The Dime Episode 49 Transcript: US Cannabis: A Generational Wealth Opportunity ft Jon Rubin

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Editors’ Note: This is the transcript version of the podcast. Please note that due to time and audio constraints, transcription may not be perfect. We encourage you to listen to the podcast, embedded below if you need any clarification. We hope you enjoy!

US Cannabis: A Generational Wealth Opportunity

In this episode, Jonathan Rubin discusses:
• Phyto Partners and what they do
• Outside industry examples of building a unique selling point (USP) and driving margins
• Trulieve’s current market strategy
• The Florida cannabis market
• How VC works in the cannabis space
• The benefit differences that retail and institutional investors receive

Phyto Partners is a venture capital firm that invests in the cannabis industry.

Get in touch with Jon Rubin on Twitter @Jonnyrubin10


[00:00:00] Bryan Fields: [00:00:00] This is the dime a 10 minute dive into the cannabis and hemp industry through trends, insights, predictions, and tangents.

[00:00:11] What’s up guys. Welcome back to another episode of the dime as always. I’ve got my right-hand man, Kellan Finney, here with me. And this week we’ve got a very special guest Jonathan Rubin, investor of Phyto partners. John, thanks for taking the time. How are you doing today?

[00:00:24] Jonathan Rubin: [00:00:24] Hey, thanks Bryan. Thanks Kellan, for having me, everything is good in my neck of the woods. How are you guys doing?

[00:00:29] Bryan Fields: [00:00:29] Doing well, doing well. It’s a nice Friday here in April and we’re looking forward to chopping it up. How are you doing, Kellan?

[00:00:35] Kellan Finney: [00:00:35] You know ,  no complaints, a little snow on the ground this morning. So welcome to spring in Colorado, right?

[00:00:42] Bryan Fields: [00:00:42] Before we dive in, John would be great to understand from our listeners perspective, a little bit of back to yourself and how you got into the cannabis space.

[00:00:48] Jonathan Rubin: [00:00:48] Yeah, absolutely. So I started off working at a private equity fund, a generalist private equity fund called combis partners. They focused on control equity deals. Basically bought [00:01:00] majority stakes of companies and I was working in business development. So, you know, my job was to network with investment banks and essentially cast a wide net for finding as much deal flow as possible because at the end of the day and the venture capital private equity space, you’re only as good as, as the deal flow that you receive and have access to.

[00:01:19] So that was my primary job. I was doing brief screenings of the deals that came our way. And ,  analysis of the companies and I really wanted to do more. So my goal was to play a role in the investment decisions ,  for the fund and get to speak and, and learn from founders. And I used to be a cannabis consumer. It’s always been my sort of, you know, drug of choice versus alcohol. And I knew the industry was at an inflection point when I first started out. With legalization taking place in Canada at the federal level and all the legislation on the state, front in the United States. So I wanted to see if I could break into the space.

[00:01:55] Us cannabis is the great American growth story. It’s a story of cashflow positive [00:02:00] companies with high growth, a long runway for growth, great margins, limited license moats a steadily decreasing cost of capital and risk premium, and a recession slash pandemic proof business. These companies are currently trading at mid-teens EBITDA multiples. And if you compare that to consumer packaged goods companies, which are trading around 20 to 30 times EBITDA, and if you compare that to Canadian LPs that are trading close to 50 times 22 EBITDA ,  just from that perspective, They’re significantly undervalued comparatively, not to mention the us cannabis industry is growing at a 20% growth rate for the next decade.

[00:02:41] So a conservative example to look at valuation ,  I would, I would call it a base case would be to look at the total addressable market by the year 2030, which is estimated to be at least a hundred billion of retail sales. If you assume that the MSO is capture. 75% of that. So assuming that they’re selling [00:03:00] 50% of their sales, wholesale and 50% via retail, and you assume 25% EBITDA margins for that, a 20% market share leader in the United States.

[00:03:11]Trading at 40 times, EBITDA could be valued at 150 billion. And right now, you know, like we’ll, we’ll mention with CuraLeaf leaf is around 10 billion of EV that implies a potential 15 X upside, you know, from the largest us operator today. So I think there’s significant upside. If you have the staying power.

[00:03:32] And ability to kind of wait for this thesis to continue to evolve for the companies, to continue growing their earnings and eventually up list onto a us exchange where investors will begin to pay a fair multiple for these companies.

[00:03:47]And an opportunity came about with Phyto partners and I, and I jumped on it. And at Phyto partners, I participate in all the components of the venture capital ecosystem from deal sourcing ,  to due diligence on [00:04:00] companies, portfolio, company monitoring, and even investor relations. And I’m super excited about the future of the cannabis space.

[00:04:07] Bryan Fields: [00:04:07] Yeah. I’m excited to kind of pick your brain on some of those topics. So I think for the first question right off the bat. When you’re consuming cannabinoids, what’s your go-to meal?

[00:04:16] Jonathan Rubin: [00:04:16] Oh, that’s a good one. Didn’t get any prep for that question. No, I’m kidding. I, I tend to eat, you know, pretty healthy diet. I actually lost 60 pounds a couple of years ago, so I still keep it pretty healthy. I’ll, I’ll stick to like fruit I’ll stick to ,  you know, sometimes I’ll do some sushi, but I mean, it just depends on what I’m feeling. I’m not really the type to just ,  have a bunch of munchy snacks. Fair?

