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Coming out of the closet

Over the past year, many friends and family members have asked why I’m intrigued by the cannabis industry.  My answer can vary depending on the day, who’s asking, my recent meetings, or other things, but I wanted to get my comprehensive answer down on paper for anyone who is interested in a quick read (and for me to look back on in 10 years with the benefit of hindsight).

So, here goes my attempt at #whyicannabis (in no particular order)

  1. Because I’m a contrarian and (not so) secretly love a good shock factor.  I play by the rules in most every aspect of life.  My kids go to bed at 7, I married a nice Jewish real-estate professional with a great golf game, followed the typical high-school → college → 2 years of work → business school → back to work progression.  I see the dentist twice a year, dermatologist and doctor once a year, and make sure to have 4 servings of vegetables per day.  I’d be lying if I said I was truly rebellious, but I would also be lying if I said that I didn’t, at some deep-down level, truly enjoy making a statement, stoking the fire of a debate, or generally just going against the grain with certain life choices.  I loved the look on my friends’ faces when (for two days in 1999) I had my tongue pierced (sorry mom and dad) (not so shocking in California, but in North Carolina…)  So, unlike some cannabis professionals that feel shamed by the stigma of years past, I embrace it.  Yep, that’s me squeezing a cannabis meeting in between volunteering in the elementary school and getting my kids to their dance classes.  
  1. Because supply and demand (I’m an Economist). As an investor or a fundraiser speaking with prospective investors, the concept of supply and demand makes the appeal of this industry immediately obvious.  The cost of capital (that is, how much it costs an operator to get financing which translates to the amount you get paid for being willing to invest or loan money) is determined by the demand for capital (how much capital is needed by operators that want to expand their businesses) and the supply of capital (how much capital is available from investors or lenders).  In most any other industry, the supply and demand find a fairly normal equilibrium, with many options available to operators that need cash (bank loans, traditional institutional capital, friends and family, etc etc).  In this industry, the equation is completely out of whack.  The demand is bloated due to strong favorable momentum at the state level and the supply is choked due to the unquestionable illegality based on federal law. This means there is zero institutional capital or traditional financing sources. Private investors are an option but you have to strip out anyone that is risk averse or morally opposed to the industry.    Higher demand = higher prices (think Lululemon). Lower supply = higher prices (think diamonds).  So, what we are seeing is extraordinarily higher prices which in this case means very favorable investment opportunities.  Of course, returns have to be adjusted for the risk inherent in an investment.  These investments have an added layer of risk due to the conflicting regulatory environment, but even the risk-adjusted returns are meaningfully above market rates.  Once this regulatory environment works itself out one way or the other, the supply and demand will find a nice neat equilibrium.  To point out the extremes, if the Trump and Sessions dream team puts a kibosh on everything including states’ rights, then the demand for capital will disappear as the operators shut their doors.  In the other extreme, if we see a complete decriminalization and end of prohibition, then institutional capital will be made available and the supply of capital will increase.  In either of these scenarios, investment returns will likely progress towards what we see in other mainstream industries.
  1. Because I’m a worrier.  Like many legal and illegal drugs, cannabis can be very unsafe.  I personally, have NEVER and would NEVER get behind the wheel of a car if under the influence of even the most miniscule dose.  THC impairs my judgement and reflexes significantly.  However, as long as cannabis is illegal and available only on the black market, we cannot have a reasonable dialog about product safety, public safety, toxicity testing, or any number of other important topics.  I worry a lot about edibles.  Anything in our home is out of reach AND in a locked container AND in a combination safe.  This is especially important because many edible vendors elect to make their medicated products identical to the non-medicated version.  Unlike a stray joint or tincture, a “gummy bear” or “brownie” would be very appealing to the average 7 year old that walks by.   In addition, unless the argument is that people that use this drug DESERVE to be poisoned by pesticides, mold, whatever, then I would think most sensible people would agree that we are all better off if the drug is regulated in an open market, rather than dirty and unsafe in a black market.  Once cannabis is decriminalized, we can have a constructive conversation about safe packaging, safe dosing and other important safety topics.
