For almost 10,000 years, while our species honed its modern-day civility, we carried on a productive relationship with cannabis. We built with it, wove cloth from it, made dinner with it, took medicine from it and yes, even enjoyed its psychotropic effects. Despite our long history of successful exchange, the 10-millenia honeymoon soured in 1906 when this member of the Cannabaceae family suddenly, under the Pure Food and Drug Act, became a “poison” in the U.S.
After more than three decades of increasingly oppressive regulation, the 1937 Marijuana Tax Act was repealed so cannabis could be added to a newly-formed Controlled Substances Act in 1970, the once harmless, cash-bearing industrial crop with both medicinal and recreational properties had become a Schedule I drug, hobbling an entire sector while criminalizing any citizen caught with it.
Now, half a century later, prohibition is being lifted across North America and the world. There are 25 U.S. states where medical and/or recreational marijuana is already legal. This year almost a dozen more states are expected to vote on cannabis legalization in one or both forms; the pivotal one of those being the November referendum in California to legalize recreational marijuana. In 2015, the combined legal cannabis sectors in the U.S. pulled in $5.4 billion. In short, we are in the middle of a grass-roots cultural and economic revolution.
However, there remains a serious stumbling block for operators within the space and companies like iAnthus Capital Holdings (CSE: IAN, Forum) are moving in to address this issue by providing a vital service as iAnthus CEO, Hadley Ford explained, “States in the U.S. have moved forward in legalizing cannabis while the federal government still classifies cannabis as an illegal Schedule I drug. This legislative dichotomy has created a very strange environment where entrepreneurs have been told by the state they have the ability to compete for a vast revenue opportunity and then the federal government has said because it’s not legal federally, you’re not going to have access to capital.”
“So all the usual providers of capital to start a business, grow a business, buy out a partner; whatever you would do regularly in a US $50.0 billion-dollar sector; none of that exists. You don’t have a Citibank, you don’t have Goldman Sachs, you don’t have KKR; nobody’s in there writing cheques to provide capital for these entrepreneurs.”
iAnthus has stepped forward to fill this void with the provision of value-added capital to legal cannabis operators in the United States working to grab their share of a rapidly budding market predicted to perform at a 30% CAGR up to 2020 when legal revenues are expected to ring in close to $23.0 billion annually in America alone.
The company has already provided capital and management consultant services to an operator in Vermont and the leading market share provider in New Mexico as well as set up an affiliated entity in Massachusetts which has been approved though Phase-2 of the three-part license process in the state for three dispensaries and a grow. They are also involved with various term sheet discussions with operators across the U.S.
Ford explained iAnthus’ business strategy, “Our aim is to work within states that have an oligopoly opportunity for us. That would mean we would finance or work with an entity that had a license in a restricted license market i.e. Vermont where we’re backing Grassroots Vermont, one of four license holders in the state. Or we would work with someone in a broader license environment that had a market share leadership position, like our partnership with Reynold Greenleaf & Associates, which manages three licenses representing 16% of the New Mexico market.”
“Another factor we consider is the amount of indications a state has approved for cannabis-based therapies. Obviously the more indications, the better the market. Then we look at what forms of ingestion are allowed to treat those indications. Again the more accepted forms of ingestion, the better the market. For instance, if you look at Colorado and why it’s been such a big growth market, you have a long list of indications from a medical perspective and many different ways you can legally ingest it. Compare that with New York which has a very narrow list of indications and small list of accepted ingestion methods.”
iAnthus’ push is good news if you’re an entrepreneur and have been lucky to work hard enough to secure a license, because basically up until now, unless you have a rolodex with a lot of rich friends you were stuck growing very slowly, losing relative market share as the sector continued to explode.
There is a strong management team at iAnthus with over a century of combined senior-level experience in healthcare, technology, business development, marketing and finance. The company runs lean with about nine employees at the moment and as a result has a minimal burn rate, meaning that most of any capital raised will go directly toward financing projects.
Ford illustrated the challenges iAnthus will face as it pushes to meet its milestones in the next 24 months, “It will depend on which day it is. Our core business is to raise capital and put that capital to work. So if we’ve just had a successful capital raise what’s keeping us awake at night is finding good projects and making sure those projects remain on track. Then the flip-side of us putting all that capital to work is getting out there to raise more money to put against new projects.”
For those thinking of dipping their investment toes into the legal cannabis pool, let’s examine the concept of normal capital formation. First someone comes up with a good idea, involves friends and family, secures an angel investor and then finally hits up the bigger VC/PE firms like the ones on Sandhill Road. Those VC/PE firms come back with a term sheet containing onerous terms like majority ownership and seats on the board. Once a couple of financing rounds have taken place, the company typically goes public.
Retail investors, who weren’t lucky enough to be part of the friends and family financing push, are left with the scraps of buying shares on the open market after the VCs and Wall Street have exacted their pound of flesh. Look at Alibaba where Softbank put in $20.0 million sixteen years ago and then took out $40.0 billion when it went public. Wouldn’t it have been great as a retail investor, if you had got in first and Softbank had to take you out? Cannabis is that industry for the retail investor. Wall Street is on the sideline. Sandhill Road is on the sideline. PE shops, the venture capitalists, the merchant banks and investment bankers all on the sideline. The only ones active in investing in these markets are retail investors.
If you pick the right investment, you’re going to be in first and three or four years from now when Wall Street finally gets comfortable with the business of cannabis, they’ll be buying you out rather than the other way around.
Ford added, “From my perspective, if you’re a retail investor and you’re interested in cannabis, there’s only one thing that matters – one thing and one thing only. Find a management team you can trust, because in a $50 billion-dollar market, a good management team will figure out a way to make money for you. Don’t jump into the next big thing or what’s hot that day. Do your work, diligence the team, make sure they’re real people and make sure they have an excellent track record, because those are the companies that are going to be successful.”
Now that iAnthus has gone public, trading on the Canadian Securities Exchange under the symbol C.IAN, retail investors have a prime opportunity to monopolize on a multi-billion-dollar market with no access to institutional capital. Finally, we will get the jump on Wall Street and VC fat cats before they make off with all the investment gains. Don’t take my word for it however. As always, do your due diligence before making any investment decision.
--Gaalen Engen
https://twitter.com/gaalenengen