown. we are very fortunate to have Troy with us to day. Welcome, Troy.
Troy: Thanks for having me, Matt.
Matthew: Troy, can you tell us a little bit about your background and how you got started in the cannabis industry before founding ArcView?
Troy: Yeah. I've been involved since I was 18. I've been an activist looking to change the cannabis laws for as long as I can remember. And I went on to found Students for Sensible Drug Policy, which is now one of the largest student political groups in the country, and just really was also really excited about entrepreneurship and went and started a dot.com digital video/media company during the dot com boom. When that went dot bust with the rest of them, a number of us peeled off and started a renewable energy company in Colorado called Renewable Choice Energy, which is still doing really well.
But I was always called back to change the laws, and always thought I was choosing between a life of poverty and satisfaction of changing the world or going after the next big startup boom. And I never for a million years did I think that my efforts to change the world would lead to the next business boom.
But low and behold, there I was in 2009. I was the lead fundraiser for the Marijuana Policy Project, which is to put a good portion of the ballot initiatives and changed a good portion of the laws. And I was raising money from high net worth individuals as well as people who were running businesses in the newly legal cannabis industry. I noticed that these people needed to know each other. These really wealthy people who had made their money in other vestments, who were now looking at this industry that they were inadvertently creating. And then people on the business side who were wanting to grow their businesses, wanting to take on capital but didn't know the right people. And so, in 2010, I teamed up with Steve DeAngelo, who had seen some of the same problems. He runs Harborside Health Center in Oakland, considered the largest retailer of cannabis in the world. And we teamed up and started ArcView in 2010.
Matthew: So ArcView brings investors and entrepreneurs together. what is the vetting process? How do the entrepreneurs apply?
Troy: So they can apply through our website. We usually hear from about a dozen companies a week. We choose the top three or four, ones that are ready that we think investors might be interested in, and we put them on a webinar. We have a webinar every week with about four companies. We usually have about 30 to 50 of our investor members on there. Then they give feedback, they rate the companies, they often times will find mentors there or maybe some times even investors right off of the webinar.
Then every 10 weeks or so, we go through all the people who have been on webinars and a subsection of the investor members select the top dozen companies out of that mix and then put them on stage. We have these big meetings where we have a few hundred high-net-worth investors. Usually CNBC is there, and major news outlets are there, and they pitch from stage. Before that though they get paired up with a mentor, who helps them really put their first ñ their best foot forward in front of the group.
Matthew: that is great. So a little bit about the mentorship, is that they kind of listen to the pitch, help them refine it and give them ñ lend their business acumen?
Troy: Exactly. I mean generally speaking these mentors are paired up with them two or three weeks before they are about to pitch, so they are not going to change their business plan in that timeframe. But they can help them talk about which things they should accentuate, and how they can present themselves in a way and also maybe help them clarify their deal. that is probably one of the biggest challenges is companies come with either no idea of what kind of deal they actually want to strike with investors, or they come with a deal that is just, for whatever reason, not something anyone is likely to bite on.
Matthew: Got it. Here in Colorado we see a lot of people ñ everywhere, but in Colorado in particular, a lot of people with money coming into the state kind of spending it willy-nilly and not really understanding the cannabis business. In your experience, what kind of mix of cannabis business at least have the spark where you think, hey, this might be something versus this doesn't even have the minimum. What do you look for?
Troy: Yeah. Well, I think you raised the key problem in need of solution, which is that investors that aren't getting to know other investors, and other key players in the industry, and aren't able to look at pitches next to other pitches, and get to really meet the all of the entrepreneurs are really investing into without knowledge and with a limited understanding of what is available out there. And so, yeah, a lot of people are making bad investments because they just want to be part of the rush. I mean, that is one of the things we really try to ñ one of the big reasons we started ArcView was because rather than saying I'm the expert, or you should let ArcView tell you what is a good company to choose from, we figured lets utilize the crowd we know. lets bring the top people together, and through that, it is a lot easier for people to get a clearer sense as to who is a good bet and who is not because I think more heads are better than one. So I think that is really common.