[00:04:37] Bryan Fields: [00:04:37] That’s fair. All right. So let’s dive into some of the, the real questions, right? The cannabis industry has been a generational wealth opportunity. What are your thoughts with that? Do you agree, do you disagree?

[00:04:50] Jonathan Rubin: [00:04:50] Yeah, I totally agree. You know, just given the fact that this is the one investment opportunity out there where retail investors actually have a fundamental advantage [00:05:00] over institutional capital, much of the institutional capital out there is unable to touch the space ,  because it is federally illegal.

[00:05:07] So they’re worried. That, you know, if they invest in the space, the government can come and seize their assets or that they could get in trouble. So this is a generational opportunity because patient capital ,  that is willing to take some risk and wait for, you know, a catalyst at the federal level has an opportunity to get in.

[00:05:26] On the great American growth story, which is us cannabis at very cheap multiples, relative to other similar industries like consumer packaged goods, or even ,  apples to apples, comparing it to the Canadian cannabis industry. You know, we’re able to get in at much cheaper valuation multiples. Meanwhile, we have a much longer duration of growth ahead and, you know, a higher growth rate for the years to come. So yeah, I do think it’s a generational opportunity ,  akin to when alcohol was ,  coming out of prohibition. And yeah, I think that [00:06:00] patient capital here will be treated very, very well and will outperform the broader indices by a decent amount.

[00:06:08] Bryan Fields: [00:06:08] From a timeframe perspective though, is there a finite window? You think that the retail investors kind of limited to? I know one of the questions that I field often is, you know, there’s so many different moving pieces, I’m more well aware of all that Canadian companies, which we aggressively try to move them back towards the U S which is likely a conversation of their own.

[00:06:26] So, in your perspective, John, is there a timeframe that you would encourage some of the investors to know that, Hey, like this is the limited window we think is really beneficial. Then, this is where I think you should start from ,  an informational standpoint.

[00:06:37] Jonathan Rubin: [00:06:37] Yeah. I mean, I think, you know, time is of the essence, the time is now.

[00:06:41]But you know, as soon as there’s a catalyst at the federal level, whether it be a safe Harbor language, which would essentially allow these institutions to invest without having to worry, or there’s an uplifting event ,  and it becomes federally legal, I think that’s, You know, [that’s] the minute that the arbitrage opportunity of [00:07:00] the limited demand of institutional capital will go away and multiples will probably be, be bid up because you’ll have a larger universe of investors that can actually come into the space. So I think that’s, you know, it’s very simple and sometimes, you know, the best opportunities and, you know, things in life are embedded in the simple, and it’s as simple as that. It’s, you know, as soon as there’s a federal ,  catalysts. I think the arbitrage opportunity, the generational opportunity will go away.

[00:07:29] It will still probably be a good investment depending on, you know, the price of these companies. But I mean, this right here is just one of the best risk reward opportunities on the market, primarily for those reasons.

[00:07:42] Bryan Fields: [00:07:42] Yeah. I couldn’t agree any more. And I want to go to Kellan to kind of expand on that and John a hundred percent, right? Like to me, even if that window closes, I still think there’s tremendous opportunity because some of these companies are just laying the foundational groundwork, right? They’re scaling as fast as humanly possible, and they’re still have all these other implications, all [00:08:00] these other roadblocks obstacles to ADE all these other hurdles that eventually will be replaced. They’ll scale, they’ll optimize and they’ll go forward. So, Kellan your thoughts on the whole generational wealth opportunity?

[00:08:11] Kellan Finney: [00:08:11] Yeah, I mean, I agree. I think it is one of the best opportunities, at least in our generation to generate a significant wealth in all transparency, cannabis is the only reason I started investing. [I] Oh, scientists by a traditional educational standpoint and worked in a lab for a while, kind of got out of that. And then I I think it was in 2018. We went till Ray went from trading around the $10 all the way up to like 300 and it made national headlines. All of a sudden I was like, Oh wow, like there is this tremendous opportunity for my wealth to just grow right? Passive income, all these other things. And so that was one of the most obvious signs. And from my perspective, as a retail investor with very, very limited experience, and that was the driving force for me getting involved in, in the [00:09:00] stock market and investing in general. And so, I mean, at the end of the day, like institutional investors don’t have the opportunity, that retail investors have currently, which is what Jonathan just touched on. And I think that the window will close, but as far as risk goes, I mean, I don’t think it’s as risky as a lot of people make it out to be. I mean, I’m out in Colorado and, and cannabis has kind of become a norm out here. Right? Dispensary’s are  just as common as liquor stores in the state. And ,  I look at it like the genie’s out of the bottle, like it’s going to be writ, I don’t see any way for even the federal government to come out and say, okay, the States need to re criminalize this and pulling that whole industry back.

[00:09:43] I just, I cannot see that playing out at all in my perspective. I mean, what are your thoughts on this, Brian?

[00:09:48]Bryan Fields: [00:09:48] Yeah, I think we’re going right. I think New York is the step in the direction that says like, we’re moving forward. And then, you know, New York, New Mexico, Virginia, everyone’s doing faster. The East coast. It’s these other [00:10:00] dominoes that are moving forward with Connecticut and Maryland getting closer. Obviously, Schumer’s pretty, pretty loud about what he’s looking to do. And as soon as safe goes through, I think it’s, it’s only a matter of time. We keep it moving. So I want to press back on John and, you know, get some insights on how he makes decisions and how he can recommend to the average investor on where to start to gathering the information. There’s endless sources of resources out there. But how does one understand the differences between the various operators in the space and then how do they know which one might fit their risk profile?

