Episode #137: Emily and Morgan Paxhia, “The Growers Who Focused On Creating Efficient Operations Are The Ones That Are Still Around Today”
Guests: Emily and Morgan Paxhia are co-founders and managing partners of Poseidon Asset Management. Emily has reviewed thousands of companies in the cannabis industry and has worked with countless founders in many capacities. She had helped to shape founders’ pitch preparations, their go-to-market strategies/ product launches, and advised on day-to-day business operations. Emily has held board seats for three portfolio companies and participates as an adviser to multiple teams. With over ten
Date Recorded: 1/4/19
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Summary: In episode 137 we welcome the sibling duo, Emily and Morgan Paxhia. Emily and Morgan begin by discussing their backstory, and how coming from a family with an entrepreneurial background influenced their path to start Poseidon Asset Management to specialize in cannabis investing. Emily and Morgan each describe their previous
Next, the pair discuss starting their fund, and the journey that included seeking service providers, raising capital, and the many challenges and hurdles they faced along the way. Morgan mentioned that even with all the hurdles, they knew they were on to something and continued to drive forward.
Meb then asks about cannabis industry trends and what the space has in store looking forward. Emily covers some regulatory and political issues, and then talks about the challenge they will face as a firm as they try to allocate capital before the industry really opens up down the road. Morgan follows with some catalysts that include legal cannabis in California, a number of countries approving medical cannabis, and expanded media coverage.
The conversation shifts to the regulatory environment. Morgan talks about the progress that has been made, although state programs are varied, which makes it difficult to see where the standout model lies. There’s also bi-partisan support, New York is looking serious at legalizing, and the environment is moving forward.
Meb follows with questions about the investment process and portfolio building, as well as a question on what areas people aren’t thinking about that have disruptive potential. Emily and Morgan talk about looking at the industry by subsector such as ag-tech and technology and being invested everywhere on the spectrum from plant cultivation to end consumer product consumption and that the portfolio construction process leans on a very diversified approach but is very flexible and dynamic. In searching for ideas, they rely on a “boots on the ground” approach to understand the industry and operator dynamics, as well as identify quality teams. Meb then asks about any areas people aren’t thinking about that have disruptive potential. Emily and Morgan respond with 100% industrial hemp as a product that has disruptive potential with almost endless applications.
Hear all this and more in episode 137, including the names of some portfolio companies and their most memorable investments.
Links from the Episode:
- 00:50 – Happy New Year and welcome
- 1:26 – Emily and Morgan’s origin in this space
- 7:04 – Launching the fund
- 10:49 – Trends in the cannabis space
- 13:59 – Regulatory landscape and the hurdles that still remain
- 14:10 – Morgan’s interview on regulatory-driven cannabis industry
- 17:57 – The investment process
- 21:16 – Building the portfolio
- 22:56 – Finding and vetting investment ideas
- 27:06 – Emily and Morgan’s take on the global cannabis market
- 28:25 – Poseidon’s investment in GTI Green Thumb Industries
- 29:14 – Poseidon’s investment in Headset
- 31:01 – Poseidon’s investment in Copper State
- 31:55 – Disruptive ideas that people/investors aren’t thinking about
- 33:25 – Industrial applications of hemp
- 37:41 – How Poseidon screen’s ideas
- 41:57 – Best resources to follow this space
o Marijuana Moment (email)
o Marijuana Business Daily
o New Cannabis Ventures
- 45:04 – Most memorable investments
- 48:15 – Learn more about the fund: Poseidon Asset Management, Twitter – @poseidenasset, Facebook, LinkedIn.
Transcript of Episode 137:
Welcome Message: Welcome to the Meb Faber show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the co-founder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Meb: Welcome podcast listeners. It’s officially 2019. We’ve had a slew of awesome episodes, so if you’ve been on vacation over the holidays, go check out the archives, Chris Cole as well as local favorite down at FPA Steve Romick, truly awesome episodes. And today we’ve got an exciting show for you. With our third installment in our Cannabis Series, we’ve got a brother and sister team co-founded, Poseidon Asset Management. They run one of the top rated sector funds and has won a bunch of awards from places like Barclays. Welcome to the show, Emily and Morgan Paxhia.
Emily: Thank you very much for having us.
Morgan: Thank you.
Meb: This will be a lot of fun today. I would love to hear a little bit about your origin story. It’s not too often you see a traditional, I believe you all in the fields of wealth management as well as I believe consulting, and then decided to team up and and start a fund and now multiple funds and focused on the Cannabis space. Give us a little origin story. What led you all to this development?
Emily: Yes. So, as you mentioned, we are a brother and sister team. We came from a family of entrepreneurs. Our father had his own real estate business and our mother actually also participated in that doing the accounting and also some of the real estate. She got her real estate license to help out with acquisitions of properties for that. So, I think we always kind of grew up with this mindset that working together in a family environment can work well and being entrepreneurs was definitely in our blood. So, we started having conversations originally about the Cannabis industry when I first moved from New York City to San Francisco in 2011. I had been working as a consultant for a small Boutique Agency in New York where we were working with large companies like Firecom, American Express, PepsiCo, Ralph Lauren, Time Warner, you name it, and I had gone through a number of consumer and B2B trend changes of pretty important scale such as the E-commerce, people shifting from purchasing in brick and mortar stores to the mass scale purchasing behaviours through e-commerce, as well as people shifting their viewership from time-locked cable viewing to over-the-top viewing with time shifting all along the way and seeing how those major trends can change and open up new market opportunities.