But I think one of the key things that investors need to watch out for is a couple of things. I'd say the biggest one is that you have got really awesome amazing entrepreneurs super excited, a great business plan, but they are wildly over estimating the size of the market for a given product. This is something that I've seen with a lot of the vaporizers as well as any sort of novelty consumption device. No one is going to make a billion dollars out of some new way to consume cannabis out of some new fangled device. I just don't think that that is likely going to happen.
The other big think I see is people that are addressing a huge problem. they have got the idea that the marketplace is amazing, right? So CBD is a great example. Everybody is so excited about CBD. It could be a huge, huge market. But often times it is not the right business plan, or it is not the right team. And so even if it is a big market, you have just got to make sure that all those pieces are there.
And then the other big challenge I see is that people are waiting for the perfect investment, and that is sort of on the other side where they want it to hit on all cylinders. They want a big market. They want the right team. They want to have the this, they want to have that, and they want to get a good deal on it, right? And that is not going to happen in an exciting market like this. If you have a team that is got all of those pieces together, great plan, great business, great investors, great traction already, you are going to pay a lot for that company. The multiples are going to be huge, which is fine. A lot of investors are saying, look, I'm willing to overpay for a company right now because I think that if I back the right team, the amount that I overpay is going to be pocket change compared to the opportunity and the success if it succeeds. So when you are in a boom, your options change, and in a lot of ways it is an entrepreneurs market right now. If you have a good plan, a good business, and a good pitch, the chances of raising money at a reasonable valuation are very, very high.
Matthew: What is the typical amount that you see raised on average for an entrepreneur making a pitch? What could they expect?
Troy: Well, it really runs the gamut. And then I think the key thing to understand in the cannabis industry, in particular, is that the past is a terrible prediction of the future because this is moving so fast. I mean even from one quarter to the next at our meetings, we see significant shifts in both who is there, the size of investments people are talking about, the types of companies they are investing in et cetera. So what I would say is that so far we've seen in our group that we know of about 30 companies raise about $15 million in funding. And the biggest one was ñ we had a couple right around $2 million, and then we got a bunch who have raised around 100 or 150. And so, generally speaking the ancillary businesses, the businesses that don't touch cannabis directly, they tend to be raising smaller amounts, but it is easier for them to raise money. And the ones that are dealing directly with the plants, tend to be raising larger amounts of money, but it is often the competition for that money is more stringent.
Matthew: And from an investors point of view, if they come to an ArcView event, is there opportunity to invest only in equity, or is there fixed income, or what options are on the table?
Troy: it is a wide range. We don't police the deals. we've seen a wide range of things. Some investors will invest in a startup for equity or even a company that is further down the line for equity. We also see a lot of convertible notes for businesses particularly before they have gotten a chance to really establish their valuation, they will often do ñ a convertible note structure seems pretty popular. The other thing that is really popular particularly when you are dealing with businesses that deal directly with the plant is high-interest loans because a lot of states require anybody that touches the plant to be non-profit ñ not for profit, or they require them to ñ the investor needs to be from the state in order to invest.
And so, as a result people have found other ways to fund their businesses through loans as opposed to investments. So we are seeing high-interest loans. Anywhere from 17% to 22%, I've seen loans. And these businesses are happy to do it because, look, if you have got a license in a state where the market is already there, and as soon as the market comes online, or you are allowed to go, you are going to have a line out your door. it is worth it for you to invest that kind of money into something even if it is at high interest rate because the margins on cannabis, particularly in a market where there are limited licenses, is remarkable. And so, people are willing to do that all day long, especially considering that they aren't able to get money from banks.
Matthew: Are the loans typically unsecured with no collateral?
Troy: Usually unsecured. I mean, the higher ones, of course, the higher ones are unsecured, and the lower ones are secured. But there is also some rules there too. So I believe currently in Colorado, it can't be secured. But also the other thing we are seeing a lot of is investments in real estate. And so, because the great thing about real estate is that you have got a hard asset. If the whole cannabis thing doesn't work out, you still have this building that is worth something. And so, what you are seeing a lot of investments in is, it is also a way for people to be one step removed from investing in the plant and having to deal with all of the regulations.
