NCIA's California Cannabis Business Conference 2019 Keynote: "It's a knife fight"
The National Cannabis Industry Association is hosting its 2019 California Cannabis Business Conference this week in Long Beach, California, and The Elegant Stoner was in attendance, along with a few thousand or so growers, manufacturers, retailers, and ancillary services for California-based cannabis. We have a lot of coverage of the conference planned (so stay tuned for more), but the event kicked off with a keynote discussion led by Codie Sanchez of a group called Entourage Effect Capital (formerly Cresco Capital Partners) in conversation with Troy Dayton, the CEO of cannabis investment and research group Arcview (which Sanchez and her employer Entourage Effect has just made a deal to acquire).
The event started with a keynote address by NCIA's executive director Aaron Smith, who talked about the industry group's lobbying efforts (and how unlike other cannabis conferences, NCIA uses the money it earns putting on events to support its lobbying for the industry in Washington). Smith talked, as did many people throughout the show's panels and discussions, about the recent vaping illness problem, and how the illnesses and deaths (which have been tentatively connected to the illicit vape cart market) show just how important it is to put federal regulation in place to legalize cannabis, and create standardized "safe products for adult consumption."
Smith also called out the NCIA's recent whitepaper, outlining a possible regulation structure, and he pointed to the recent House approval of the SAFE Banking Act as a big victory for the industry (though, like others at the conference, he said the next goal was to pass the bill in the Senate -- no easy task).
Smith then introduced Sanchez and Dayton, and the keynote proper began with the two talking about what their businesses have been focused on lately. Dayton's Arcview provides research and insights for cannabis investors and entrepreneurs -- there are 15 million accredited investors out there, he and Sanchez said, and "people need a place to go to make sense" of what's happening.
Dayton (who is also a co-founder of NCIA) started out as a fundraiser for the marijuana movement, and he started Arcview because "I thought the business side could play a big role in ending prohibition." The conference this week is focused on business, of course, but Dayton believes that the cannabis industry has a responsibility to be more politically aware and involved. While there are a lot of people coming into cannabis from other industries right now, he said, "people forget that the other industries they're involved in, there aren't people sitting in jail for doing that same thing." Dayton also talked about Arcview's name -- based on a Dr. Martin Luther King, Jr. quote saying "the arc of the moral universe is long, but it bends towards justice," and he also told a story about the early days of the company, when he was featured on the cover of Fortune with his team as a huge success, despite having just been able to move out of his car and into an actual house.
Sanchez agreed, saying that cannabis business owners looking for investment could "write in some interesting terms" to their investment contracts to make sure they stayed focused on social justice (she suggested the clothing brand Patagonia, which dedicates 1% of all sales to helping save the environment, as an example outside of cannabis). Sanchez said that her company acquired Arcview because their goal is to provide investment across the entire cannabis industry -- from "seed to IPO" -- and Arcview is one of the relatively few companies doing "seed stage" investments right now.
The two talked about how investing in the cannabis industry has reached a sort of second stage at this point. Some of the big early valuations in the industry have been disproven or fallen apart, either because of regulatory tangles or poor management, and both Sanchez and Dayton agreed that the industry has gone from a stage where early risktakers were jumping in, to a point where good companies are dealing with distressed capital (or going from investments for growth, and towards investments to save the company). Sanchez reminded the audience that unlike other industries, "we don't have bankruptcy." Without banks in the industry, there's no bankruptcy options or leveraged buyouts, and that means that the stakes are higher, both for individual companies and for the whole industry. Cannabis, in the public mind, Sanchez said, is all one thing, so when one company fails, "all they see is cannabis" is failing as a whole.
Dayton then talked about some of the mistakes he sees potential investors make when looking at cannabis, and what he looks for. The biggest mistake in coming into cannabis, he says, is that "they think it's easy." These days, being successful in cannabis requires someone who knows the industry, so if investors or companies show up and expect to succeed because they succeeded elsewhere, the odds aren't as good as they think.
But Sanchez pointed out that it wasn't all doom and gloom. "Vice businesses do really well in recessions," she said, and considering that experts are starting to predict a recession on the way, that might actually be good for cannabis. "Technically, we're a vice business," she said. Dayton agreed that "the future is incredibly bright," but that while "there will be a ton of money made, there will be ups and downs" along the way.
Both speakers stressed that their criteria for choosing successful cannabis companies was getting more specific. Dayton said these days, he wants to see a company that's polarizing -- "if everybody thinks it's a great idea," he said, "that's not as interesting" as an idea that some people aren't into but a few smart people really like. He said he expected to see more deals like the Acreage Holdings purchase by Canopy Growth, and that more non-cannabis companies will make entries into the space. Fortune 500 companies, he said, were currently buying Arcview reports, and when legalization finally tips over into reality, "people who weren't willing to overpay before will get into the space."
Sanchez said that at this point, the most important thing for a company trying to get investor money was "sales, sales, sales, sales, sales." "A differentiated product doesn't matter if you don't have revenue," she told the crowd. Ideas aren't enough at this point in the industry -- if a cannabis business is trying to grow, they need to get into the arena and find a distributor and retail space and get products out the door. "It's a knife fight," Sanchez said about the chaos going on in cannabis distribution at this point, she recommended that the businesses at the conference "give yourself the space to think, 'how could I get out of the knife fight and into whale hunting?'"
There was a short Q&A session afterwards, where the panelists were asked about female investors and why there were so few of them even in the cannabis industry. Sanchez said that less than 3% of investment money goes into women-backed businesses, and admitted that in the cannabis industry, that figure was even lower. She said female-led businesses should probably focus on the business rather than their gender when presenting to investors -- "we already get that [investing in female businesses] would be a great thing to do." Dayton said that Arcview has a women's investor network being built inside the company. And he added that diversity is a tough issue -- it requires change not just at the macro level, but at the micro level, like how companies and investors treat each other at conferences like these. He admitted that sometimes he needs to "look into my blind spots" as well, and to make sure he's not "doing things that I don't even realize that might be discouraging" to women and minority business owners.
It was very interesting to hear from the perspectives of these two investors in the industry, and many of the topics they touched on (including the fact that things are tougher in the business right now, but that if people can hang on and survive, there are probably better days ahead) definitely echoed throughout the rest of the conference.
The Elegant Stoner was all over the show yesterday, and we'll have more coverage of the conference (and its attendees) coming up this week. The cannabis industry is definitely doing better than ever at the moment, and even though legalization is still a big question mark, the industry is still pulling in lots of money, and building up infrastructure that will only grow in value. But at the same time, as Sanchez and Dayton both said, a lot of care needs to be taken, both to avoid overextending (in case more issues do appear), and to make sure that the cannabis industry is more socially responsible and more diverse than the industries that it's beginning to compete with (like tobacco, alcohol, and other consumer packaged goods). If cannabis as an industry can keep those priorities in mind (while individual business owners survive the ongoing knife fight), there there's a lot of money to be made as well as good to be done in the future.