But when I was working with those companies, it’s a highly competitive environment, very saturated. They’re all kind of going after each other’s lunches and having difficulty often differentiating how they’re approaching that. When we moved to California, I started to see this Cannabis industry start to emerge in this, I would say, in this modern era because Cannabis has a long and deep history in California. But we started to see stores that looked more like boutique hotels and they were selling products that were coming in packaging, it seemed like it was moving in the direction of true branded products, and started to have phone conversations with my brother about it. The two of us had a pretty open mind about Cannabis because we had lost both of our parents to cancer and in 1996 or maybe end of ’95 a hospice nurse mentioned that Cannabis could be a potential palliative care resource. So, we think we had a pretty open lens to seeing it that way. So, you know, started having conversations about what we could do potentially in the cannabis industry. And I will let Morgan share about what he came up with, which is ultimately where we are today.
Morgan: So I do come from a…well, I actually started buying stocks when I was 12 years old with lawnmower money. So, developed an interest in investing from a very young age but made a career out of it. Started a UBS Financial Services in a, kind of like a hybrid training program, got exposure to investment banking and wealth management and then, you know, did that for a couple of years, which was an incredible, pretty much like a paid MBA in Finance, and then from there moved over to a private registered investment adviser. Started out as a junior portfolio manager and the senior partners were all former institutional portfolio managers. So just had a fantastic experience working with them, learning very fundamental analysis and portfolio management and construction and built up a business there. And that was, you know, just an incredible backdrop for looking at investing. But as we started looking at this industry, it was so much white space back then.
And so, we were trying to think about what would we do to get involved in Cannabis? Were we going to do a product company? What would make most sense for what we were passionate about, but also what we were good at? And at that time I just, you know, as we’re going through a lot of ideas, which are now actually companies today, you know, as much as you did [inaudible 00:05:32] Solutions back then we identified have had to be created looking out from just like the ancillary compliance kind of elements to build a regulated industry. But back then there was just very little capital in the industry, and that was driven because, you know, there’s a lot of misunderstanding, perceptions were still shifting. When we were really starting to research the space, I think there was, you know, less than 11 medical markets. There was no adult use markets yet, but we knew things were changing.
And so, from our perspective it was…how is money going to start flowing into the Cannabis industry? As an investor, how are you going to approach this? There’s just so many question marks of how do you value companies? How do you invest? What kinds of companies do invest in? So, from that investor mindset, I just couldn’t get past this notion of early stage risk, a lot of opportunity, what need…what is the right vehicle to do that? Really that comes back to the idea of a funded structure would be the best tool to do that. And back then there was nobody doing that. I mean, there was a couple of firms that were owned like two or three assets or something like that. But from our perspective, we wanted to take a much more diversified approach. So, we basically created Poseidon as a solution for ourselves to start investing in the industry believing that there’d be a lot more people that would be seeking a solution like that. And as we started to do more and more research around it too, it was very evident that it required dedicated focus and time and, you know, boots on the ground really getting into these markets and getting involved to be able to figure this all out.
Meb: So, you guys just crossed 100 million in assets. That’s a huge congratulations from someone who has also started an asset management company from scratch. I know it’s not easy. I would actually say it’s effing impossible and really hard, but maybe it’s an odd way the point of this podcast. But could you talk a little bit about the starting of the fund? You know, how was the environment? Because this is five years ago, I believe at this point, three or five years ago where are you guys started this. And maybe just walk us through like the fundraising process, because you all were early as far as, you know, a lot of this development is going. What was it like to start the fund?
Emily: So, in 2013 we started seeking out service providers that any traditional fund would want. So we had to seek out legal, obviously to form audit services, back office support, because it was our intention to run this fund just like any other traditional fund with a lot of transparency and a focus on compliance and KYC AML. That was in itself its own challenge, was finding service providers who could understand what we were doing, understanding the real risks around it and being able to provide support to us. And we always say that that was a big step for us to get those folks on board because that was a…that’s a pretty big endorsement to get some of those more traditional professional services sectors behind us. So that was one step. And then we…raising capital in the beginning was extremely, extremely challenging. People a lot of times even laughed at us about this idea, you know, lots of bad jokes about like, smoking and 420 and everything. So, it took a lot of swallowing our pride and having to get through that. But because we had a vision and because we’d taken that time to investigate and understand the industry, and we just really leaned in on the policy side to work with the different policy groups we just kept, we had the fortitude to keep going through that process. But it was really difficult.
