Ones To Watch is a newsletter about the people shaping the European cannabis sector. Each update contains a brief note on some of the exciting entrepreneurs and startups I’ve met on my journey.
This month we’re going backwards instead of looking to the future, and global instead of European.
Last week I was at a cannabis conference in London. My first live event in almost 2 years, so I was expecting the room to be brimming with new ideas.
I’d forgotten how great it was to get in a room with people and chat face to face. Some of the chats were eerily familiar though. I felt like I’d changed, and certainly learnt a lot, since the heady early days of the European cannabis sector (2017-18), but many of my fellow attendees were stuck repeating old narratives with unrealistic expectations of success.
There seemed to be an expectation that, by being an early mover in a new sector you deserve success, and fast!
What struck me was two things in particular:
Very few people have learned from what has worked elsewhere in the world of cannabis – or asked themselves what models ‘successful’ startups have followed.
Even fewer people have realistic expectations of the pace of regulatory change when it comes to complex new drug markets like cannabis.
An understanding of both puts a founder in a strong position. It also protects investors from the hype-fueled upswings and the inevitable slumps in momentum that follow.
In this issue, I’m going to be talking about a few of the models that have worked in the cannabis sector so far. I’ll explore more ‘ecosystems’ and the ‘policy vs investor time’ issue in Parts 2 and 3.
If You’re Not Learning You’re Dying
When George, Henry and I founded Hanway Associates in 2017, we were clueless about what sort of business model we wanted to build. All we knew was that we were interested in drug policy and, as lobbyists, we had a skill set that was very useful for entrepreneurs looking to navigate a new and complex industry.
We’d been working on cannabis and drug policy reform for over three years at that point and we’d got our heads around how regulations change. Business interests, in our eyes, is an engine that drives reform. The prospect of economic opportunity carries strong intellectual arguments and civil society campaigning over the line – or, at the very least, swells the coalition in favour of reform. So we began by building our businesses around this thesis of opportunity = change.
Our model was simple: We launched cash generative businesses that only required knowledge (like consultancy and events), and used these as a platform to learn while quickly building a reputation and network. Over the last 4 years, we have moved from a consultancy focus towards a venture focus – exiting a spin-out conference business, building a portfolio of minority shareholdings through sweat equity and incubating new startups (at The Hanway Company venture studio).
As three young guys with no capital behind us, our options were limited. If we were starting again today (and had the access to finances some of the people I met at the conference last week have) we’d be looking very closely at who has been successful over the past few years, not sitting around moaning about regulations.
If you’re not learning and adapting you’re dying.
I am interested in how models form, and how groups perfect them over time, often with repeat successes. The investors and entrepreneurs whose models I’ll explore over the next few issues are arguably some of the smartest and most proactive in the global cannabis sector. Notably, they are not the ones making the most noise, all the time. These operators share some traits, including the ability to create their own narratives and understand the dynamics that drive a new sector into the mainstream.
I won’t go into huge detail on the operations of companies discussed here as those are recorded elsewhere in far better detail than I could muster. What I will try and do is give a sense of the ecosystems around them and the top-level strategies they deploy(ed). While often known for one main business or ‘success’, there are whole networks of interesting companies founded, financed, and supported by these ecosystems. Many of those companies are also category king contenders in their own right.
Traditional metrics of evaluating success are less clear in the early stages of an industry. These companies are undeniably leaders within their category or region but every cannabis company has a long slog ahead of them. Whether or not they have the ability to sell the most or the best cannabis, or even maintain their market share is yet to play out.
Those who have already raised huge amounts of capital are well-positioned to take advantage of the opportunity that lies ahead. In many cases, the founders and early investors have already made vast returns, so while we’re talking about ‘generating value’ it’s important to ask – for who?
Mainstream Giants With Momentum
Nobody has made their mark on the cannabis sector like Seattle-based Privateer Holdings and their tight-knit ecosystem of frontier-facing investors and portfolio companies. Founded in 2010 by Brendan Kennedy and Christian Groh, who, while working at Silicon Valley Bank, were exposed to the cannabis sector when they were pitched to by a cannabis startup.
