Guest: G. Ryan Ansin is an entrepreneur, early-stage investor, and philanthropist focused on using the holistic combination to generate returns and positive impact for those in the targeted communities wherein he works.
Date Recorded: 1/30/19 | Run-Time: 55:07
Summary: Ryan begins by discussing how his introduction into the cannabis industry started with thoughtful conversations at home, focused on the social justice perspective. He started investing in the industry over 4 years ago, then had an opportunity to purchase a factory in Fitchburg, Massachusetts. What started off as a passive real estate investment he thought would be a fit for vertical farming, and a suggestion from vertical farming experts to consider cultivating cannabis, led him to start his operation, Revolutionary.
Meb asks Ryan to speak in more depth about the business and the cannabis ecosystem. Ryan discusses the laws that shaped the cannabis industry in Massachusetts that caused a lot of fallout until recently. His operation is vertically integrated, and they go after products they can excel in, while licensing and distributing other products they don’t feel they can execute as well. Next, he discusses his vision for the company, and his goal to expand within Massachusetts, do it responsibly and sustainably, before growing elsewhere.
Ryan then gets into investing in cannabis companies, and although he receives hundreds of decks per month, he focuses on areas that fit well and within his areas of competence. The basis for his thinking behind the investments he makes is how it initially can help Revolutionary. He brings up the important point that we have not seen a full venture cycle in cannabis yet, what the exits will be, how, and when, so it is important to think about investments that can optimize operations.
Meb shifts into valuations in the space. Ryan mentions that he feels that valuations are high, and that valuation is a huge consideration for him. He notes that while many companies appear to be valued under assumptions of being able to sell what they’re funded to produce, and expand internationally in some cases, he believes competition may create unforeseen barriers in certain markets that may not be accounted for in valuations.
The conversation then transitions into the huge institutional interest that Ryan sees in the industry, as he has seen family offices gradually shift in their comfort level with the space. As the pair wind down, Meb asks Ryan to discuss his involvement in the Family Office Association. Ryan provides useful insight about best practices in managing multigenerational wealth.
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Links from the Episode:
- 0:50 – Welcome and introduction
- 1:30 – How Ryan got his start in the cannabis space
- 6:27 – How Revolutionary fits into the Cannabis ecosystem
- 11:31 – Vision for the company
- 18:08 – Experience investing in cannabis companies and what Ryan looks for
- 24:14 – The challenges of valuing cannabis companies
- 28:30 – Disclosures and going public
- 30:04 – How other institutions, like family offices, are thinking about the space
- 38:04 – Broad investing thoughts
- 39:47 – Involvement with the Family Office Association and lessons learned there
- 49:42 – The Best Way To Add Yield To Your Portfolio (Faber)
- 50:10 – Most memorable investment
- 54:08 – Connect with Ryan – LinkedIn
- Revolutionary Clinics
- Revolutionary Clinics Wholesale
- Bloom Automation
- Trendy Butler
- Green With Greed: A 2018 Year-End Cautionary Tale for the Cannabis Industry (Ansin)
- Compounding Risk: The Seven Businesses of Vertical Integration in Cannabis (Ansin)
Transcript of Episode 142:
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 www.cambriainvestments.com.
Meb: Welcome, podcast listeners. We have an excellent show for you today. It is Wednesday, January the 30th, 2019. Our guest is an entrepreneur, early-stage investor, philanthropist. He is the president of the Family Office Association, where he’s also the co-founder of Revolutionary Clinics up to all sorts of stuff. Currently, he spends most of his time leveraging abandoned mill buildings in Massachusetts, to aid in the fast expansion of the medicinal marijuana industry. Very cool. We’re gonna talk a lot about this. This is one of our…might be final in this series of cannabis investments. I don’t know. If you guys got any more good guests, let us know. But I would love to welcome to the show, Ryan Ansin.
Ryan: Hello. Thank you very much for having me.
Meb: So, Ryan, I got to meet you in Las Vegas, and I thought, one of the more thoughtful speakers, so I thought it’d be a lot of fun to connect and chat a little bit because your background is pretty wide-ranging, similar to mine. But I would love to hear a little bit about how you got your start in this world of cannabis and investing and operating and everything in between.
Ryan: Sure. Thank you. It’s been an odd serpentine path into the industry, around the industry, as most of my life has been as an entrepreneur. And so, this one has been quite interesting. I grew up in a family where the discussion about the legalization of cannabis was always part of our dinner-table conversation because of the social justice issues around the industry, and so it was always present in my life, that this should be legalized, that it didn’t make sense for it not to be. It doesn’t make sense, for example, for someone to be disallowed to get a student loan or be able to buy a car or get a job because of having small amounts of marijuana. So, we always spoke about it quite openly.