Morgan: It was, yeah. If you could imagine, I mean, every single hurdle was in front of us. I mean, it was a new industry. This was our first fund. You know, it was like every reason that investors would say no have the ability to do that. I mean, it’s, you know, unproven, unproven, unproven, but we just…we knew we were onto something and just kept driving forward. You know, we set the first fund up actually as a hedge fund. We did that for many reasons. But one of which, you know, trying to figure out how much capital could you actually deploy back then was just too uncertain. So we wanted a vehicle that, you know, was trading heavy, heavy compliance costs for more flexibility. And we thought that was the right trade-off, and we thought it was the right thing to do for investors anyway, you know, we’re more than happy to be fully audited, fully reporting for our investors’ sake. But it gives us the ability to build, build a portfolio, build a track record, build the reputation while the industry was building itself. So, you know, we’ve grown up alongside of, you know, pretty much from the inception of the emergence of the legal, adult use legal market of Cannabis.
Meb: Yeah. And, you know, part of the reason that, you know, it’s so hard to raise money is actually justified because there’s a lot of people, and particularly in the hedge fund world that see sort of the pot of gold at the end of the rainbow. And I smile because one of the best piece of advice, Julian Robertson who ran Tiger, one of most successful hedge funds of all time used to always say when a young analyst ask him about what’s his best advice when you’re starting a fund, he said, “Have have great performance,” because then everyone will think you’re…everyone would think you’re brilliant. It makes it a lot easier. But so look, you know, often with these funds you get to kind of three-year track record and that’s when the kinks starts to happen where at least people know you’re going to survive and exist, and you guys are now at five years plus. Walk me through, let’s talk about the industry a little bit and then we’ll get into some more portfolio ideas and process and everything else. You guys have kind of seen the full maturation over the past five years. Maybe talk a little bit about some of the trends you’re seeing, what’s going on, maybe perhaps a look forward as we enter into the 2020’s. What’s going on in the Cannabis world? Give us a broad overview.
Emily: It’s interesting because every…since we launched our fund alongside the start of the calendar year, every year we kind of come up to this, the new year and reflect on the different challenges we’ve seen occur throughout the year that are, that kind of present themselves in Cannabis. And last year it was January 5th when Jeff Sessions rescinded the call memo and made things really challenging and we saw a retreat of capital in that first quarter of 2018. And so, I think that, you know, this year we’re thinking about what are the potential challenges that we see coming up and what are potential big opportunities. And for us, we’ve been working so long in this kind of contrarian space where there was not a lot of capital standing around us to deploy into the industry. And at this point there is a lot more capital moving into the space, which for us presents a whole new challenge as investors because we have to work really hard to maintain the reputation we have with founders where they want to work with us such that we can really help to set the terms of the investments that we’re placing. Because, when there’s more capital standing around the table, valuations can go up as everybody I’m sure saw last year in the Canadian markets leading up to October 17th. So, this year it’s going to be…for us the big challenge is going to be all about deploying capital before the industry opens up too much more from a legal standpoint because we want to make sure to get in to these opportunities that the best entry points. And what, you know, it’s painful sometimes to be the only person or the select few out there who have a vision around something, but it does give you a lot of room to play. And so, it’s going to be changing a bit for those of us who’ve been in it for a while this year.
Morgan: The last several years, there’ve been these very significant catalysts that have been just a huge driver of the market. But we’ve ticked off a lot of those massive moves. I mean, California is open, Canada’s legal, and there’s about 37 countries around the world now with medical programs. The media talks about it all the time now, this is something that’s still not all the time now, but it’s covered quite extensively in the financial community. So, you know, it’s becoming more, and they’re still very early, but it is maturing. And so, you know, for a long time you could just kind of by hopes and dreams as investors, or investors we’re doing that. I’m not saying we were doing that.
Emily: Not us. Yeah.
Morgan: I think we’re changing to a point now where companies have track records. There’s things actually to look at. And so, from an investor standpoint, we would be surprised or were expecting, not surprised, but we’d be expecting as more sophisticated capital comes in, they will be more discerning as well. But there certainly is more at the table than we’ve ever seen before and it’s only going to increase because it’s still is what we think is maybe the third inning of the game.
Meb: Yeah. So, you know, I mean it’s funny because Cannabis and hemp is such an old industry, you know, that goes back a really long time. So, it’s kind of funny to think about it in the sense of being somewhat new, but a lot of that is regulatory driven. And Morgan, you did an interview recently where you said, you know, “We look at the industry is very much regulatory driven. That can be your friend or foe.” Maybe talk to us a little bit about the regulatory landscape right now. What main issues remain and kind of as a side question, how close do you think we are to a banking solution, whether it’s state by state or national?
Morgan: I mean, regulatory standpoint, we’ve made a lot of progress, but what’s interesting is looking at all these different state programs, they’re so buried and it’s so hard to say which one has really been the standout as the model for other states to maybe conform more to. So, it makes from an investing perspective, you certainly have to understand the ins and outs of these, of these different state programs, it impacts growth and that’s where like the friend or the foe, like you want to understand is this going to be a scalable market or is it going to be costly and long as it takes to ramp up? Or is it going to be too much of an open market and you’re going to see a flood of over capacity and over supply and a lot of commoditisation pressures coming. So, you know, you have to really take a lot of look at the, a long look at these regulatory environments and then continue to track them because they do change. I mean, we look at, I think a great example is Illinois. It started off as a pretty conservative program, the medical side and started to pick up and they actually became a pretty progressive program as far as getting a lot of qualifying conditions to become patients. And now that patient count is growing quite nicely and now with the election of Pritzker certainly seems like they’re in a position to fully legalize 2019. And so, now all of a sudden that’s a very interesting market. But if you thought about it in isolation a couple of years ago, you’d be missing out on some pretty considerable opportunities. You know, same thing could be said about New York State. Now there are looking very seriously at legalizing, and that’s something we’ve long believed is, you know, with the concentration of states in the northeast, they just are very competitive and so, those pressures help to accelerate once the dam finally opens. So, with Massachusetts opening, that’s putting a lot of pressure now on New Jersey. So, the environment is moving forward. I mean, listen, the bi-partisan support is there. I mean, we have the best support yet and growing. And so, that’s as you’re looking at the tax basis, you’re looking at essentially a slowing global economic environment, these tax revenues just become more and more front and center for these politicians, which is positive. I mean, that’s the whole idea is as you mentioned is this industry has existed for a long, long time as far as the consumption. We’re just transitioning that to legal access point.