[00:10:30] Jonathan Rubin: [00:10:30] Yeah, I think that’s a good question. And I always recommend, especially for people that are just starting out to start by diversifying, and then eventually once they accumulate a knowledge base and understanding to then concentrate on, on what they are most convicted.

[00:10:45] And so, you know, obviously we have the ETF and SOS, and you can kind of, you can Google what their holdings are and you could start doing research, you know, one at a time ,  understanding each of these operators you can read through their quarterly [00:11:00] earnings report. I actually recommend reading through ,  the 10K document for any of the operators that are filing with PSCC. So for instance, green thumb, you can go on ssc.gov and read through their 10 K filing. And you can learn a lot about the business, where they’re operating in all of that good stuff, all of their financial metrics. And, you know, you start by getting a good understanding there, you can read a few of their quarterly press releases, understand kind of the growth.

[00:11:28] And then a lot of investing is just comparing, right? Comparing using, you know, the, the broader markets or other companies as a measuring stick. And if you do that, I mean, if you see these companies are growing at 150%, year over year. The only thing that’s comparative to that would be looking at these high growth technology companies, you know, that are actually losing money. And they’re trading at 30 plus times revenue versus cannabis companies are trading. You know, a lot of them are trading and under 10 times, or, you know, something to that nature. So [00:12:00] it’s not a great comparison to look at, you know, cannabis versus technology, but at the same time, comparing, you know, the growth that you’re seeing in the cannabis space.

[00:12:09] It’s pretty much one of the fastest growing industries out there and to be trading at a multiple that’s, you know, relatable to value stocks ,  is where the opportunity lies. So I think that’s, that’s like a good way to think about it. But mainly just, you know, reading through these quarterly reports and getting comfortable following the industry, signing up for newsletters, you know, going to these online webinars and just, you know, getting comfortable.

[00:12:34] I think right now it’s, it’s primarily a land grab kind of like you mentioned, we have the domino effect happening, New York legalized. We’re probably going to see some other States follow like Pennsylvania, probably Florida in the next, you know ,  18 months. So it’s just, it’s just a matter of time and it’s not like we’re forging building a new industry. That’s never existed. You know, the cannabis solicit market exists everywhere. People consume cannabis. So it’s an industry that already [00:13:00] exists, but we’re, you know, we’re moving from the illicit market to the legal market. And I think that’s why there’s a lot less risk. It’s not like we’re creating a brand new vertical that we don’t know if people are going to use it. Or if you know society, you know, condones it it’s out there. It’s already being consumed. It’s just now we’re having, you know, States and governments benefit from the sale of it.

[00:13:21] Bryan Fields: [00:13:21] Perfectly said.

[00:13:23] Kellan Finney: [00:13:23] I have a quick follow up question on that. How much weight Jonathan, do you put on the management of these companies? Right. In a comparison standpoint, I mean, is it something where you’re looking for individuals that have past experience in cannabis or are you more comfortable with. Individuals that are managing these companies from outside the industry that have been successful and say consumer packaging goods or, or, or something like that. How much, how much do you guys put into considering those as far as decisions made.

[00:13:52] Jonathan Rubin: [00:13:52] Yeah, I think it’s important for the management team to be adaptive and be used to highly regulated [00:14:00] industries. You know, I think that’s definitely important, but versus just looking at their previous history and where they’ve been or what successful companies they’ve built, I like to see kind of how they’ve been allocating capital. So I think at the end of the day, this entire, you know, Right now the growth for the cannabis space is about making good acquisitions and good limited license States ,  doing the right mix of, you know, debt equity, you know, stock and cash for those deals. So I think just the way that they do deals and, and think about growth and more importantly, the way they think about strategy to me is most important.

[00:14:35] I think right now it’s a land grab and going forward, you know, once the industry is more matured, That’s when I’m going to say, Hey, like, you know, I think the management team is going to be much more important at that point. That’s just my thoughts on it.

[00:14:48] Bryan Fields: [00:14:48] I wanted to ask a follow-up to that is, saw John Sandeman of air strategies on a rhino’s podcast. And he was talking about Liberty health deal and how he made that decision. And he [00:15:00] said that he didn’t want to miss out on the opportunity. And that struck me completely different because here’s somebody who’s not supposed to be making like an emotional decision, but he knows he’s limited. And if he doesn’t act now he could get placed out, right? And that to me was another variable that I hadn’t thought of, right? That like, there’s such a limited opportunity where there’s the time essence where if he didn’t move there and somebody else scooped Liberty. He might now have to pay 10 X for maybe a less valuable variable. And then his overall goal is to try and add value to shareholders and do that mixture like you were saying, but how they place that emphasis on the balance is, is truly remarkable in understanding, you know, what’s a fair price to bet.

[00:15:43] Jonathan Rubin: [00:15:43] Yeah, no, I absolutely, as far as like kind of the deals that are happening with these larger MSO’s scooping up, you know, smaller ones, you know, th they’re paying a lower multiple of EBITDA, then their stock is trading for on the overall market. And hopefully, you [00:16:00] know, AYR is also able to make Liberty, you know, more efficient ,  bring, you know, their protocols and ,  you know, playbook to them, help them be, you know, organically grow.

[00:16:10] So I think that’s super important too. It’s like how, how they roll these companies up and, you know, bring them into the organization and all of that. But that’s really interesting.