  1. Because medicine is medicine.  Why are we voting on this?  I recently heard a statistic, touted as great news, that over 70% of Florida voters approve of the use of cannabis for medical patients.  My reaction was to wonder who the other 29% are and what they think about the scores of other dangerous, behavior altering, addictive pharmaceutical drugs that are prescribed daily.  Why are we voting on this?  We don’t get to vote on every other pharmaceutical drug on the market.  Although formal clinical studies aren’t yet available (it’s a schedule 1 drug, after all) the stories are more than anecdotes.  In some cases, cannabis is believed to have reversed the course of an illness (such as epilepsy), and in other cases it has shown to help with some of the symptoms that accompany an ailment.  Many of the cannabis operators I have met entered the industry because someone dear to them had a life changing experience from their use of medicinal marijuana.
  1. Because I hate calories and hangovers.  I say it tongue-in-cheek but  I mean it.  I am a hyper-anxious, type-A, headcase.  I can be hard to be around.  But, like the rest of you, I like to have a good time, and enjoy taking the edge off with a controlled substance every once in awhile.  Alcohol is a horrible choice for me.  I get loud and obnoxious, get horrible stomach aches, and feel guilty for going off my eternal diet plan.  For the past 20 years, cannabis has been a good option for me.  I don’t use it regularly or even often, but on the occasion that I want to take the edge off, party a little, or have a mini escape, it is truly the perfect drug for my brain chemistry.  I’m fun, I take time to smell the roses, I sleep better, and I wake up feeling like my normal self.  Did anyone else notice my subtle apology to my parents for the tongue ring but not for this?  My parents enjoy the effect cannabis has on me as well.
  1. Because botany is real.  It’s terrific that this plant was discovered so long ago, and that we’ve been able to enjoy its therapeutic effects for generations.  But, it’s interesting to ponder the fact that if some hiker were to discover a cannabis plant in the middle of nowhere in the year 2017, it would unquestionably be lauded as one of the greatest botanical discoveries of all time.  Let’s get this thing mainstream and stop hiding behind the stigma!
  1. Because no industry should have to operate in the Stone Age.  Regardless of your stance on the moral or medical value of this substance, nobody wins when the operators have to deal in cash (think about getting an armored vehicle every payday just to bring your payroll taxes to the tax collector), have a hard time getting basic business services like insurance, and have to lie to bankers and other service providers about the nature of the business.  No one wins.
  1. Because traditional business disciplines are necessary in every industry.  The past 15 years of my life have been spent in corporate America, where I may have stood out as a high performer, but I never stood out for having a unique or scarce skill set.  Everyone knew how to do conditional cell formatting, run a pro-forma, or balance an equation.  That’s not to say that skills and aptitudes weren’t noticed or rewarded, but it is to say that most of my colleagues had taken the same classes in business school, had the same lopsided SAT scores, etc.  This industry is different.  Many operators are entirely unfamiliar with accounting principles, financial statements, or anything corporate.  Historically, this industry has been encouraged to “not put anything in writing” in every possible way.  Not to mention, accounting for cash transactions requires more than downloading an automated paper trail like we take for granted in mainstream industries.
  1. Because “vices” should be taxed and regulated.  I have plenty of family, friends, and colleagues who are vehemently opposed to recreational (“adult”) use of cannabis.  Some of them also question whether it should be legal to use cannabis for medical purposes.  I almost always avoid trying to change their minds about the morality, safety, or efficacy of this drug.  With that said, I’ve not heard a single argument to support enabling (forcing) a black market for this drug.  There is no way to exterminate cannabis, it grows in nature.  People will use this drug whether it’s legal or not.  If you think it’s “bad”, I would think you would love the idea of imposing a significant “vice” tax on this drug.  Tax proceeds can be used for drug education, addiction treatment, bridges and highways, whatever.  It’s hard to see the controversy in that, and there is no question that this drug is used whether it’s legal or not.  

Possibly most importantly, it’s fun and energizing to be around entrepreneurs that are passionate, brilliant (but also still learning), open minded, and cooperative.  At this point, I am working to find operators that need a “business mind” to help them with finance and corporate tasks as a part-time CFO.  My place in this industry is still evolving but I’m always looking to meet operators, investors, or anyone interested in learning more about this exciting industry.

Would love to hear feedback and comments on this blog if you're willing!

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