Emily: Yeah, and there have been some key things that occurred that are definitely going to be helpful to the industry, such as the Attorney General, Jeff Sessions, no longer being in that position. Pete Sessions, he’s no longer in the position he’s in to stop legislation from moving, being heard on the floor and moving forward. The CARERS Act was introduced and then we have the STATES act in 2019, we have a strong feeling that that could…and based on what we’re hearing. we believe that could get passed, which could provide some serious relief to businesses within the states that have a legal regulated programs to have some form of banking support, which has been one of the biggest pain points in the industry, which we can speak from experience of having to deal with that with our portfolio companies and also in our own banking relationships. So, it’s no fun to be trying to be above board and be a legal operator as we’ve seen with a lot of the groups in the industry and having to be forced to deal with multiple bank accounts, paying your taxes in cash and all of the kind of issues, the end security risks that come around that.
Meb: Let’s pivot a little bit into…want to hear a little bit about y’alls actual investment process. And you mentioned it’s a bit of a hybrid approach with a lot of early growing industries. You guys focus on both the public and private space. Talk to us a little bit about what the investment process looks like. So, as you put together this fund, how do you think about allocating the capital? What are the traditional position sizes, etc?
Emily: Yeah. So, when we first started investing in the industry, we basically divided it up into sub- sectors that we thought would be critical to basically building an infrastructure for an entire industry to grow. So that was how we originated with our investment strategy and decided, based on the sizing of those different sub-sectors, how we would allocate the capital to right size for portfolio balancing.
Meb: What would those sectors be like for those listening?
Emily: Great question. So, Agriculture Technology, as we knew that the price of Cannabis would ultimately be driven down, that they could…that operators could no longer afford to grow at kind of exorbitant prices per pound or per gram. So, really wanted to focus in on that. And also just new, you know, when you’re trying to get an industry to be, to gain acceptance in the public eye, you don’t want to then all of a sudden have an industry that’s going to be a drain on the power and water supply. So, you really have to think about this from a bigger perspective, but a lot of people only think about the bottom line. So, that’s a great way to think about Ag Tech as something that drives it forward. And time and time again, we’ve seen in these markets where price compression occurs, the growers who focused on creating efficient operations are the ones that are still around today and end up being the ones to consolidate and buy other operators out of business or get their assets. So, that’s one thing that we were focused on.
Morgan: Yeah. I mean, technology is such a huge category. So, it’s like, you know, Emily is mentioning, like, even sub-sectors of the sub-sector. Because then you have SAAS-based compliance data, software solutions. That’s an area that we think is very, very interesting because when you look at Standard ERP solutions, they just don’t transition well to the industry because it is so nuanced. We strongly believe that ground up built solutions were very important and remain very important as the emerging enterprise companies that would start to proliferate multiple markets, you know, having that backbone to operate efficiently would be critical. And, again, because of this, you know, the off the shelf solutions that’s an, you know, like SAP or Oracle, things like that just don’t work for this industry. And so, we like to capitalise those kinds of companies because they have just great growth capability. They have a lot less so cost of for proliferating into other states or even into other countries. And it gives them a lot of pathways for scaling in two significant operations, a stand-alone or consolidation or acquisition. So, that’s a very interesting category for us. CBG and brands, consumer devices actually back on technology.
Emily: Distribution. Basically, everything from how the plant gets cultivated all the way through to how the consumer is experiencing it, we’re investing along that entire supply chain.
Meb: And so, how do you think about building a portfolio? Is it a situation where you guys are investing in per fund like a hundred companies and you’re maxing out at a percent or two? Is it highly concentrated at like 5 or 10? What’s the general approach?
Morgan: The first fund, we took a very diversified approach. And we’ve actually invested in over 50 companies over 5 years in that fund. You know, the benefit of being a hedge fund, if we have exits or we have cash flow, we’re able to re-invest. And that doesn’t include any kind of public market activity if there’s like some shorter term positions that are trading kind of things, but just really from an investment perspective. But that one still has 38 companies in it today. So, you know, we do believe that the vehicle is really meant to be a very diversified strategy and it’s continued to be that way. And we are still actively investing that even though we are raising another fund right now, but very different strategies. Between the two, but that one, yeah, so our first one was diversified by design. And, you know, as Emily mentioned, we have a whole process around how much exposure we want in our sub-sectors, how much exposure to the various life cycle, whether it’s early stage, middle or later stage, whether it’s public or private, whether it’s debt or mezzanine or equity, you know, however, we’re structuring these components to get the exposures that we’re aiming to have in the fund. It’s very interesting though, how that has, it changes with time. You know, one of the things that we tried to keep at our core is being flexible and dynamic. Just being so early stage in this industry, taking too hard stance in any one way we felt would be very limiting from a return opportunity and investment landscape.