[00:16:19] Bryan Fields: [00:16:19] Yeah. It’s gotta be so complex to try to be acquiring all these different operations and then roll them back into like your normal operations and then get them up to speed and in the same breath, look for the next acquisition, the next step, because you always have to be two steps in front thinking like that because these deals take time to put together.

[00:16:35] So let’s, let’s take one more step forward on the, the MSO thesis side from a standard side. I know like a lot of the focus has been on the U S side, but when cure leaf made their acquisition internationally, does that change your perspective on evaluating these companies? That now they might need to be thinking more from a global scale? And how does that relate to the way you put together? Your thoughts?

[00:16:54] Jonathan Rubin: [00:16:54] Yeah. I mean, I think it just adds to the future potential total addressable market for [00:17:00] these companies. International opportunity is actually is, is obviously huge ,  or will be huge. So. I think in the thesis, it just increases the potential Tam, which a lot of growth investors will eventually pay for. You know, I think right now it will pay to be focused on the US especially for all the other operators. I don’t think there’s, there’s a rush or anything like that to start acquiring assets in Europe, et cetera, until. You know, the framework is more solidified there until the demand starts to pick up there a little bit more.

[00:17:30] And there’s certainly enough of demand in the U S to start, you know, to capture before they have to go and do that. But like you said, I mean, Europe alone has population of like 700 million people. So like double the US but the cannabis market there is still tiny. So it’s almost like reminiscent of, of the us cannabis market, you know, 10 years ago.

[00:17:51] So I think eventually we’re going to start having those conversations, but for now, you know, with New Jersey coming online, the New York, all of these States, I think that [00:18:00] it will pay to be focused on, on those States.

[00:18:03] Bryan Fields: [00:18:03] Yeah, Charlie’s probably looking for that first mover advantage, trying to secure an asset they think is probably going to get scooped first. So let’s talk about that, that first mover advantage you’re in Florida. Obviously we know the big player in Florida, but what’s their plans? I know they’re dominating Florida. Are they going to continue to grow on the East coast? Do you have any sort of thoughts on where you think truly it goes.

[00:18:22] Jonathan Rubin: [00:18:22] Yeah, I think that they have an interesting strategy. You know, the, the hub model where they’re not trying to necessarily have a presence in every state, but in the States that they are in, they want to go deep. And I think that strategy will probably, [you know]  pay off in the long-term if, if, and when there’s interstate commerce. But I mean, even for now with their million plus square foot grow in Florida, they could still barely supply the Florida market. So I think that the day that they’re able to do interstate commerce, I think that they still need to ramp up supply pretty heavily. But I think that they will, you know, continue to have great margins because they’re [00:19:00] operating at scale. They don’t have to replicate facilities and, 10 20 different States because they’re focused on going deep in the States that they’re in.

[00:19:08] I think that they have an interesting strategy and obviously their margin profile is, is the best of the best out of the MSO’s currently. And I guess we’re just gonna have to see how it plays out.

[00:19:18] Bryan Fields: [00:19:18] Kellan, I know you did some research on Florida. You want to ,  add any areas there?

[00:19:21]Kellan Finney: [00:19:21] The only thing I would add is I do think that that’s probably the most well thought out plan as far as approaching cannabis from a national perspective. You talked to other manufacturers in different verticals for ,  they, they look at an East coast hub ,  kind of the middle of the country hub and then the West coast hub. And I mean, that, that plays into all of the benefits from the economy of scales, right?

[00:19:46] Building bigger facilities means you’re able to maintain quality, consistency and decrease your margins, right? And then having those three different hubs gives you access to the entire country with our ,  ability to just, [00:20:00] if it’s, if you are able, able to transport between States, which I would imagine once federal legalization comes ,  comes into play, that that’s going to be a no brainer. There’s going to be no issues with that. There might be some issues in terms of like dry counties. I don’t know how ,  alcohol is kind of handled in terms of transportation through counties that don’t allow alcohol sales right? There, there might be some nuances associated with that, but I would imagine that interstate commerce for cannabis will be facilitated no problem.

[00:20:29] And, and having those multiple hubs one on the East coast, West coast and in the central United States will be the most beneficial for not only margins, but build out costs. I mean, even building like a 30 or a small 25,000 square foot cultivation facility. You’re going to be looking at five, $10 million in just capital deployment to be able to facilitate something like that, right? And so, and then you’re going to still face all of the problems with maintaining consistency and quality in every single state. And it’s just not the model that [00:21:00] works. And it’s not the model that’s been proven time and time again, in terms of other comparable manufacturing sectors.

[00:21:07] Jonathan Rubin: [00:21:07] So that’s interesting. And I’ve been hearing a lot about three tier distribution model that, that takes place for a lot of States with alcohol and people are kind of discussing that as a potential downside risk for, for cannabis. I don’t know if you guys have any thoughts on that.

[00:21:23] Kellan Finney: [00:21:23] I do,I know that ,that’s kind of the approach that California has, has taken, right? Like you, in order to say you grow your cannabis in order to get your cannabis from your grow to a retail location, you can’t do that on your own. You have to go through someone with a distribution license, right. Which is the exact same way that the alcohol industry is kind of managed, right? There’s that middleman distribution situation. I think it works from a regulatory standpoint in terms of trying to, it helps the government regulate bigger, less people, but they’re going to be bigger. Right. So I think that that might be. An attractive option from a regulatory standpoint, it’s also going [00:22:00] to increase profits for anyone with a distribution license.

