Investing in Cannabis with Phyto

Following the 2016 election, 70% of the population in 33 states, have put in place Cannabis laws to allow medical or adult use of Cannabis. That equates to nearly 220 million Americans that can legally purchase and have the RIGHT to use Cannabis. 8 states, California, Colorado, Nevada, Washington, Oregon, Massachusetts, Maine, Alaska and the District of Colombia, allow adult use, commonly referred to as recreational use, 21 and older can buy cannabis, just like alcohol and tobacco, ~25% of the country, 80 million people. Astonishingly, the Federal Government still classifies Cannabis as a controlled substance subject to DEA prosecution, a federal crime punishable by lengthy prison terms.

The Federal governments position holding marijuana as a schedule 1 drug with no medical benefit highly addictive and prone to abuse is no longer tenable or sensible and is clearly unjustifiable. Society at large has made it clear that marijuana is a medicine and most people think marijuana should be a sanctioned pharmaceutical medication. In fact some 65% think marijuana should not be a controlled substance and should be regulated like alcohol and tobacco, leaving it up to adults to determine if they want to use it or not either medically or socially.

There has not been an industry that has grown as quickly and with as much fervor, and which has as many potential consumers TAM; since the repeal of alcohol prohibition. Not even the commercialization of the Internet in the 90’s can equal the pent up demand for this soon to be prevalent cash crop.  Comparisons to the cell phone and organic food industry are made frequently…I think that could be modest. The market for cannabis and cannabis related products and services is estimated at $50-$100billion in the United States alone. Investment capital is taking notice and nearly $300 million has been invested in cannabis related businesses since 2014. UPDATE-In 2016 alone over $500mil was invested in Cannabis public companies and some $300mil in privately held companies through Venture Capital funds.

The Birth of a New Industry in America

It’s clear the tide is changing in both political and scientific views toward cannabis. We are not very far from a constitutional referendum for State Rule which would lift prohibition nationwide even if congress and the president resist. The industry is attracting significant capital and the zeitgeist has most certainly shifted.

Popular opinion toward use of cannabis is rapidly changing as well, with recent medical and research developments showing that cannabis has medicinal value. Main stream media’s Dr. Sanjay Gupta’s famous reversal on his position on cannabis’s health benefits and President Barack Obama exclaiming “I don’t think [cannabis] is more dangerous than alcohol” has also impacted peoples views and opinions.  In fact, a super majority ~67% of Americans think that cannabis should be legal for medicinal use and 53% of Americans think Marijuana should be treated as alcohol and tobacco. Vitamin CBD is not a stretch as Cannabidiol could become as widely used and valued as Omega-3 oils, bottled water or the Glutten free food craze.

The Decriminalization and Legalization of Marijuana

Over the last ten years, a renewed effort has been made by the cannabis lobby for both decriminalization of the plant as well as legalization. The unconstitutional and discriminatory mass incarceration of non-violent people jailed and lives ruined for simple possession has left a deep wound on our inner cities and minority communities, all to fill jail cells with people using a harmless and probably beneficial plant. The prison industrial complex has lobbied heavily to keep marijuana illegal and punishable by stiff penalties…incarceration is a business. It is time for the War on Drugs including Cannabis which is a GOOD drug, to end.

On a Federal level, there have been important developments that push this agenda forward. Most recently US Attorney General Eric Holder in a speech to the House of Delegates indicated that he had mandated a review and modification of all Justice Department policies relating to the sentencing of non-violent drug offenders. These laws went into effect in December 2013 marking the first time in nearly 80 years that Americans were allowed to consume cannabis legally. These changes along with DOJ decisions expressed in the Ogden memo and the Cole memo all set the stage for continued reform and acceptance of Cannabis as a Medicine and allow for the industry to grow and mature.

How Big is the Opportunity?

As a business opportunity cannabis legalization spawned a mini gold rush creating an entire industry from legal growing operations to secondary and tertiary businesses to support the conversion of this industry from illegal to legal. MMJ Business Daily has done a good job of analyzing the data and projects that the current size of the legal cannabis industry in the US (only Washington and Colorado) is about $1.5 Billion and will grow to $6.0 Billion by 2018. Keep in mind these are only the revenues for Colorado and Washington, currently the only two states offering full legalization. MMJ projects that the size of the total US market if legalized would be $46 Billion. Globally, this market is even larger with the United Nations (in a report from 2005) stating there are nearly 150 million active cannabis smokers in the world expending over $150 billion a year.