And I started investing in the industry about four and a half years ago, maybe bordering in on five, just as part of a generalist private equity and venture capital portfolio looking at some of the picks and the shovels, the tech plays that were starting to emerge back then. And soon after that, as I realized the lack of professionalism in the industry and just huge varieties of opportunities and ways that you could approach the space, I was presented with an opportunity to purchase a factory in the small mill town called Fitchburg, Massachusetts, where I went to elementary school. And I always pledged to come back to Fitchburg and help create jobs, hopefully, with a new industry, because I watched the demise of that mill town, as I grew up.
My family was involved in the shoe industry for a few generations, and when we moved manufacturing over to Asia, I was in a position where I had a first-hand view of what happens in post-industrialization times. So, I had always wanted to come back to Fitchburg. I love the community there. And it was really meaningful to me to take a look at this asset, this piece of a real estate, a 250,000 square foot facility. And I originally thought that it would be perfect for vertical farming. It was a time in New England where the farm-to-table movement was gaining traction, and it seemed to make a lot of sense.
So, I flew out real experts in that industry, and they all looked at the building and gave it in between a C minus and a B minus because of relatively low ceilings compared to what they would have liked, poor loading dock space, the inability to access the highway within a short number of minutes, but they all said, “You know, medicinal marijuana in Massachusetts is becoming a real thing.” This is the beginning of 2015. “If you don’t have any moral qualms with it, you might want to look into that.” And so, I expressed to them that I’d likely get more use out of basil, but I’m happy to utilize this asset for the medicinal cannabis industry and hopefully evolve into the adult use as well, back then.
So, it started off as a passive real estate investment. I ended up getting the great fortune of helping the city of Fitchburg refine their regulations a little bit. I’m working with a really great group of people, just giving my opinion on what would be realistic and useful for the community, so that Fitchburg could become the most attractive community in Massachusetts to cultivate in, not necessarily to dispense in. And so, I tip my cap to all of the thought leaders in Fitchburg who have created this opportunity for town’s revitalization. And it’s been a real pleasure to go from a passive real estate investor to an active one, to helping to start Revolutionary Clinics in that space with a great group of co-founders, and then to professionalize from there.
So, we’re now just over 100 people in the organization. We’ll continue to hire, and we’re projected to be over 250 by the end of 2019 along with a kitchen, a full lab, three dispensary licenses in the Metro Boston area, which has been really exciting, and a really robust wholesale line of business as well. Inclusive, purposefully, as part of our model, of the economic empowerment license holders, so that we can be as helpful as possible to early entrepreneurs who don’t have millions and millions of dollars to create a vertically-integrated license, but allow participation in the industry nonetheless. So, from real estate to operations, and I continue to invest across the industry, so it’s been quite a nice combination.
Meb: So, unpack for me a little bit about…it’s an interesting concept. So, the way I understand that it’s almost like a vertically integrated, are you guys doing everything from growing the flower to extraction and distribution? Tell us a little bit more about Revolutionary and where y’all fit in the ecosystem.
Ryan: Yeah. Happy to. So, in Massachusetts, there were two unique elements of the industry, and we’ll speak more broadly as this podcast continues on the state-by-state nature of this really interesting space. But Massachusetts had two unique elements. One was that you need to start out as a not-for-profit, which created all kinds of hoops that one needed to jump through and work towards to stay compliant and to align with the interests of the voters when medicinal marijuana first passed. And then, you also needed to be vertically integrated. And some states force you to be vertically integrated. Some states disallow you to be vertically integrated. And every aspect will have great ramifications, robust, serious ramifications on the margins and on the nature of your business and how you’re going to generate profits. So, Massachusetts, being a vertically integrated state, initially, we were forced to do it.
And that’s one of the many reasons why Massachusetts’ industry has moved so slowly is, it’s really difficult to attract capital in this space, even when you’re part of a group in Massachusetts, part of some of the best organizations in the state, still hard to attract capital. And so, for most people, to raise $10 to $50 million, really, in that range, to create a vertically integrated enterprise was too big of an amount. So, most folks, and I say most, about 85% of people who started licenses in Massachusetts didn’t make it to the finish line. Some of them are still working hard to open a dispensary or be a part of one aspect of the industry. Now, with adult use, you no longer need to be vertically integrated. We are. And we’re thrilled to be. We have the space in this 250,000 square foot facility. We have great partners, we have great investors who had real estate coming into this operation, and so we had greater access to high-quality real estate in the Metro Boston area than others.
And so, we do the whole thing, Meb. We deal with our own genetics, which is a huge task. We then have about 80,000 square feet, at this point, of cultivation space. So, canopy, they call it. We have a full kitchen. We have a wonderful kitchen staff, a wonderful lab staff. We’re working with both C02 and ethanol in our facility. We have brought in an incredible CMO and a branding and marketing team under him, to create a series of sub-brands which has been really important, especially for our wholesale side, because Massachusetts is so juvenile in its nature that the far majority of groups who are wholesaling are wholesaling store-brand product. And if someone is starting a dispensary, let’s say, in Medford, just to throw out an example, and they’re wholesaling from somebody in a town just next door, they don’t necessarily want the name of their competing dispensary on the product. Yet, for your patients and for your clientele on both the med and the rec or adult use side, it’s important to have a real variety. And no one can be the best at everything. You can’t possibly be. And it’s a very complex industry, so you need to have the right partners. You need to have the right IP.