[00:22:03] It’s just going to solely focus on distribution. They’re going to be more successful, not having to fight. People with cultivation licenses that are also trying to distribute, you’re going to also, it’s probably going to result in higher quality services, right? Cause they’re only focused on one, one piece of the supply chain.

[00:22:19] Right. So they’re going to do a better job in my opinion. So there’s all those things that kind of, you could put into the protocol and if you’re looking at it, the downside would be it’s. You’re going to see big corporations come in and push the little guys out, there’s going to be a lot of ,  acquisitions.

[00:22:32] I mean, you can see a lot of the complaints right now in terms of how Amazon’s subcontractors are treated within the Amazon ecosystem. You can see there’s a lot of pushback associated with. So Amazon strong arming them on some certain aspects. So those, I think you could chalk up in the con column as far as that, following that model, right? It’ll be interesting to see how it plays out though.

[00:22:57] Jonathan Rubin: [00:22:57] Yeah. It’ll hurt margins for sure. As well. Like you [00:23:00] like truly having, you know, 75% gross margins, some of that’s going to be cut down. They have to sell to an intermediary, a middleman. That’s [going to] definitely not be helpful for margins, but

[00:23:13] Kellan Finney: [00:23:13] I mean, that’s what east, east, right? East is next plan is to go vertical. And the only reason is, is because they have to increase margins in order to pay their bills. Right. And so the best way they can increase margins is by owning the bile, but owning the grow and then their margins go through the roof. Cause they’re not playing that middleman $5 for a delivery charge. That makes no sense for 80% of their deliveries, you know?

[00:23:37] Jonathan Rubin: [00:23:37] Yeah, exactly.

[00:23:38] Bryan Fields: [00:23:38] Margins are also nuts, right? 75% is not, but I have actually a different question is, is in that same regard, once companies don’t have to be vertically integrated and they can focus on the one part of the chain, maybe then, they can still increase their margins because you can’t, I mean, you can, right? But most companies can’t be efficient at all the different operations. That’s why they kind of connect with other vertical partners. So I wonder [00:24:00] if, if these companies link up and go, okay, this is what we’re good at. We’re going to really drive home here and then they can focus on maximizing those margin.

[00:24:07] Jonathan Rubin: [00:24:07] Good point.

[00:24:08] Kellan Finney: [00:24:08] What about other companies that have that skillset and other sectors, right? Like Uber, right. Uber just came out and said they were looking at cannabis delivery. I mean, they’re currently optimizing their platform for delivering food and people from location, location. I mean, the headstart that they’re gonna have when they decided to get into the space.

[00:24:28] Yes. It’ll be almost a no brainer for say another company, just partner with Uber as a strategic partner and have Uber facilitate the deliveries because Uber has been spending the last. Two decades optimizing all of their margins for moving item eight, two from location A to location B. Right. And what are your thoughts on that?

[00:24:47] Jonathan Rubin: [00:24:47] Yeah, and Trulieve[you know]  I think like a few, like a hundred or so delivery vans, and they’re kind of managing the whole delivery process, but yeah, maybe they’ll want to outsource that similar to like when AWS came [00:25:00] out Amazon web services, you know, before that. Companies like Facebook and other, you know, other tech companies had their servers on premises.

[00:25:09] They had to, you know, manage those servers and AWS gave them a chance to outsource it for a smaller fee. And then, you know, Facebook and these companies can focus on, you know, what was making them money, what they were better at and it made sense to outsource it. So I think that that makes a lot of sense, given the, you know, given what the infrastructure that Uber’s already built and their ability to probably. You know, facilitate at a much cheaper price.

[00:25:33] Bryan Fields: [00:25:33] Right? And that’s why when people were freaking out that the Uber CEO said that, I mean, logically, why would he not consider that vertical? It’s a huge opportunity for them cannabis is exploding and people need this. He already has the infrastructure and the fleet and the technology. This is a smart play for him. And. I wonder if these conversations are already happening, right? Like people are already having strategically like, okay, like when this goes down, [our] we’ll announce, this agreement will have some sort of informal handshake and understanding that [00:26:00] we’ll look to incorporate you guys.

[00:26:01] Do you guys think that type of conversations are already happening?

[00:26:03] Jonathan Rubin: [00:26:03] I wouldn’t be surprised. 

[00:26:05] Kellan Finney: [00:26:05] Yeah. I would bet money that most, I mean, most large organizations at this point, have some team devoted towards researching the cannabis industry from my experience. I mean, I was at the conference four or five years ago when California wasn’t even RAC.

[00:26:21] And I remember sitting down and I mean, the DEA and the FDA were already having special group meetings regarding how to legalize cannabis on the federal level. And so, I mean, if the government is having special group meetings five years ago, you would imagine that large corporations that are trying to make cap are trying to generate revenue are also looking at this as a potential opportunity.

[00:26:42] I mean, perfect example, you could look at Johnson and Johnson, right? Johnson and Johnson has ABI KONA, I’m not exactly sure how they’re positioned from an ownership perspective within ABI KONA, but ABI KONA is following marching orders. If you will, from Johnson and Johnson in terms of [00:27:00] how they are running their incubation hubs and those kinds of aspects of getting involved in the industry.

[00:27:04] Bryan Fields: [00:27:04] So before we move into the prediction and some of the other questions, John, I want to ask real quick about the venture space and how that kind of works because. Unfortunately, or fortunately the cannabis industry always works a little differently. So from a VC space, how does that work in the cannabis industry?

