Cannabis Capital: Valuation, Distressed Deals, Retail, Exit Strategy & Understanding The Market

Renowned cannabis investors Brett Finkelstein (Skyvest Partners and Phyto Partners,) Morgan Paxhia (Poseidon Investment Management) and David Kram (Spring Leaf Capital) gathered at Benzinga’s Cannabis Capital Conference in Chicago this past September.

Led by David Feldman of Skip Intro Advisors as moderator, below is a peak at what these industry titans had to say about ongoing and possible regulatory changes. 

Schedule III 

All four agreed that the possibility of cannabis being moved to Schedule 3 is the biggest news in the past 10 years. ”If it happens, and it happens in the way we want it to happen,” Paxhia said. But there is still a lot of work to do. 

“It's a big win for us obviously, but I think the industry needs this to show the outsiders that we're not all crazy and why are we sticking to this thing: there are real companies with real growth,” added Finkelstein, who remains “cautiously optimistic” facing cannabis stocks and moves at the federal level affecting issues like access to capital and safe banking. 

Although “getting rid of 280E is going to be the real game changer for these stocks to have real follow through, and then we could have a more normalized market in the industry to become a real asset class, maybe not even correlated to the broader markets,” Finkelstein said.

ROIS & MSOs Business Models

For Kram, although plant-touching businesses have historically gathered much interest, certain limited license markets still represent an attractive opportunity to generate outsized returns above open markets, for both private and public companies to enter and generate cash flow.

“I think the ‘land grab’ that a lot of the MSOs have put to work over the last few years is largely over, because a lot of these guys are already, at least geographically, in every market that they do want to be in. So I think that opportunity is no longer there,” he said.

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“It's way too easy to build over build supply, while access lags. Access helps to the verticality, the overall growth,” Paxhia said. “I'm not nearly as optimistic about a lot of the cultivation considering it's way too easy to overbuild capacity; also, if you're too reliant on wholesale you're fighting in a pretty challenging dynamic and are challenged with suppliers and vendors and people not paying each other -this industry has a lot of growing up to do in that aspect.”

Distressed Markets & Valuation

On capital raises, Paxhia added that the challenge for capital providers and venture investors is to find entrepreneurs willing to accept venture capital that requires venture capital returns. “People say there's no capital flowing: that's only partially true because there are groups that do want to invest, but they need to be rightfully compensated. So we still think retail has a lot of opportunity.”

For Finkelstein, there's “that nine-letter word that the issuer and the investor fight about, which is valuation.” Highlighting the importance of interviewing the company’s check writers, he said there’s a need for both parties to work collaboratively.

Regarding the depression and distress the industry has been talking about in the past three years, Finkelstein believes it might actually be due to lower evaluations compared to prior capital rounds, plus “never-ending capital” drying up. For investors, “it’s a chicken or the egg” kind of situation. 

“I believe that everyone that wants to put out capital is trying hard to valuate companies. It depends on what their horizon is, what their return profile is, what they promised investors,” Finkelstein shared, adding that more companies could do well and actually would have done better with less capital: “They would have been more hungry and worked on execution and not ideation, and really showed investors how they're gonna make money.”

Final Advice

Kram’s number one piece of advice is to genuinely understand your numbers, your target market, your competition and what you’re going after. 

For plant-touching companies, he suggests they be prepared to raise money. “Just be ready to present yourself and a full strong package. By being able to answer and anticipate investor questions and ready to raise money you'll have a much better shot, because there's not a lot of capital out there and everyone's buying for the same dollar.”

Photo: Benzinga Cannabis Capital Conference.