The way we’ve gone about it within Revolutionary is the products, the skews, the verticals that we can approach with intelligence and excel in over the course of six months, let’s say, we’ll go after those. We’ll do those ourselves. The products that we can’t… for example, there’s a breath spray that is of very high quality with great flavour profiles, with a really sophisticated nanoemulsion and homogenization technique. We didn’t have time to figure that out. It also has fantastic branding and great marketing. And so, we license in some products from across the country where we’re their exclusive license holder, and we get to distribute for them. And then, there’s a profit share on the back-end.
So, we’ve had the privilege and the capability of being in each part of the vertical, which creates all kinds of complexities. And I’ve often said, when I have the privilege of being on stage in front of other investors every month or so, I often say that this is a complex business because you’re not starting just one. If you’re doing it right, and you’re maximizing your margins and ultimately your revenue, you’re really starting seven businesses or so, at once. And each one you have to do really well in, and you have to care for the people, care for the process. It’s an extraordinarily in-depth exercise.
Meb: What’s the eventual vision for the company? Is it something you think there’s growth or expansion in the current state? Is this something that you would look to expand elsewhere? Or are there also other niches that you guys just might focus on in the future? You’re growing pretty quick. So, what’s the eventual one, three, five-year plan?
Ryan: It’s a constant evolution. What I can tell you is, unlike some of our competition who really see this industry…and rightly. There are many right answers to this. But many people see this industry as a land grab, right now. That you need to be in as many states as possible, as quickly as possible, as frugally as possible. And that footprint will put you in a position for excellence or acquisition because of distribution and future revenue. We see it a little differently. Not that that’s not a right answer, but for us, we believe that you can do really well by going deep into one state before you even consider spreading seeds all over the country. It’s a very complex business to run, as I said, and it’s a very difficult business to back into revenue.
I often tell people, “If you grow it, they won’t come. If you open the doors, they won’t necessarily come.” And yet, all of the business plans that I see as an investor assume that every ounce of grown cannabis is going to be sold the day that it’s dried and cured. It’s simply not the case. Likewise, people think, “All right. X state is going to be a $2 billion industry, and we estimate that there will be 200 dispensaries. And thus, we’re going to make Y dollars.” And it just doesn’t work that way.
I share the anecdote often that I’m invested in a dispensary network out on the West Coast, and they’re branded and well-known and, frankly, high-priced. And this particular group has two dispensaries with a 1.6-mile radius. So, 1.6 miles away from each other, there are two dispensaries, and dead-centre in the middle, there’s a third dispensary, unbranded. It’s actually a legacy dispensary. It had been there for years and years prior. When I went, right around lunch time, to assess how these dispensaries that I was invested in were doing, the group that was branded, and what I think of as well-run, at point A, they had 100 people shopping right around 12:30. At point B, 1.6 miles away, they had 60 people shopping. So, now we’re at 160 in this series of dispensaries. And dead-centre in the middle, with nearly the exact same product, you had 3 people shopping, all within 30 or 40 minutes of me seeing these things. So, 160 versus 3, same product, the one in the middle actually had about 15% lower prices. And yet, you know, there was a tiny, tiny fraction in the one in the middle.
So, I share that anecdote with people to express, you know, you can have high traffic counts, you can have parking, you can have a nice staff. You’re, of course, going to have high-quality product because, quote, “Everyone has the best.” And yet, they still won’t necessarily come, they being the customers. So, I get really nervous when I look at these business plans that too quickly spread themselves too thin, both with time and capital.
So, let’s go back to your question. What do we plan to do? We first plan to really excel in Massachusetts. And what I mean by that is being present, being available for all of the customers in various categories. We’re med-only right now because Somerville and Cambridge, where our first dispensaries are, haven’t flipped or haven’t transitioned to adult use, yet. We anticipate they will in Q2 and are helping to make sure that there are responsible regulations to do so, as well as inclusive regulations, so really important to us there.
Meanwhile, we are creating a significant wholesale business. We want to make sure that the products that we’ve invested serious time, thought, and capital into are available for folks across the state, and so we’re working with many dispensary partners, both economic empowerment and social inclusion, as well as everyone else who’s trying to get into the space. As I said, there was a huge pent-up demand of people that were trying to raise money to do the whole thing, to be vertically integrated. They didn’t do that over the course of five years, and so they’re settling for a few dispensaries, which…we’re thrilled. It’s hard to make money in the industry, and so if people feel like they can be really good at retail, we’d love to support them. So, we anticipate being a big provider of wholesale product here, in Massachusetts. So, that will bring us through profitability, and we’ll be able to continue to invest in the things that we care about.