[00:27:19] Jonathan Rubin: [00:27:19] Yeah, so, I mean, we started off on the ancillary side, so we weren’t looking at plants. How should companies, I only recently started learning and ,  and doing work on these multi-state operators, but you know, how it works for us is we aggregate deal flow. You know, we have articles that come out. We have portfolio companies and the founders of those companies send us, you know, other interesting businesses that they work with.

[00:27:42]We work with other, other VC funds and ,  basically, you know, we source deal flow. Whatever is interesting to us. We ,  we start the due diligence process for. So we speak to the founders. We learn about the business. We look through their financials, we speak to their customers. We try to speak to their [00:28:00] competition and learn about their competition. We get their data room access and just go through most of their contracts. We make sure that the management team checks out, whether they have past experience running a successful business or another company that was, you know, in a similar category. And, you know, that’s kind of the due diligence process.

[00:28:20] We do sparse checks in earlier stage companies. So, you know, call it series A and before that sort of series seed rounds, and we do more concentrated investments in later stage companies, especially at this point of the industry. As we continue to mature and develop. So when we first started in 2015, there were only a handful of companies that were doing over call it, you know, a million dollars in revenue run rate.

[00:28:46] And today kind of our criteria is like, you know, a company has to be doing at least two, two and a half million in revenue run rate for us to really consider investing just because the industry has matured and a lot of the ancillary [00:29:00] verticals that make business for these operators, much easier and more efficient. A lot of them have been established. So for instance ,  we invested into a company called leaf link in ,  want to say 2016, it was their series seed round. At the time and leaf link is the largest B2B wholesale marketplace in the cannabis industry. At the time. They were only in, I want to say two States and they facilitated like 50 or 60 million of transactions on the platform and that’s not revenue.

[00:29:30] That’s just the transactions that they facilitated. They actually charge a flat fee for the brands that sell on the platform and they had a couple hundred brands and retailers on the platform at the time and fast forward, you know, three or four years later, the company has several thousand brands and dispensaries on a platform has facilitated over, you know, has ,  over $3 billion gross merchandise value run rate. And, you know, essentially. They just ,  they just [00:30:00] secured an investment from founder’s fund, which is one of the most iconic venture funds in the world that doesn’t participate in the cannabis space, but they clearly saw an opportunity here on the, on the technology ancillary front with a company like Lee flank, which facilitates, I want to say over 20% of all the wholesale cannabis transactions in the United States. I think the number is much higher at this point, but ,  yeah, it’s ,  it’s, it’s pretty, pretty phenomenal to watch these companies grow, but you know, so, so we, we source deals. We do diligence. And another component of venture capital is raising money from outside investors.

[00:30:37] So we do that. We utilize different softwares and platforms such as PitchBook, you know, family and friends, et cetera. So we target accredited investors and we raise capital from them. And then, you know, we open a fund to do so. And the way that you get paid on the venture capital side is typically two and 20, and what that means is we earn [00:31:00] 2% of the assets. That we raise and we earn 20% of the carry, which is essentially the profit at the end of the day. So if we invest a total of, you know, call it just use simple math, a million dollars. And at the end of 10 years, it turns into 10 million. You know, we sell our, we liquidate our companies that either went public or were acquired. For the 10 years, we earn 2% on that million dollars ,  the entire time. So we’re earning $20,000 per year. And then on the 9 million of profit at year 10, we earn 20% of that. So, you know, so 1.8 million, that’s kind of how the incentive structure works when you’re managing a venture capital fund. So, you know, the numbers can get ,  pretty significant when you’re investing more larger amounts of money.

[00:31:49] When you have. You know ,  a company that, you know, hundred exes or something like that. So that’s when it gets really interesting and a lot of fun. You know, that’s the basics on [00:32:00] venture capital. And one thing I will add is, you know, it’s much different than investing in the stock market because you’re investing in private companies. So you can’t wake up tomorrow and say, Hey, I want to sell my, I want to sell my stake. You have to wait until the company’s either acquired by another company or you wait until the company goes public in which you’re issued [you know] public shares, where you can sell them on the open market. So typically the life cycle of a fund is around 10 years and investors that, that invested into the fund get paid back first.

[00:32:31] And, you know, we, we make the, the 20% carry on on whatever the profits are. Sorry for the long-winded explanation.

[00:32:37] Bryan Fields: [00:32:37] No, I think was really well said. I learned a ton that I didn’t understand that the two and 20, so I appreciate you breaking that down. The biggest misconception since you started working in the cannabis space.

[00:32:49] Jonathan Rubin: [00:32:49] I think a common misconception is that, you know, the real story is the medicinal side and all the, all the drugs that will be made from the plant. You know ,  [00:33:00] FDA approved drugs, but I think that really, it’s a, it’s a story of recreational substance that, that people have been using for thousands of years. And I think that adult use cannabis is where the real opportunity is for investors and just for the largest group of stakeholders. And I think that. You know, a lot of people will use the plant for medicinal purposes, but it will be, you know, they’ll be purchasing it from a recreational dispensary. It’s not going to necessarily, you know, the large part of the, market’s not necessarily going to come from drugs that you need to be prescribed to.

[00:33:31] So I think that’s one of them and ,  I’m having a hard time thinking of others. What do you think for you? What would you say is like a misconception, maybe it’ll spark some juices for me.