Meb: Talk to me a little bit about the process. You know, I think there’s a lot of investors that are probably listening that may or may not be overwhelmed about the space. They’re interested. They definitely want to allocate. What’s y’all’s process for finding ideas, for vetting them? I know you judged a tech startup competition in Denver. Would love to hear if anything came out of that. What’s the general process for finding and vetting new ideas?
Emily: We always start with, well, as we mentioned, we start with kind of that division of the industry and where we’re kind of looking. If we feel like there’s a place that we haven’t been able to allocate, we’re always looking for teams. It really comes down to that. So, a good example of this is the data analytics company that we’ve invested in. When we started the fund, we knew there was a huge gap in terms of real time data that was flowing to everything from groups developing products, to retailers, to cultivators, to and, even investors. And so, we were looking for a data company to really think about how to do this from the point of sale and derive insightful and actionable data for different groups to use. For us, it was about finding the right team for that. And the best way for us to do that is boots on the ground, we’re always, always traveling. We’re traveling every week this month into next, just to go into these different markets to understand the market dynamics and understand who the key players are and who the teams are. Because, you know, I, one thing that worries me when people look at the industry is they’ll just hear from one company and they haven’t taken the time to realise how much competition exists out there that’s already serving that market. So, for example, point of sale would be a great example in this industry. We’ve already got four or five key companies that are trying to provide point of sale services to the industry. And I’ve heard of some investors coming in, they’ll just hear from one company and think that that’s the point of sale company. So, it’s really important and imperative to be out into the market doing the diligence and talking to different operators to understand their pain points and who’s who’s serving that well, and then of course assessing the competitive landscape. But we always start with team as an important aspect of it because in every investment that you place, there’s always challenges and especially in this industry. And so, it’s the team who’s going to help to navigate through that to really survive the investment. When we’re looking at public companies, it’s really important to dig deeply into the filings because it’s frothy, you know, and it’s an exciting time in this industry and Morgan spends a lot more on the public side than I do spend more time on that side, but we can’t stress enough how important it is to really dig into those filings and understand what’s going on in the core fundamentals of those businesses.
Morgan: You definitely, I mean, you know, as you look at the public side too, with most of the companies do not trade on a listed exchange, so it is important to understand, you know, what you’re buying into. It’s a very interesting market that is still is so retail-to-institutional dominated, which is very backwards to pretty much every other sector of the stock market because we’re not a sector yet, but some day we’ll be a sector, yes, we’ll be, I’m confident of that. But for now you just, so you just have to be mindful, there can be massive swings, you know, Last year alone, index we follow, the new Cannabis Ventures, the Global Cannabis Index. Global Cannabis stock index was down, what, 55% in a year. So, you really just have to understand where you are in the cycle. If this is a newer company or there a lot of unlocking of additional shares coming, is that going to pressure the stock? What’s the valuation you’re getting in at? You know, we do try to look for a large margin of safety whenever we’re investing in public equity and that we feel very confident about our entry points, you know, to protect ourselves. And that suited us well. You know, we’re not going to be the ones that are going to be chasing these things up to very, very high levels. We would rather wait and invest elsewhere, and that’s where the benefit of having kind of this hybrid approach where we’ve been able to be more valuation driven than liquidity driven, and that certainly does evolve over time. But, you know, that’s been our playbook to make sure that we’re getting those right entry points.
Meb: And Are you guys operating mainly just in the U.S and Canada, or are you looking abroad to some of the other opportunities in Europe and Australia as well?
Morgan: We see a lot of opportunity in the U.S. It’s just there’s major addressable market, a lot of tailwinds here, so much capacity to still come online. But we do look at opportunities everywhere. We were early investors in Canada. We thought that was a very interesting market, being federally legal from a medical perspective years ago. It’s very interesting when we were up there, felt like we were the only ones investing out there. But, you know, like that obviously changed dramatically and was very good for us. But, no, we do see this as a global evolution here and certainly trying to stay abreast of all of these emerging international opportunities, but also, you know, having the benefit of being in the largest economy right here in California, large Cannabis economy and also just the largest addressable market, the United States.
Meb: Talk to me to the extent you can, I mean, if you can’t, that’s okay too. But I would love to hear a little bit about some of the portfolio companies, either ones that you think would be particularly indicative of, you know, kind of your process and how you think about things or ones that you think have quite a bit of potential maybe that you’ve added recently. I’d love to hear about two or three or four names that you think might be a good framework for how you guys think about the space and put money to work.