And as we do that, there are a couple of ways that we can look across the country, in order to participate in other markets. Some are technology driven. Some is real estate and licensing driven. I don’t necessarily believe in spending the huge amounts of money that some of our competitors are spending to purchase a lot of these licenses because I don’t believe that there’s an economic rationale for some of the states that are referred to as limited-license states, for them to stay that way. I just don’t see the economic rationale as to why a government wouldn’t increase the licenses, should it be economically rational. I do see that happening.
So, in a state like Florida, which does have an expansive nature of their licensure, I think that it’s an exciting opportunity, but I wouldn’t spend $30 million or $50 million or…I think there was one that was sold for $87 million. I wouldn’t spend that kind of money on a license. So, we look at it slightly differently. We’re a frugal bunch of people, even though we’re many millions of dollars into this deal. We look at this industry as, how can we responsibly allocate resources so that we can continue to grow our business and do so responsibly with an eye on generating profit. We all got involved in this industry for, partially, so that we can continue to grow and continue to give money away and continue to care for the people that we want to care for?
Meb: It sounds like this is a combination of self-funded but also picked up some investors. You know, as someone who’s been experienced in this space, you’ve probably seen quite a bit of, you know, an evolution over the past five years. Maybe talk a little bit about your experience investing in cannabis companies. Mainly, what’s your framework? What do you look for? What are some of the biggest landmines to avoid…over the past five years?
Ryan: First, I’ll further clarify. We have many capital partners. My founding partners and I put in what we think of as a significant amount of money. And since then, we’ve built a cap table of individuals who have been really excited to participate in a company that’s responsibly run, that’s not throwing caution to the wind. And we’ve built that cap table with an eye on who or what roles are really necessary at each stage of the company. So, we worked with a great horticultural supplier at the beginning, and we continue to, but they were heavily involved in the vision of building our factory. And they ended up participating financially as well. We’ve worked with some of the greatest marketing minds in the world who have participated in us, financially, or in our deals. We’ve worked with HVAC people. We’ve worked with everyone you could imagine that it takes to build a vertically integrated cannabis company. We’ve invited them to participate, mostly for their minds.
We’re in a really unique position. As you opened the discussion, I’m president of a group of 300 family offices. My business partner, my founding partner, is also in a position where he’s surrounded by bright people who want to place capital responsibly. And so, we’ve had the outrageous privilege, extraordinary privilege, to choose the people with whom we work, with whom we participate in this industry together, doing so in a thoughtful way. So, it’s far from exclusively self-funded, far, far, far from it. And we wouldn’t be here, we wouldn’t be successful without having built a smart cap table. So, that informs a lot of how I go about investing.
And I’ll share with you both how I look at it, as well as how I’ve seen the industry evolve, as it has evolved incredibly in the last four years, of course. But the way I look at it is, there are, it seems like, 1,000 deals a week passed around. I feel like I’m a nobody, and I receive hundreds of decks a month. And the way I think about it is, even if I think that this deal will be a success…partially because of a rising tide raising many ships, partially because of the nature of the details of the deal…it’s not necessarily for me. I forget who said this, it was definitely someone much smarter than I, but they expressed that just because something is in a batter’s strike zone, to use a baseball reference, it doesn’t necessarily mean that it’s the batter’s pick. Right? The strike zone between the chin and the knees, and then the two shoulders, that’s how the umpire’s going to see it, but the batter may only care about one quadrant or one-tenth, the upper corner, whatever it is, to hit the ball out of the park. And I’m not interested in losing money, and so that’s how I look at this. If I say no to a deal, it’s not that the deal is not going to be successful, by any stretch of the imagination, it’s just that I can’t maximize my ability to be helpful to the company, given whatever skills or capabilities that I have, to really be a great fit for that.
So, that’s how I look at this. I’ve built a portfolio of assets, great operators, great people, amazing entrepreneurs, and the basis of how I generally invest in the industry is I consider how it will initially help Revolutionary. We’ve not seen a full venture cycle, yet, in cannabis. And so, it’s hard to imagine, or it’s hard to anticipate exactly what the exits are going to be, how, or when. And so, I don’t put a lot of stock, I don’t put a lot of faith into the theoretical exits that folks are hoping for. So, in order to protect myself, most of the things that I invest in have an immediate or really short-term return for myself and for the investors within revolutionary because it optimizes our operations or informs how we’re going to optimize our operations.