So what you'll see often is people will buy buildings. They will outfit them, and make it perfect for the cultivators that have licenses to come in and set up. Then they charge a real premium, not just because it is cannabis. But because they have set it up so all the grower needs to do is come in and start working. You get better ñ so that is one way that investors are looking to really benefit. it is also something investors tend to invest in things that they know or with people who have a track record of returning investment back to investors in a given sector. Neither of those things really exist.
And so, that is why you see a lot of people investing in ancillary businesses. Look, if you are a real estate investor, and you want to get into the cannabis industry, well, lets see. where is the intersection between cannabis and real estate? If you invest in software and you want to get into the cannabis industry, okay, what are the options to invest in software companies that are solving problems in the cannabis industry? If you are an investor in service businesses, what are the service businesses that are starting up around here? And so, that is what helps to provide the bridge for a lot of investors into this sector. But there are very few agriculture investors out there. And so when it comes to investing directly into the plant, you have got a lot of people for whom this is the first agriculture product that they are investing in. But of course, this looks totally different than most agricultural business because of the way the regulations are working.
Matthew: Can you give us an example of an entrepreneur that you saw present recently in person or on a webinar that had a great idea and just did a great job of communicating that clearly in a way that investors really appreciate it?
Troy: I can give you a couple. One that is really won over a lot of our investors is Aunty Delores. Loren Frasier, and Julianna Carella have a great business out of California with cannabis edibles and really great branding. And they are now bringing that brand to other states. And so, the opportunity was to invest in essentially a licensing company where they would license their brand and their recipes et cetera and know how out to other places where they can launch the product in those states. And really sharp entrepreneurs, and they were able to raise a pretty significant amount of capital. I think they raised over half a million dollars out of our group. We also have another example would be Mass Roots. they are sort of like a social network for the cannabis industry. And they have now done multiple rounds through ArcView. I think they are up to close to $1 million from ArcView investors at different rounds where they took on a little bit of capital. Then they proved what they said they were going to do in terms of growth of number of customers, and then they came back and pitched again, and they got more money et cetera. So that represents a kind of a unique way to go about it.
And then what would be another example? Well, packaging is interesting. we've had three or four packaging companies present and do really well. One that really stands out is a company called FunkSac because there is an interesting thing happening in the cannabis industry right now where in the criminal market the last thing you want is your name to be on a package. But in the legal market, you definitely want your name on your package.
You also have the additional challenge of the regulations and making really safe packaging that meets with the regulations but also meets with the publics needs and also meets with the merchandizing. Well, this packaging just doesn't exist. And so, there is enterprising companies that are out there working to make solutions to those problems, and they stand to do very, very well because if they are first out the gate, look, everybody that is going to buy cannabis, it is all going to need to be in a package. What package is it going to be? What are customers going to prefer? What are regulators going to prefer? The people who are in a very nuanced way figuring out how to solve those problems in these early phases of the industry stand to benefit in a large way.
Matthew: that is really interesting. A lot of people probably aren't thinking about packaging. That makes a lot of sense. Where do you think the cannabis industry will be in five years? there is hundreds of small companies that are small right now, but they will grow up. Where are we going to be in five years?
Troy: Most of them will be out of business in five years. And a few of them will be wildly successful. You look back at the dot com boom or the social networking boom. I live here in San Francisco and everyday I hear about a new startup, a new brand, a new thing, a new service, and six months later half of these things are done. They don't work, right? So I think even though we are in a green rush, it is going to be a little while before we figure out which things are actually going to be successful and which things aren't. But I think five years from now where we will be is I think that there will have been a number of exits for ancillary business companies. I think you are going to see some big companies that would otherwise have been in whether it be security or point of sale, or advertising, or media, I think you are going to see traditional companies come in and buy these folks out. And so, I think we are going to see some exits in the next five years.
I think that in five years from now, it will be 2019, and I believe that that is the year ñ either 2019 or 2020, that Congress will change federal law and make cannabis legal nationwide. Well, it wouldn’t make it nationwide, but it would leave it up to the states to decide what they want to do. And when that happens, that is when the big multinational companies will come in. And you'll start to see exits ñ you'll start to see people in the New York Stock Exchange and NASDAQ, and real serious companies coming in and making acquisitions of not just ancillary businesses but of the more direct and more profitable businesses that deal directly with the plant. that is what I think we are going to see in five years.