Morgan: Sure. I’ll give public name to start. And then, you know, we can back fill some others. But we were earlish investors in GTI, Green Thumb Industries. We had the benefit of getting to know the team pretty early and seeing how they were executing. And at that time it was very hard for these operators raising capital. I mean, it’s just amazing how much the environment changes, but, you know, you can see them executing but the capital flow was just not there, but we wanted to get involved. And so we started investing with them and that’s been a great one for us. We still hold our position there and see a lot more opportunity in that position. So, because we do like the approach to the multi-state focusing on, you know, key states to go into and certainly think that the management team there is helping to drive those decisions.
Emily: Love that one. The company I was just talking about was Headset, which is the machine learning data analytics company. Very excited about that one because it’s already expanding into Canada and they were right there ready for when Canada launched their adult use market in October. I just think that it’s going to be the way that people, both companies in the industry and outside of the industry are going to inform their decisions around it. So, examples of that are definitely probably interested in that are companies like Diageo, Constellation, PepsiCo, Coke, any of those, or even like L’Oreal, any beauty products or any company that’s now contemplating putting Cannabis-active ingredients and to some of their product lines. So, that one’s really exciting for us. We just feel like there’s so much to be done there and, and so much to be learned. And that’s very exciting. And we do believe that can scale very quickly from a global perspective.
Meb: The interesting thing about that is you’ve seen this mass adoption, or at least I have and maybe I’m biased to kind of my demographic, but people that have never used Cannabis in their life, that a lot of the CBD side that it’s made its way into lotions and smoothies and almost anything else possible. But I have a lot of friends and contemporaries that are now experimenting with some of these ideas for whatever may be sleeping, pain management that never in a thousand years would have used traditional psychoactive THC based products like smoking or vaping or whatever it may be. So, you know, that’s probably in many ways, you know, the really early stages one would think. All right. Couple more ideas and then I’m going to start to fire in some random quick questions. Any others you think are particularly interesting or indicative of how you all think about the world?
Morgan: Sure. You know, another plant touching asset copper states, one of the large largest producers in Arizona. We were able to get involved with them and a really strong team come from a great background of growing commodities at scale in large greenhouse. And so, taking that team and that footprint and doing so in what we think is a very interesting market in Arizona that is heading towards a full legalisation as well. And so, you know, we liked about that is a similar approach that we’ve taken them to other places like up in Canada where we do look to when you do have commodity like pressures, you want to be low cost producer, and we were attracted to that story for that very reason that they know how to grow and scale and know about really focusing on that production per square foot, cost metrics and containment. As, you know, just giving ourselves sufficient mode or commoditisation pressures puts them in a very good place.
Meb: Let’s talk about a few, just kind of quick questions that may spawn into some other ideas as well. As people think about the traditional cannabis space. I mean, I know a lot of people in the early days, their first thought was just production. And as we’ve seen that start to evolve into a bit of a commodity, like any farming is, for someone that comes from a family of farmers and very marginally profitably grows wheat and sunflowers and everything else. You know, you’ve seen the industry evolve into so many of these different sub-sectors and sub-industries and specifics. Is there an area, this is a little bit harder question that that people you either think are not thinking about or underappreciated or do you think has a lot of legs in the future that might be a disruptive application of something in the Cannabis space that you think investors are not appreciating or thinking about yet. And this could be looking out six months, but it could also be looking out 5, 10 years. Is there any sort of adoption or development of the technology that you think is really interesting application that no one’s thinking about?
Emily: Hundred percent. We’re so glad you asked that question. For us, it’s 100% industrial hemp. Hemp that’s not, I mean, it’s the aspect of the plant that’s not being consumed for CBD. Although you can use…one of the things that’s wonderful about hemp as you can’t grow hemp or CBD and you can also derive fibers and wards from that same plant. So a farmer could have three or four yields today from one crop, a pen. So we can talk about more about it, but it really does have almost endless applications just [crosstalk 00:33:31].
Meb: Yeah. Go for it. Let’s hear it. I don’t know. We haven’t talked about the industrial applications of MPN on the podcast. So, run with it.
Emily: Yeah. A lot of people think it’s really boring and we think it’s really interesting. But I’ll talk about one of them and you can talk about the other. So, a couple of years ago went to this conference and we heard…I heard a PhD speaking about how he was testing what is called bast fibers. So those were being hemp, flax, jute I think there’s one more, but you can basically use the fibers from those plants and carbon nano technologies. So, you could look at replacing using graphite, which is hard to extract from the earth and costly and damages the environment to make cell phone batteries. You can use graphing derived from these bast fibers. Now, it’s really early days in terms of investigating and understanding this. But the indications show that a battery that’s using graphene from these plant fibers charges more quickly than graphite and holds the graphite derived graphene holds the charge for longer. So it could be a much more environmentally sound and far more reproducible. And also potentially bio-degradable battery source, which then of course my mind just goes to where we’re going with solar and where we’re going with massive scale batteries as a power source instead of using coal or sourcing carbon material from the earth. So, those are some big scale things and it’s extremely early days, but we wouldn’t be who we are if we weren’t thinking about things that have not yet been discovered around this plant. So that’s just one. Yeah.