An example of that is I’ve been, hopefully, helpful…you can talk to the CEO and confirm, but I’ve worked really hard to be helpful to a group that has automated trimmers for post-harvest cannabis. And no one would, really, have thought of this, if you didn’t know the industry well. But trimming, hand-trimming, is a huge pain point in the industry. And so, when I looked at that, and I considered the pain point and the nature of trimmers being, hopefully, well-paid because they’re critical, and they are in our company, but generally lower-paid than other folks in your company. And they look left, and they look right, and they see what all other people are doing in the company, and they think that that’s really interesting. So, you lose trimmers often. You have to pay a lot of money for background checks on every one of your employees. And so, labour like trimmers can get very expensive, if there’s a lot of turnover, if there’s a lot of attrition.
And so, the company is called Bloom Automation, and we’ve been thrilled to work with them, to help them along the way because I feel like I’m gonna make my money back by being one of the first companies to have one of these robotic trimmers. Now, if years later, I see venture returns because the had a fantastic exit, which I do think will happen with this particular company, all the better. But, in the meantime, we’re going to save a huge amount of money by optimizing our post-cultivation processes. So, that’s how I look at the structure of my own cannabis portfolio.
Meb: You mentioned this, briefly, earlier, but how much of a challenge is valuation, these days? As we, kind of, look around the space, there’s certainly a lot of interest in money flooding into the various stages of both private and public companies. Is that a deal killer for a lot of the deals that come across your desk, or is it something that, depending on the opportunity, isn’t necessarily a huge consideration?
Ryan: It’s a huge consideration. It is for me because, as I said, I don’t believe that it’s easy to back into revenue in this industry. There are just 1,000 things that can go wrong. I often point out that, if 95% of start-ups fail, in general, and then you add in multi-state risk, you add in regulatory risk…so, I guess multi-state complexity, regulatory risk, the nature of the lack of professionalization in general, in this industry, although it is evolving relatively quickly…I don’t even believe that it’s a 5% success rate. So, the risk-adjusted returns, when you do the actual calculation, don’t make sense for these astronomical valuations.
Now, there’s certainly a bifurcation between public sector and private sector valuations. Why and how they get there, and specifically, why I’m nervous about each of those aspects. On the public side, I think most of these companies are valued so highly because there’s a theory that, after one harvest, all of the product that they’ve been funded to produce, right…people value companies at two to three year out EBITDA…there’s a theory that, once you grow it all, that it will all sell. And in many cases, a lot of these public companies are coming from Canada, and so they’re considering selling out-of-country. So, Argentina or Germany or Australia, any of the countries that have legalized and are open to imports.
I look at that scenario, and I think, “Boy, Germany’s full of brilliant engineers. Why wouldn’t they create their own industry? Argentina and Chile have incredible sunshine. Why wouldn’t they grow their own product? Why are they going to continue to import?” And thus, the metric of valuing these cultivation facilities, these cultivation companies in Canada off of forward-looking EBITDA generated from or calculated by the amount of funded capacity they have, it seems crazy to me because I don’t think they’re going to be able to sell it. So, I put a huge discount on that.
In the private market, it’s somewhat similar that each state comes online, they look at the other states, and they think, “Well, if they could do it, then certainly we can.” But they’re not considering any of the operational complexities. They’re not considering incredible dilution that generally comes as people progress in these companies. So, I effectively am waiting for a lot of these assets to go on sale. When the general public markets flatten, so having nothing to do, necessarily, with the cannabis industry, but I think we’re all waiting for a more general macro-correction, liquidity will then dry up. A lot of these companies that have raised money at astronomical valuations won’t hit the revenues that they were projecting, that they convinced people of, and so there will be a sell-off at the same time that they need capital to upgrade their facilities, for example. So, I think that there’s going to be, both on the public and private market side, I think there’s going to be an incredible fire sale come 6 to 12 months out from now.
Meb: Interesting. Yeah, no, it was funny. When attending that conference in Vegas, I’m a quant, but I like trying to be informed and have a pulse of what’s going on. I remember, there was this speaker who was talking about the public equities, cannabis equities, and he’s like, “You know, you just can’t use valuation to evaluate these companies.” And my jaw just, kind of, dropped and looked around because, I said, this has echoes of the late ’90s, to me. The feeling where people have said you couldn’t value internet stocks based on traditional metrics, you had to use some newer era ones.
Ryan: Yeah. Similarly…I think I shared this on stage in Vegas when you were in the audience, but the disclosures that one needs to go through to public here, in the States, are astronomical, thousands of pages. And the disclosures for an RTO, reverse takeover, in Canada are very, very limited, comparatively. And I have a real problem with that. Within our company, we work very, very hard to generate a sense of transparency. This is a new industry. People want to see what’s going on. People need to understand what’s going on. And so, we work hard. We have monthly email releases. We have quarterly very-in-depth meetings, and people say, “I’ve never been part of a company that has been this transparent.” We say, “Well, we’re purposely that way.”