[00:33:40] Kellan Finney: [00:33:40] I agree with your statement as far as medical goes, I think this thing with big pharma and like actual medicine is big pharma is going to want to make money too. Right? Like we love to say that they’re out there just for the good of people and providing medicine, but they need to make money too. And the biggest obstacle why big [00:34:00] pharma has never really approached THC as a medicinal compound is because you can’t patent it. Right? Like they can’t patent it. Like they do all of their other drugs. Because you can’t patent nature, right? And so from a medicinal standpoint, I could see a lot of cannabinoid derivatives come onto the marketplace as medicines ,right? But traditional pharmaceutical standpoint and providing people with medicine, even like, if you’re looking at the derivative products from cannabis, like these oils and the concentrates that is a cocktail of 400 different chemicals, or even even 10, right?

[00:34:36] Depending on like the turpines and all these other things. And how far down that purification chain they take it. I mean, it’s really, really hard. I mean, you listen to pharmaceutical commercial now, and it’s like five minutes of these are the side effects. Right. And those are the side effects of one molecule.

[00:34:50] And like now they have 200 different molecules in this same drug. I mean the side effects are going to be obnoxious and they’re not going to be able to kind of shore those [00:35:00] up from a liability standpoint. And so I don’t think that the future of cannabis is going to be from a medicinal standpoint, unfortunately. I think that pharma will find some pharma kinetics that why THC binds with certain receptors and how it actually interacts with the human body. And they’ll develop a derivative molecule that looks really, really similar, but it’s not THC. And then they’ll patent it and that’ll be where the medicinal side of cannabinoids come into play.

[00:35:25] And that’s just my opinion on what are your thoughts here, Brian? What’s your biggest misconception?

[00:35:29]Bryan Fields: [00:35:29] I think at least on my side, the biggest misconception is that then people want to consume cannabis. It doesn’t have to be heavy THC. It can be, you know, a low dosage or an entourage effect or a bunch of these other minor cannabinoids that have maybe not medicinal benefits, but other serviceable benefits.

[00:35:45] And I think for me, I do enjoy consuming the plant, but I also don’t want the heavy THC side that kind of tends me to be a little more antisocial. So I think the biggest stigma is that when people say cannabis, they’re like, Oh, you just want to get stoned and go eat McDonald’s. And it’s like, not [00:36:00] exactly. That’s not really how it works, but you know, good luck to you in the future.

[00:36:04] Jonathan Rubin: [00:36:04] Yeah, I agree with that. And you guys kind of sparked some other thoughts for me, but yeah, that’s one of them it’s that, you know, consuming cannabis is not just a stoners game anymore. It’s not that, you know, that archetype of somebody just sitting around the bond, sleeping on the couch and, and munching it’s, you know, people that want to be more creative people that want to take a hit to microdose and engage in like a really interesting conversation.

[00:36:26]So I agree with you. I think that is a common misconception that will [you know] slowly but surely go away as people explore, you know, using smaller doses, like you mentioned, another misconception from the investment side, I would say is that, you know, as soon as it goes legal, you know, liquor companies and [you know] Canadian cannabis companies are just going to buy out all these licenses or they’re just going to be able to start growing cannabis and kind of just bypass the fact that these, some of these States still will have, you know, a limited license structure. And I think that’s incredibly false. I [00:37:00] think they’re going to have to pay an exuberant amount to buy, for instance, a license in Florida or, or one of these limited licenses in New York. And, and I think people just forget that Amazon can’t come into Florida tomorrow and start selling cannabis.

[00:37:15] They would have to pay, you know, an incredibly high amount for a license there. They can, however, go and compete with Apple and create a cell phone, or they can go compete with Celsius, the energy drink and make a drink tomorrow, but they can’t come into a limited licensed cannabis state. So I think that’s where you know, us as investors that are sitting patiently are going to win when that legalization event does happen. And these companies all want to enter this space and they’re going to pay a much larger amount for these licenses.

[00:37:43] Bryan Fields: [00:37:43] Absolutely. Next question. The last time you consumed any cannabinoid.

[00:37:47]Jonathan Rubin: [00:37:47] So I, you know, I consume with friends on probably like a weekly basis. I only do it at night because kind of like you mentioned earlier, it makes me a bit antisocial.

[00:37:57] I used to smoke a lot more, but I’ve [00:38:00] kind of slowed down ever since I started getting a little bit more into like self-growth and meditation. But I still enjoy it. I think that there are tons of health benefits to doing it. Sometimes it puts me in a different state of mind, a different perspective. I have great thoughts when I’m on it, versus when I was doing it, when I was consuming it pretty much every day. I got comfortable with it and it didn’t really take me into a, a different state of mind. So yeah, a couple of like, I want to say like a week and a half ago. Yeah,

[00:38:26] Bryan Fields: [00:38:26] It’s fair. Right? I mean, everyone has those stories where they used to consume it every day and the couch was their best friend and wish Netflix was around back then.

[00:38:35] All right. Let’s do prediction time five years from now, who do you think will be the biggest player in the space in regards to Evy? And from that standpoint, give us two smaller companies or long shot horses that you think in the next five years we’ll make a larger growth that people might be sleeping on right now from just an informational standpoint.

[00:38:58] Jonathan Rubin: [00:38:58] I like that question. I think from [00:39:00] an evy perspective, I think curely has the best, the best shot of winning that. But that’s not to say that I think that their stock price will be the best performing stock. I think that they’re going to have a ton of dilution. I think that the margin profile is not as good, but they’re also, you know, just the amount of shares that I envisioned them issuing ,  to keep up with this growth.