Morgan: Another, you know, that we’ve been working on for several years is our industrial assets application to the textile industry. And, you know, when we talk about it at the, you know, the initial response usually is other itchy clothing that is, and then certainly there is plenty of, kind of legacy hemp clothing by…we’re talking about modern textile application where improper processing and all the way through to an actual marketable products, you’re at an equivalent or near equivalent to what [inaudible 00:35:48] can be, and you’re able to grow so much more production cost-wise than cotton. And your inputs are way lower. Your yields are much higher per acre. The harvesting of it is much more automatic, you know, you don’t need, it’s just everything about it as much more efficient and they actually blend well together. So, when we look at that application, we’re talking about addressing, you know, a multi-trillion dollar market.
And last time we like to…I’m pretty sure people still wear clothes every day and probably wear for a long time. So, you know, the application there is significant and we do have to think about more sustainable ways to address, you know, modern textiles for now and into the future. And you can think about, you know, smart textiles too, which is pretty interesting when you can start integrating like data into your clothing or just even being more knowledgeable about the sourcing of your clothing. People are, you know, wanting to know was it done in sustainable practices? Was it done with, you know, without harming the environment with, you know, chemicals or natural ingredients. There’s a lot we can do in that space and there’s…it seems like a concerted effort from pretty much every major textile company now to look at more sustainable fibers and enhance right there. I did a…I went and saw Yvon Chouinard talk a couple of years ago. He’s the founder of Patagonia and the audience had ask him what is the best fiber on the planet and he said without a doubt, it’s hemp. And we certainly believe him and agree with them and what we’re working on it’s very, very interesting. But it is also interesting from the standpoint that as somebody mentioned, people perceive industrial hemp is boring and we judge that by the lack of capital flow. It’s been a trickle when it’s comparative to looking at Cannabis, but lion’s share of the Bassline chairs going towards Cannabis and CBD where so much opportunity still exists and the industrial health aspects
Meb: And if I could ask earlier, but how do you guys accept, particularly on the private side, you know, a lot of VC firms say, “No, no, we’ll only invest in companies where someone refers it.” Some of them say, “We accept pitches of their decks on the website.” You know, there’s such a growing industry. I recently went to the big conference in Vegas, which for someone who goes to a lot of investment conferences, this was slightly different, including the institutional investor day where I think at the table to the left to me was drinking beers and the table to the right of me was vaping. So, it was a little different than a, that I’m used to. But we went to the convention. There must have been 20,000 people and you see just hundreds and hundreds and hundreds of companies, and it’s just kind of a wild west. What the process for you guys accepting or screening ideas? They would just say it seems like such a flood of companies. Is it friend recommendations? I mean, starting not recommendations but people that they have to have an intro? Do you have a website submission? What’s…how’s does it work?
Emily: We have a website submission because we still read those submissions. It’s still really important for us to see that because it’s part of how we keep track of who’s potentially coming up behind any company we’re already in? Who’s out there that we don’t know about? I think that being humble in our view of the industry is a really important strategy around being open minded to investment opportunities. However, it is rare that we’re responding to an investment that comes in as a cold inquiry through the website. It’s much, much easier if someone makes an introduction. And we always say that good founders introduced us to really good founders. So, it’s just really important as an entrepreneur, I think to spend time networking with other founders for so many reasons, but also for introductions too. And the investor network because it’s all about who you can connect with through that. So…
Morgan: We’re still in a store with fund one here. We have as much 38 companies, we sit on numerous boards. So we see just so much activity across the industry. We can see who, you know, our regular partners of portfolio companies and if they’re doing very well, you know, we get…we just have a lot of insight and as I mentioned, you know, being very active out in the market and networking, constantly reviewing everything that comes across the chance. So, I mean, there’s…we looked at thousands of companies over the years. It’s just an incredible amount of business models, approaches and then also just a lot of very, very similar companies. But it’s all, it’s all very, very helpful to just…as I mentioned at the very beginning of the podcast is that, you know, research in this industry from an investment perspective is largely been non existent because it just hasn’t been enough history yet. I mean, there’s, exits are starting to happen, MNA is starting to happen, but, you know, we’re writing the investment book while we’re doing this. I know it’s becoming more visible now, but, you know, several years ago it wasn’t. So, you know, just having wide net to inform ourselves is very important.
Emily: You talked about that pitch competition back in Denver, was that 2005? I think it was. It feels like a century, oh, 2015. Yeah, it feels like a century ago. But, you know, those are other great ways for people to meet us and get their word across as to be at those events exhibiting. We walk the floors where we kind of, for example, that huge show in Las Vegas. So it’s important to be out there too. And that’s another way we found things. It’s just through, like one of our investments we found because we go to…we didn’t go to a job and career fairs in the industry just to see because who’s hiring kind of tells you something about how that company is doing, and when we met a great company through that and built…we’ve done this multiple times where we build relationships with founders before they even need to raise money so we can get to know them, get to know how they work in their business and then when it’s time for them to raise capital it becomes more of a discussion about what they’re looking to raise, what they’re looking to use it for? And we can have an open dialogue about what structure might be the most optimal for their business. And we’ve worked for our return profile.
Meb: Old school boots on the ground research, you know, Peter Lynch would love it. Talk to me a little bit about it and expand upon your comment about resources. You know, early industries like this, not a whole lot of eye banking support. Anything that come to top of the mind as far as websites, books, companies, podcasts, conferences, where if you’re an aspiring equity analysts in this space or someone who is really interested in following the Cannabis space, what are some of the top resources that you think might be useful?