On the other side of the coin, you have these 15, 20 page RTO disclosures that I think, are often just short of fraudulent. And to not be able to hold people accountable for what they’ve said is a real complexity in this industry. I simply don’t believe in it, in treating investors that way. And I especially become nervous about what happens to the retail investor that believes all of what they’re hearing, and they overexpose themselves in this particular industry because of claims that are being made. What happens on the back-end of that? I just simply don’t want to be part of that aspect of this industry.
Meb: You come at it from a slightly different perspective. You’ve been part of the institutional world. I know you’re president of the Family Office Association. Maybe talk a little bit about how you see other institutions thinking about this space. In particular, family offices, is it an area where people are starting to wade into or are cautious or, in general, a lot of interest? What’s the general sentiment?
Ryan: There’s a huge amount of interest. A huge amount of interest. I think that the interest is actually outpacing quality deal flow. There’s an enormous amount of deal flow that one could invest in, but I think the amount of capital out there that is hungry for responsible operators actual outweighs the opportunity set. So, short answer is, there’s a huge amount of interest.
Of course, interest. I always say, in this industry, interest is very cheap. You could spend your entire lifetime, once you’ve garnered an education in this space, re-educating other people. You could spend 12 hours a day doing that. I try really hard to make myself available to Family Offices, to give them a few lessons, a few questions to ask folks, that will help separate the weak from the strong and preserve capital in the future because it’s very dangerous, and most people don’t do nearly enough diligence.
One question that I ask people, and if our company’s head grower ever hears this podcast, she’ll chuckle, but I ask people, when I diligence vertically-integrated operations, I ask, “What is your process going to be when you find a hermaphroditic plant? How are you going to take that plant out? What are you going to do to the plants around it?” And there are many answers to that question, but 9 times out of 10, I receive the answer, “Well, our grower is going to figure that out.” I said, “Well, have you hired your grower?” And they say, “No, no, no. We don’t want to spend the money on our grower too early because we’re frugal folks.” And I say, well, it’s good to be frugal, but how am I going to trust a company that doesn’t know what they’re going to do with such a massive operational issue? And if they don’t see that, then we’re not going to see eye-to-eye. So, I have a list of questions like that that I share with Family Offices, even if I can only give them five minutes instead of the hours and hours that they’d like to have. I give this list to separate out folks.
But there is an incredible appetite, and a nearly insatiable appetite at this point, for high-quality deals from the Family Office community. And that has evolved. In the time that I’ve been looking at this space, we’ve gone from Family Offices, they could refuse to get out of bed for anything less than a $10 million check in any other industry, but they still start out in the $100,000 range within the cannabis space, which is really interesting. It’s such a small amount of money compared to how they typically operate. And yet, they still start at that basis.
And so, 2014 to 2016, what we often saw was, I would hear people say, “We’re in the staying-wealthy business, not the getting-wealthy business. I have no interest in that. I don’t want to be handcuffed on Thanksgiving night.” Whatever people would say. There’s just no interest. And then I started watching, Of the 300 or so family offices at FOA, I started watching about 1% per quarter go from, “No way. I have no interest,” to “All right. Maybe something not plant-touching.” It’s an expression in the community that people felt much safer in a data play, a technology play, possibly leveraging their real estate to put a dispensary in or something of that nature, but they wouldn’t want to be in an industry, necessarily, at the beginning of this legalization period that we’ve been a part of. They wouldn’t want to be in a company that was plant-touching, that was cultivating, that was creating product. So, they would do anything that they could to get around that. And, so they’d put in that $100,000 check.
And a quarter later, three to four months later, they wouldn’t have walked away in handcuffs. They would see that the operators, hopefully, were responsible and working toward the goals that were in the presentations. And their friends or family members would say, “You need to get involved in this vertically-integrated license or this multi-state license.” And they’d start to look at it because of their experience going well, the quarter prior. And the industry has really picked up steam. So, going from that in 2014, 2015, where the big checks were $250,000… A friend of mine was very involved in one of the first big funds for the industry, which capped out at a $92 million fund, and I forget the exact numbers, but…hundreds and hundreds of phone calls. I think he had, maybe a 2% hit ratio to amass the $92 million, and the average check size was $150k. That’s an enormous amount of work.
Now, fast-forward to October 2018 up in Canada, when the RTO wave was at its absolute peak, I had friends that were doing reverse takeovers to go public, that were being approached with seven and eight-figure checks in the hallway from people that they didn’t even know. It was a moment in history that I, as a young guy, have never experienced before. Certainly, you hear stories like this, in the dot-com boom, in technology, but I’ve never seen anything like this, and it’s a particularly unique scenario because, in those other major bubbles, the bubble was often lead by institutional capital. And in this instance, other than some institutions in Canada and now, some funds that are becoming much larger, relatively speaking, $150 million, $250 million being the top, you don’t have true institutional capital coming in. So, it’s still family-driven. Perhaps it’s done through a fund, but it’s an extraordinary time.