With their third co-founder, Michael Blue, they began planning a venture capital firm. They soon pivoted into a private equity holding company model when they realised that trustworthy investment opportunities were limited. The private equity model gave a lot more control over their portfolio’s destiny while providing flexibility to tackle the unpredictable timelines of legalisation.
Over the proceeding years, Privateer acquired, incubated, and built cannabis tech platform Leafly, recreational brand Marley Natural, and the jewel in their crown, Tilray, a Canadian medical cannabis producer. Their vision was to make each venture they launched a leader in its respective segment of the sector. One thing that is clear early on is the clear focus on mainstreaming cannabis.
Here’s lesson 1 for aspiring entrepreneurs in a new sector: get your investors inside the tent.
In a 2013 press release, titled ‘The Cannabis Industry's First Private Equity Firm - Closes $7 Million Funding Round’, Privateer named Michael Auerbach, then a senior director at global strategy firm Albright Stonebridge Group, as their first board member. That same year, Auerbach founded Subversive Capital, a fund ‘dedicated to investing in radical companies whose core missions subvert the status quo and require sophisticated regulatory strategies for success’. A match made in heaven – at least it appears to be from my outsider perspective – and the first glimpse of a wider ecosystem or model at play.
Lesson 2 is: don’t underestimate the importance of positioning as ‘the most mainstream’ operator in a ‘risky’ new sector.
A $75 million Series B round in March 2015 from investors that included Peter Thiel’s Founders Fund and Subversive Capital only boosted the momentum behind Privateer. It was becoming clear that their model involved a relentless focus on the mainstream positioning of their companies – as illustrated by the early hiring of former DEA agents at Privateer and the litany of PhD-emblazoned pharma and political heavyweights that came to adorn Tilray’s advisory boards.
Regulator-friendly, mainstream advisor-backed companies with collaborative financial partners may sound like a simple strategy but so far few have managed to pull it off so well. Tilray IPO’d in July 2018, raising $153 million through its public offering, while Privateers tech company, Leafly, is set to go public through a SPAC later this year.
As an outsider, it’s hard to know exactly the role of the investors like Subversive Capital was in the development or implementation of these strategies but if you look south to California or as far as Israel on this side of the Atlantic you can see some familiar business strategies emerging.
Lesson 3: every region has a narrative, and every jurisdiction is ‘on the cusp’ of something.
The Parent Company launched through a Subversive Capital SPAC in January 2021. Figureheaded by Chief Visionary Officer, Jay Z, the company wrapped up some of California’s leading brands and supply chain operators into a mega group. The framing was evidently clear: California is ‘the largest and most influential cannabis market in the world’.
This formula looks to create mainstream giants almost overnight.
Another Subversive backed venture making waves in the cannabis sector is Canndoc, the Israeli giant who boasts Ehud Barak, the former prime minister of Israel, as their chairman.
In April 2021 a Subversive Capital SPAC combined with Israel’s largest licensed cannabis producer Intercure, the parent company to Canndoc – following many of the same steps that made The Parent Company in California such a digestible and exciting package for investors.
The regional-specific narrative is clear; Israel is the most exciting consumer market East of the Atlantic. Not only is the medical cannabis market booming, with a wealth of choice creating a ‘connoisseur-friendly’ environment for patients, but the country is (*has been for some time*) on the cusp of recreational legalisation.
Regionally-specific narrative + Mainstream figures + Supportive early investors = Success in these early days of the cannabis sector.
While it is all well and good to identify top-level strategies, it’s another thing to implement them. While the formula might look simple, the execution certainly is not.
Watch this ecosystem closely in the years to come, as I imagine there’s a lot more to come from these US-based frontier folk – and from the alumni that have had the chance to see their mentors work first-hand.
In the next issue, I’ll be looking at the ‘London public market ecosystem’ and other groups that have been successful in cannabis to date. If you have any tips on interesting models to read about please send them my way!
If your friends and colleagues have the same curiosity about cannabis entrepreneurs with proper visions for the sector, share this newsletter with them.
Investors looking to join my investor only briefings can fill out an application here.