Morgan: That’s it. Absolutely. [crosstalk 00:42:30]. Because you get, you know, you get data points, you can actually see like profit margins, products, you know, you get a lot of insights into how these states and companies in them are growing. So, and that’s why you’re starting to see like Collin recently did a partnership with that to start powering their data and actually selling the data too. So, you know, they see a lot of that value. And we expect that to only increase as more and more modeling is built out. I mean, kind of, you know, can a court’s been pretty prolific bankers in the space, but there’s so much more data to help inform those models over time, especially as like, you know, now Barclays put out a research piece, so they’re starting more actively collaborate and…
Emily: What about Green Flower?
Morgan: Green Flower is great from education standpoint.
Meb: The website or what is that?
Emily: Green Flower media. Green Flower does a lot of online lecture series. So, it’s green-flower.com. So they have experts speaking on the topic of the science of the plant, of investing in the plant of launching companies and the plant genetics ever…I mean, everything you could ever want to know when they do professional training modules to four different companies. So, I would say that’s a really good resource for sure.
Morgan: I read a marijuana moment every day. It’s a morning email. Tom does a fantastic job of, you know, hitting on was it policy, science business, you know, it’s very concise. It’s so you get a very good real time walk of your activity across the space and it comes in every day. So, he’s a great one and really appreciate his way of how he built this business. You know, very much just dedicated to moving the industry forward. So, that’s a great one. And they do this daily, I get there, you know, I think they do pretty good with their updates about industry happenings. You know, one last one that I mentioned before, new Cannabis Ventures, Alan Braunstein [SP], you know, he’s definitely works very hard to demystify the public market landscape. It’s a big task and he’s certainly working hard, but he does provide a lot of value for those trying to get caught up on that aspect of the industry.
Emily: And he’s hung in there through for five years. So, yeah.
Meb: As we wind down guys, we always ask people a closing question and this doesn’t have to be Cannabis related. It’s really kind of what the first thing that comes to mind, and since you guys have been investing in stocks since I think you said 12 years old, this could be your answer, but as you look back at your career, what’s been your most memorable investment? It can be good. It could be bad, it could be Poseidon related, it could be anything related. You guys each get one answer so you can pick who goes first.
Morgan: Well, I was going to say one for my child or like a young age just because it was a pretty memorable, like making money, and how you can actually make money investing. So, Emily and I are family from a of sailors. Sailing was always a part of our childhood and we still sail today. And back then one of the electronics providers to the marine industry was Raytheon. A Ray Maureen was a division of theirs for making marine electronics. They also were big governments, electronics provider for defense. And I had started a Roth Ira when I was 18 years old and started buying stock in Raytheon. And obviously that did incredibly well. As, you know, the unfortunate events happened in the early two thousands, but, you know, just understanding if you do invest in kind of like what you’re saying about Peter Lynch is like something I knew. like this was something I could understand. It was something that we saw every day in our lives. And being able to get ownership of a company and then see how well it can generate the returns. That was just a, you know, very memorable moment in my investment career.
Emily: So we invested in this company that’s called Pax two years ago. Pretty much in December, that company had a new product line that was emerging called Joel, which I’m sure you’ve read about in the newspaper recently. Pax was focused more on the Cannabis side. Joel was focused on the E-cigarette kind of space, that category. When we invested they were one company. Joel was the newer product line was launching. And I did have some good momentum and subsequently has gone on to take over 70% of the market share in that category. But those two companies split around this time last year and recently you probably saw that Altrea invested and took our 35% stake and Joel, which we do have ownership in. And so, that one’s been…that one’s kind of a landmark for us because of the multiples on the return that, but also just in terms of staying kind of in touch with the team and understanding what they were going through as they navigate some of these recent challenges and the press.
Meb: Joel was the market cap ended up getting into what was like 20 or 30 billion or something. Just amazing.
Emily: Yeah. Really.
Meb: Yeah. That’s incredible. That’s a deck of corn, I think. Awesome. Funny to hear on both sides. You know, it’s a…I come from a family of aerospace people. So hearing about Raytheon, is close to home and you guys for picked a good space to continue sailing if you do this SF Bay area is a pretty awesome. Team, this has been a blast. If people want to find out more information, investing, sending you their crazy ideas, etc, where’s the best place to learn more about you all and your fund and everything else?
Emily: poseidon.partners is our website. You can follow us on Twitter @poseidonasset. And we’re on Facebook as well, @posedonasset.
Morgan: And LinkedIn.
Emily: And LinkedIn. The redheaded step, our social [inaudible 00:48:34]. I can’t stand it. It’s just [crosstalk 00:48:39].
Meb: You guys, thanks so much for taking the time to join us. Today is a lot of fun.
Emily and Morgan: Thank you.
Morgan: Let’s do it again.
Meb: Listeners, we’re going to add all these links to the show notes at mebfaber.com/podcast from all the resources as well as homepage, LinkedIn, all that other good stuff. You can find us in the archives as well. Over 130 episodes. Subscribe the show on iTunes, Breaker, Overcast, all the other places, podcasts are found. Thanks for listening, friends, and good investing.