Now, the public markets did soften a bit, over the holidays. They’ve started to pick back up, one by one. It’s not as much the tide raising all the ships. They’re raising, hopefully, smarter ships, one by one. But I do have a lot of friends and colleagues who were poised to go public or to do an RTO in Canada Q1 of this year, so right as we’re talking, and they’ve taken their foot off the pedal. And that’s been really interesting to watch because six months ago, four months ago, three months ago, me and my board, we were considered crazy that we weren’t jumping on this Canadian public-market bandwagon. We see it as a method, we understand the method of raising capital through this and having a secondary currency of your public shares to offer to roll-up companies, but we feel that our strategy, frankly, is quite possibly a greater avenue to profitability than, as I said before, hoping that you’re going to back into revenue in one of the most complex industries out there.
Meb: Yeah, no, it’s interesting. It’s been fun to watch. I’m mostly on the sidelines. The U.S. public market is quite a bit behind, as far as…you mentioned institutions and funds. A lot of the custodians are unwilling to hold a lot of the public companies because of various legal…maybe not even legal, but more just political risk of being involved in the space. But that’ll change.
Ryan: It’s changing quickly.
Meb: Yeah, I hope so. We’ve had a fund filed for about three years. So…it’s not going anywhere. Talk to me a little bit about how you think about investing, more broadly. Are you still outside of the Canada space? Is this something that you still are involved in, either public or private markets in general, or is most of your attention these days focused, really, on cannabis, and the rest of the stuff tends to be on autopilot?
Ryan: Nearly all of my focus is on this industry, right now, at least on the for-profit side. I still stay quite involved in the not-for-profit activities that I’ve participated in for years. But by being so unilaterally focused on one industry, which is the first time in my life that I’ve had that opportunity, I have a greater vantage point, a greater deal flow, greater access to other really bright minds within cannabis. And frankly, it’s so diverse and so expansive that I don’t feel the need, right now, to go outside of it. I’m investing in a company, now, that their minimum viable product has a bullseye on cannabis, but they have massive pharmaceutical applications.
And that’s what I’m seeing more and more is cannabis is an avenue for some of these companies to reach profitability, but they may have bigger dreams, bigger aspirations, and so I’ve become so limited in my knowledge and thus, my ability to diligent nearly any other sector right now. So, really leaning on other friends or family to keep me updated and to accept my apologies for not being able to participate in any other earlier-growth-stage deals with them, but I like where I am right now.
Meb: As we start to, eventually, wind down here, talk to me a little bit about your involvement with the Family Office Association. I think it’s of interest as most of what we talk about on this podcast is about building wealth, but we’ve had a few guests on, whether from psychologists to journalists and authors and everything, that talk about the dual challenges. One, preserving wealth, but also how they spend it and spending it intelligently. And for many, that means philanthropy, but many, it also means building a legacy, which is challenging. You know, I think there was a stat we saw the other day that’s a really high percentage of many families’ wealth is lost by the second and third generation. Are there any main takeaways or things you learned during your involvement with the Association about families, about how they run, kind of, their assets, that you think are particularly insightful, either as very thoughtful frameworks and processes, or on the opposite, classic mistakes that you think families, kind of, run into over and over again?
Ryan: Yeah. We may need to have another hour or many, many hours to answer that. There are 1,000 lessons. It has been a privilege to be a part, first as a member and then for years an active president and now a couple years a little bit more on the sidelines, but it has really been a privilege to work with FOA over the years. And to see how families function or don’t, frankly, has been an extraordinary learning opportunity for me. Again, as a young person, to have a vantage point into how hundreds of families, bright people, well-intentioned people, work with each other as well as professionals to do their best to preserve or grow capital. Because no family is the same, every situation is unique, and nothing is easy.
I don’t think I’ve ever met a family principal who had a negative intention. And yet, it’s so delicate. How you bring up your kids. How you involve your kids, and by that, I could mean a 45-year old kid. It doesn’t need to be a seven-year old. But, how you plan, how you work together, how you make decisions together, boy, is it complex.
So, a couple highlights, or a couple meaningful things to consider, the families that I’ve seen with multi-generational wealth act most responsibly and in the interest of their relationship being at the forefront, barely trailed by the desire to preserve and grow capital. Those families are the ones that are most open to discussing with each other and with professionals how to do it because it’s hard. The families that don’t hide what they have from their kids, the families that involve their kids and their kids’ partners, frankly, in the family business… The ones that try to hide it from their kids, generally it doesn’t work.
I remember a peer-to-peer presentation by someone who expressed that in order to keep their kids humble, while having a private jet, they always made peanut butter and jelly sandwiches, instead of going out for every lunch. And I thought that was a little bit lackadaisical and not quite as thoughtful as they maybe could have been because flying around on a private jet with a peanut butter and jelly sandwich I don’t think brings humility. But I get what they were trying to do.