Investment Capital Is Coming in Fast!

Private capital is seeking out opportunities in the Cannabis industry at a break neck pace. It is hard to see all the capital that is flowing into Cannabis or related companies, but figures from New Frontier Data indicate that in 2014 about $100 million was invested into the Cannabis industry. In 2015 that number grew to nearly $250 million and in 2016 that number will near $1 billion across 275 companies, including some $400 million in public raises by Canadian producers. Private Equity funds have seen tremendous interest this year as well with prominent funds Privateer and Tuatara each raising $100 million. M&A activity has also increased dramatically of late up by 350% in the past quarter, with 27 deals being announced and bringing the total to 82 deals YTD in 2016. Public companies are being aggressive in order to stake a claim in the industry by buying small companies that have proven technology, services, products, or brands.

The Investment Fund

  • Phyto Partners is a venture capital fund that makes equity and debt investments in emerging early stage and operating businesses in the Cannabis industry.
  • The fund is invested in companies that provide products and services which are mandated, and in many cases part of the capital budget required for the businesses to operate.
  • Phyto Partners will seek out co-investment opportunities with like minded venture and private equity funds that have a similar investment strategies as the Fund. By collaborating with other investment experts, we will develop synergistic partnerships that will benefit our portfolio companies and our partners.
  • Phyto Partners’ portfolio companies are able to leverage off one another and collaborate to execute successful business plans. Our advisors and industry relationships bring together the knowledge and expertise to help our portfolio companies thrive in the dynamic and fast growing cannabis industry.
  • Phyto Partners’ twelve (12) portfolio companies ALL benefit from the growth of the industry and are not directly impacted by supply, demand, and pricing dynamics of Cannabis. None of our current investments are licensed producers, processors, or distributors/retailers of Cannabis.
  • Our portfolio companies provide business critical solutions, services and/or products including grow technology, secure packaging, data analytics, business intelligence, testing, research and development, POS technology, Seed to Sale, CRM, distribution logistics, and consulting services.
  • ALL of our portfolio companies will benefit from the expansion of the industry as a whole and the increasing acceptance of Cannabis as a health and wellness product as well as Cannabis as a medicine CAAM.

Phyto’s Investment Criteria

  • Experienced, seasoned, and mature management team
  • Scalable businesses requiring low CapEx
  • Businesses not subject to the interstate commerce issues
  • Not directly exposed to supply, demand and pricing dynamics
  • Proprietary intellectual property, methods, and technology
  • Reasonable and justifiable valuations
  • Clear visibility to profitable cashflows
  • Prudent Use of funds and clear path to MVP or rollout of services
  • Competitive advantages within the industry
  • Synergies with portfolio companies, our investors, and our industry network
  • Strategic and capital strong co-investors
  • 6-9 months ‘monitoring’ of management/operations and execution
  • Visible and viable exit strategy or path to monetization

Areas of Focus

We are focused on investing in scalable businesses, most importantly technology and big data. We seek out high-margin products and services that provide clear added value to operators. We seek out companies with low cap-ex and labor costs, such as those involved in providing tertiary internet services, software solutions, regulatory compliance, testing and research and security.

There is a huge opportunity in ‘the businesses of the Cannabis industry’…in order for the cannabis industry to emerge and develop, many supportive verticals will be swept up in the growth.

We see numerous ancillary businesses that will be necessary and critical to facilitate the growth of the industry. Testing labs and equipment, business intelligence, data analytics, grow technology, extraction equipment and services, packaging, branding, and licensing opportunities, security and cash management, CBD products in the health/wellness nutraceuticals, veterinary and petraceuticals are all areas that we believe offer tremendous opportunity for development and high growth which will require supportive business products and services to execute their plans.

There is substantial pressure upon the cannabis industry to respond to legal regulations, which can be complicated, time consuming, and expensive. We seek to invest in companies that can profit because of this regulatory and compliance chaos.  Entrepreneurs that facilitate businesses to function will be sought after.

Significant opportunities exist to invest in cannabis industry operations requiring the engagement of neutral third parties to ensure accurate, timely, and competent compliance with various state and federal regulatory authorities.  Technology solutions and data analytics will be a critical infrastructure backbone and will provide significant opportunities for exponential growth opportunities.

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