And that is why people are investing right now whether it be their time as an entrepreneur, or their money as an investor now, because I think anything we are talking about right now is pocket change compared to what is possible upon legalization. And it is unique to be in a situation where you have got a multi-billion dollar industry that is ñ where there is no big players. there is not a single player in this industry that is doing over $100 million in sales. there is only one or two that are in the dozens of millions in sales. And so, it is a very, very rare opportunity for the little guy to get an opportunity to make it big in a business. And so, I think that is part of the reason why you are seeing just such an amazing flurry of activity.
Unlike previous booms that relied upon customer adoption and changing ways in which people act in order for those things to be successful like in the dot com, the social networking boom, or even the green tech boom. The difference here is the customers are already there. Cannabis is widely used. And so, when we move it out of the criminal market and into a licit market, not only are the customers already there, but attendant benefits to society are just enormous.
And so, I think we are also not just building a new industry, but I think we are building a new kind of industry. Particularly, because so many of the people that are at the helm of this industry right now got to it in part because they really wanted to see a day when nobody was punished for this plant. And so, I think there is some real core values. And I think ñ my hope is that this industry grows into an industry that looks a lot more like the renewable energy industry and the organic foods industry. Industries that started out of a social justice goal, and then the business models ñ profitable business models spread that social goal far and wide.
Matthew: What a great vision. That is awesome. I know you are passionate for Burning Man Festival. For our listeners that may not know what Burning Man is, can you give us a little overview, and why you are so passionate about it?
Troy: Yeah. Well, obviously, this is more my personal life, and not my ñ yeah, Burning Man really changed my life. I've always been pretty outside the box kind of guy. And when went to Burning Man for the first time about 14 years ago, it was really the first time that I realized that there were other sane people, who had a good dose of insanity and were willing to be really creative. So I mean Burning Man is sort of this experiment in community, experiment in radical self-expression, experiment in art. Some of the most amazing art ñ I mean, the thing is that ñ hereís the big reason why I love Burning Man, why I think people are drawn to this idea they should go is we spend all year being whoever we are. Like I'm Troy Dayton. I'm CEO of the ArcView Group, and I am dah ta dah. Everyone is so busy trying to hold on so hard to whatever identity they work on all year long. And it is great for a week to go out into the middle of the desert and just totally shed that in an environment where you can find out what is really inside of you other than the role that you usually play in the usual society.
Matthew: that is a great summary. And there is no faster way to show that you don't know anything about Burning Man than to say ìtheî Burning Man Festival, as I've noticed because everybody just says Burning Man.
Troy: Have you been:
Matthew: I haven't been. I'd love to go sometime. I've seen some pictures. Do you have a blog or something that ñ
Troy: Yeah. If you go to burnerlove.com, you'll see it is not just me writing on there, but you'll see some articles that I wrote on there. I wrote one that says Five Ways to Make Your Life More Like Burning Man that I co-wrote with Steve Bierman, and a couple of other ones that people might find fun.
Matthew: Troy, as we close how listeners can find out more about ArcView?
Troy: Well, we have a website called arcviewgroup.com. And our next big event is going to be on November 11th in Las Vegas right ahead of the big MJ Business Daily Conference. And it is important to note that with ArcView, there are really only - there is three ways to be involved. The first one is if you are an accredited investor, you can join ArcView as a member. If you are a company that is looking to reach this audience, we do have some sponsorships available. And then we also have if you are an entrepreneur looking to raise capital, you can apply to pitch. And so, everybody in an ArcView meeting has been especially invited to be there. And so, that is what makes it the highest concentrated group of key players in the industry. And all the entrepreneur and sponsor slots are already taken for the November 11th thing, but we do have some investor spots available.
And then we are coming to San Francisco in late January. it is going to be our next big event, and we'll have the exact date probably in a couple of days, but there will be lots of room for applications leading up to that event. So that is how people can get involved.
Matthew: Troy, thanks so much for coming on CannaInsider today. We really appreciate it.
Troy: Thanks for having me, Matt.
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