[00:39:20] I do not think there’ll be the best performing stock, but I do think that they will have the highest evy. I think probably the best performing stock over the next five years will be, you know, on between green thumb and Cresco, just based on kind of the efficiency and really just the management team there.

[00:39:38] I’m very bullish on those two. As far as the little players, I don’t focus on, on smaller players that much. I think that the industry is going to consolidate tremendously over the next 12 months and especially over the next five years. So I’d prefer to, to have a more risk adjusted bet and ,  invest in, you know, companies that are the larger tier one [00:40:00] operators.

[00:40:00] Bryan Fields: [00:40:00] Fair. Kellan?

[00:40:01] Kellan Finney: [00:40:01] I mean, I can’t argue with curely having the largest CB and in five to 10 years, for sure. I mean ,  some of the moves that they’re making internationally, I think they’re ahead of the game from that perspective. And I mean, they’re already, they already have the largest CB currently, right? I think it’s like, what 2 billion larger than the next competitor? Are they at 10 now? So, I mean, they already have a substantial lead. So I got, I think that for sure, they’ll be the biggest one. And then as far as the small player goes, I’m going to give Colorado some love. My Swayze, right? They’re penny stocks are trading down at like $2. I think last time I checked and I really liked they’re growing organically.

[00:40:40] And they’re really trying to just own Colorado right now before they, they kind of expand. And the way they’re doing that is they acquired Starbucks, which is a dispensary chain. And ,  in Colorado, I really liked the brand Starbucks. I think that a lot of locations that are well thought out in the brand as well, thought out the retail experience is [00:41:00] really positive.

[00:41:00] Every time you go to them, go to one, it’s very similar across the whole state. And so I think that they are kind of sitting in the background, learning a lot and really optimizing ,  that kind of retail side of the supply chain. And I think that that could really benefit them as they go to. Kind of grow and expand hopefully in the future.

[00:41:19] And, and I mean ,  Starbucks with being green, really similar to Starbucks, like I could see just ,  a lot of consumers ,  psychologically playing on that comfort of Starbucks and then they see the Starbucks thing and then not inherently creates like a comfort level that. I mean, it’s a big deal right? On the East coast where people are still very skeptical about cannabis, right? It’s the devil’s lettuce. I mean, those kinds of little tiny nuances in terms of tackling that psychological aspect from a consumer perspective, I think go, I think that’s undervalued right now, personally. So that’s my 2 cents. What do you think, Brian?

[00:41:52] Jonathan Rubin: [00:41:52] I’m going to check that out.

[00:41:53] Kellan Finney: [00:41:53] Yeah. Go check it out. I really liked the Starbucks brand. I mean, dispensaries are really cool and I’m a regular, when I do go shop for cannabis [00:42:00] at those dispensaries. And so that’s my truth. They were met. They were formerly known as medicine man, I think and then they went through some reorganization and renamed it Swazi a more attractive name. And I think they brought in some more ,  professional financial individuals to kind of help them shore up their balance sheet. And ,  in effort to hopefully expand from a Colorado perspective.

[00:42:21] Bryan Fields: [00:42:21] I might be wrong with them, but I think they had some also bad PR that they were trying to get away from and the easiest way to kind of, you know, wipe your hands of that is to change your name and people then don’t remember all the bad things that are associated to common practice in the pharmaceutical space and some of the other industries. So I wonder if that was the direction of why they did that. For me, I’m like you, John, I prefer to bet on the bigger horses, because while the, some of the smaller guys I think are doing great things and are showing incredible numbers, I think, you know, I want to go back to the first point you said about like that risk profile and what your time horizon is. And for me, I am invested at all across the board, really heavily focused on the cannabis companies. And I’d rather bet on the five [00:43:00] biggest horses and say, Hey, I know the game isn’t fair. And I know it’s an incredibly expensive. And at the end of the day, that’s the way the rules are. And I’d like to bet on the five or six biggest horses and say, good luck guys.

[00:43:11] Like over the next 10 years, the here’s my bet. Let’s rock and that’s how I do it. And that’s what I recommend to people. Right? Like there’s so many smaller companies that are doing great things, but you don’t cause 10, 10 licenses and guess who’s in there all the big guys. So, I mean, the game’s not fair.

[00:43:27] Jonathan Rubin: [00:43:27] Yeah. And also the smaller guys are being acquired at a much lower EBITDA multiple than the larger guys are trading for on the market. I think, you know, truly, even Cresco, they did deals that they bought companies that like four X, 22 EBITDA, which is a much lower multiple than, you know, their stocks currently trade for. So I think there’s a, you know, I think might as well be invested in the larger operator that the market’s willing to pay a higher multiple for.

[00:43:53] Bryan Fields: [00:43:53] Cool. So before we wrap John, where can our listeners get in touch with you? I know you’re pretty vocal on social media. Is there any handles you want to shout [00:44:00] out that they can reach?

[00:44:01] Jonathan Rubin: [00:44:01] Yeah. Check out the phyto partner’s website and then also, yeah. Twitter, you could follow me @JohnnyRubin10 and you know, that’s pretty much, that’s pretty much it.

[00:44:10] Bryan Fields: [00:44:10] Cool. We’ll tag everything in the show notes. Thank you so much for your time and looking forward to chatting with you in the future.

[00:44:16] Jonathan Rubin: [00:44:16] Thanks, Brian. Thanks, Kellan.

[00:44:18]Kellan Finney: [00:44:18] Take care.


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