2018 was a transformational year for the cannabis industry. Long awaited legislative reforms combined with historic medical breakthroughs, fueled incredible growth and progress for everything cannabis related. Cannabis is no longer taboo and much of the stigma surrounding the industry has faded away. In 2018 CBD was the number one search term in health and wellness and mainstream media has jumped on board. Phyto and our partners have been at the forefront of this change and we have been rewarded and recognized for our foresight and expertise.
2018 highlights: • Canada legalizes adult use nationwide • California legalizes adult use • The FDA approved the first cannabis derived medication, Epidiolex for childhood epilepsy. • The first NYSE cannabis company Tilray began trading. • Numerous IPO’s of Canadian LP’s started trading on the NASDAQ • Fortune 100 companies entered the cannabis industry with billion-dollar investments, including Altria, Constellation Brands, Scotts, and AMBEV • The first east coast states legalized cannabis including MA, ME, VT, and PA • Many cannabis opponents including former House speaker John Boehner and current Senate leader Mitch McConnell joined the crowd calling for cannabis reform • Federal legislative initiatives are under consideration in the House and Senate • The Criminal Justice reform Bill passed which will exonerate thousands of people from past drug possession crimes was passed with bipartisan support • Capital inflows grew to $14 billion from $3.5 billion in 2017 up over 400%
In April 2019 Merrill Lynch Bank of America published a research report titled “A Cannabis World…and more people are living in it”. The report was the first of it’s kind from a major sell side Wall Street firm and in it the team of analysts highlighted the many industries that Cannabis is set to impact and disrupt. The report estimates the size of the worldwide cannabis market at $166 billion annually and points out that that Cannabis related products have the potential to impact ~$2Trillion of entrenched multi-industry sales.
This year it became even more apparent to us that the Cannabis industry, what we refer to as the Cannabis Economy, is completely uncorrelated to the overall economy, geo-political tensions, trade wars, political chaos in the US, oil or commodity prices, interest rates and/or the Fed. None of these things will deter the up and to the right movement for every metric of the Cannabis economy.
As current Cannabis events have come into focus by the mainstream media, much having little to do with the incredible progress and growth the industry has had, for many people Cannabis has risen to the top of mind for use as a medicine, a health and wellness product, a career or business opportunity, and for investment consideration.
Following the 2018 midterm elections, 70% of the population in 35 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. 10 states, California, Colorado, Nevada, Washington, Oregon, Massachusetts, Maine, Alaska Vermont, Michigan, plus 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. Recently there are new signs and hope for Federal legislation that will rectify the banking problems, eliminate unfair IRS tax rules, and allow research. The SAFE banking Act and the STATES Rights Act are both openly supported by both parties and houses of Congress.
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.
How Big is the Opportunity?
As a business opportunity cannabis legalization is spawning a 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. In 2018, the Cannabis industry generated ~$11bil sales and created nearly 250,000 new jobs. This far exceeded sales estimates of $6-7bil and legalization has created more new jobs more than any other industry. In 2019 the growth is suspected to continue with estimates that in 2019 over 500k new jobs will be added and $14 billion in annual sales.
Private capital is seeking out opportunities in the Cannabis industry at a break neck pace. Cannabis-related companies raised over $13.8 billion in 2018, compared to $3.5 billion in 2017. Private investments specifically grew from $591 million in 2017 to $4 billion in 2018, according to Viridian Capital Advisors.
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’ 27 Portfolio companies ALL benefit from the growth of the industry and are not directly impacted by supply, demand, and pricing dynamics 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.