After Initial Shock of DOJ Action, Cannabis Investment Interest Growing Rapidly

After Initial Shock of DOJ Action, Cannabis Investment Interest Growing Rapidly

Poseidon Asset Management’s Morgan Paxhia discusses recent behavior trends in cannabis investing and how the federal government’s stance may affect investment activity moving forward.

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January 31, 2018
Melissa Schiller
Banking & Finance

In the aftermath of U.S. Attorney General Jeff Sessions and the U.S. Department of Justice (DOJ) reversing the Cole Memo and other Obama-era protections for the cannabis industry, investment behavior took a pause, but capital is still flowing, according to Morgan Paxhia, co-founder and managing director of Poseidon Asset Management, an investment management company operating exclusively in the cannabis industry.

As the industry faces constant pushback at the federal level, companies should be aware of investment trends and how the federal stance may impact funding in the coming months. Here, Paxhia shares where investment activity has been, where it is headed and what businesses can do to impress investors.

Cannabis Business Times: Have you seen any noticeable trends in investment behavior these past few months?

Morgan Paxhia: Certainly [the DOJ’s announcement] sent a shockwave through the industry, and … the area it [seemed] to land on the hardest was the fragile banking access. … It can cause a pause to larger pools of capital that were starting to heavily consider … investing in the industry.

What’s interesting is that it sent that initial shock—people took a pause—and it seems as though because of the amount of bipartisan Congressional outpouring of support [for] the industry, it’s almost like a boomerang, and now … the amount of inbound interest we’re getting daily is incredible. … The big pools are still moving slow, but the high net worth and family offices, … their interest is almost invigorated in this environment, which is great, but we need these larger pools of capital. We need these quasi-institutional groups. I’m not expecting institutional money at this time, but [rather] ones that are of significant size that start allocating in a more [timely] manner to the industry. …

We were just up in Toronto, and the capital conversations up there are vastly different from a timeliness [standpoint] than they are down here. Canopy Growth [received] $200 million last week, and that was no problem. To be able to do that here, … you would never say no problem. … There’s a lot more friction in the process.

CBT: Do you see these trends continuing, or how might the DOJ’s recent repeal of the Cole Memo and other Obama-era industry protections continue to affect investments and financing in the months ahead?

MP: It’s easy for these larger investment pools to wait and see because … [the industry is] … growing fast, but relative to other industries, it’s still pretty small. It’s still very much an emerging industry sector.

The newest thing is attacking the FinCEN guidance because the Cole Memo was rescinded, and it didn’t really change anything. … Now they’re trying to remove [FinCEN], and people are waiting to see if that actually gets removed because that could certainly add a lot more uncertainty into the banking space.

The other component with this dysfunctional government we have right now is we’re in this limbo period. I know we did this short-term funding [deal] to let them try to figure out these headline issues around immigration, but one of the big hang-ups in there is the Rohrabacher-Blumenauer amendment. Thankfully it’s still in place, but people are waiting to see once we pass an actual budget for the federal government [if] this is going to be another one-year bill, or [if] we [are] actually going to get a permanent law here. … [If] it [is] just another one-year extension, is it expanded to actually include cannabis outright and not just … medical? … It seems like the bigger pools are watching that, as well. Once we get clarity around that, people will start to get even more confidence.

CBT: Will the qualities investors look for in companies change due to the changes in federal policy? What can cannabis businesses seeking funding do in the wake of the DOJ’s announcement to ensure they are in a good position to secure capital?

MP: When you’re thinking about your business and raising capital, the future is unknown. What you know is the present [and] if you’re raising money or setting realistic timelines and working extremely hard to get the funding in when you have the environment to do so. … We have a lot of companies getting ready to do capital raises or some that were in the middle of it, and then this hit, and it just kills your momentum. Then all of a sudden, you have to have a deal that’s taking a long time to close and people start to get worried.

As a business raising capital in this industry, evermore are you required … or expected to be very professional, very buttoned up and really understand your business. … Now there are a lot more questions around permits and team and cost structures, as it should be. It’s a typical kind of due diligence anyone should be doing. There was some frothiness last year around [the idea], “throw money at California and you’re going to become rich,” which [we] as actual investors in the industry know, it’s nowhere close to that experience. It’s a lot harder. You’ve got to put in the hours, you’ve got to do the work, you’ve got to have the right people on board, and do things in a proper way.

CBT: Do you have any insights or advice on key aspects companies should focus on to make sure they can win over investors?

MP: The due diligence—taking that seriously. There are checklists out there of what investors want to see—marketing materials, formation materials, financials. Having your ducks in a row, doing that work up front so that when you get into the marketplace, … you have the questions answered.

The other component I’d say is if you’re trying to raise … a million dollars, you need to have 10x that in interest because the conversion of what interest is in reality is about 10 percent.

You have to cast a wide net and dedicate the time to [securing funding]. Anyone that’s trying to raise money in a company, you really need a dedicated person—that’s there full-time, that’s all they do, they are communicating with their investors or interested investors, they’re getting out into the marketplace and putting the time in. If you’re not doing it with full effort, it just takes too long and you’re just not going to get it done.

There are some hot deals that will get done very quickly … but for the vast majority, especially if you’re in a crowded space—like, let’s take edibles, for example. I think there’s something like 10,000 edible brands in California. Trying to jump into that space, you’re jumping into a highly competitive, very crowded and now very expensive cost structure with the new regulations. So, [when] we’re looking at companies trying to start new product companies in that category, we look immediately at their proforma and we know that their cost structure is completely off and they’re not going to be profitable at that pricing. … If you’re choosing a competitive landscape, you have to have a very unique offering that can separate yourself from all the noise.

Editor’s Note: This interview was edited for length and clarity.

Top image: © purplequeue | Adobe Stock

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