What I’ve seen work the best with young kids is an expression that I’ve heard a lot of, “When it’s gone, it’s gone.” So, families that are open with their kids about wealth, about philanthropy, about what the dollar can do where, why, how, and when and giving the opportunity, the allowance, for someone, not the financial allowance, but the possibility for someone to take control, those are the ones that generally act responsibly because they know that once the money is spent, it can’t be brought back. It sounds so simple, but it is ultimately really, really meaningful. There are no mulligans.
And if there’s just a bottomless pit of money, then I think you’re gonna struggle because all resources are scarce, frankly. And this may be just a bigger game for folks to play, but you really want to bring your kids up with a sense of responsibility. And if people spend their whole lives fighting to gain access to their money, once they get it, they spend it. If folks spend their life knowing that they have resources, and there are smart people around them to help them grow or allocate those resources, then they preserve it.
And it’s shocking to me that, over many generations, some folks just don’t get that. And you do see very sad stories of what you mentioned in the question, that most families don’t preserve wealth beyond two generations. The first generation makes it, second generation saves it, third generation spends it, is typically the pattern. It’s horribly sad when you think of how most of those folks are spending the money, but when you take a step back and you think, within three generations, how many family members are there actually going to be? Meanwhile, the first generation introduced the following two generations to a lavish lifestyle, it’s hard. It’s certainly hard.
Meb: You know, it’s funny, we’re of the belief that I think, there’s a lot of ways to invest just fine or simply, and I don’t think that part is particularly that hard, but on the flip-side, it’s really easy to muck it up. What do you think…this is something that I don’t know the answer to, and maybe the FOA has a curriculum for this. But let’s say, you know, you’re chatting with the family office. It’s the first generation. It’s the patriarch, whatnot. And they’re like, “Look, I really wanna build a framework for my kids and my kids’ kids to have them understand a lot of these concepts, the best practices.” Are there any good resources? I mean, I know that may be a softball for the FOA, but as far as books or courses…I’m not that familiar with that world. How would people go about implementing a lot of the best ideas, there?
Ryan: I’m happy to share with you and with your community a list of resources. There aren’t many groups like FOA, frankly. There’s one group named FOX, Family Office Exchange, who is very focused on the softer issues. I often say that Family Office Association, frankly, has families with slightly lower net worth, but they’re in general hungrier than some of the other networks. But most of these groups that masquerade as networks of family offices are generally email Listservs. And I don’t see a lot of value in those.
I do see a lot of value in community. And so, anything that brings together a small number of people to share the realities of what they are going through, what they have gone through, and what they should be looking forward to, looking ahead to, and preparing for, that’s what I see as really valuable. And there are great professionals for every aspect of this. So, I’m happy to share an honest list of who I think people and groups that are worth looking at.
Meb: I’d love to add it to the show notes. I mean, the challenge we have in a lot of this discussion, a few years ago… You know, we focus primarily on the investment side, but even there, I’ve had a lot of nieces and nephews and friends that say, “Hey Meb, I really wanna learn about investing. I’m a realtor,” or, “I’m a scientist,” or whatnot, but a professional that is very intelligent, “I just don’t know.” And they say, “Where do I go?” And often, the answer from me is kind of a blank. There’s not really a good central repository. You can’t just say go read Ben Graham because no one’s gonna do it.
And so, we actually polled our audience once. We said, “Send me your number one investing book that you would give to a college graduate.” And we got, like, I think it was like 300 responses, and so it’s a pretty fractured area. And I think it’s probably…I would assume it’s equally challenging on the behavioural side and the family-dynamic side. But I guess, if it would be an easy solution, then probably everyone would do it.
Ryan: For sure. There are, of course, great resources. But in short, I often share with people, the more focused you can be, the better. And that’s a really hard thing to do, right now, because we’re all pulled in so many directions. But if you know something really well…so, if your real estate friends are asking where to invest, I’d put it right back on them and say, “Well, what do you know?” I think if we all invested more in ourselves, to better educate ourselves and better surround ourselves with people that we find intelligent… I’m a huge believer in the fact that you become the balance of the five people with whom you spend the most time with. So, you wanna learn to invest? Find five people who appear to be very successful and you can verify that, who you enjoy spending time with, and they enjoy spending time with you, and learn. Learn, learn, learn. That’s all it comes down to. So, I’m happy to opine for much longer.
Meb: Yeah, I think it’s good advice. We did an old post…I forget what it’s called, but we’ll link in the show notes, that kinda illustrated how much alpha you would have to generate to make it worth your time, if you were spending X amount of hours per week on the investing process, and the take away was basically that everyone under, I don’t know, $10 million or $20 million should just index their portfolio and spend time, kind of what you said, investing in yourself and either making more money or working harder or doing other things.
Ryan: Working smarter. Definitely, working smarter.
Meb: Yeah, working smarter. Ryan, this has been a lot of fun. We wind this down by asking people, what’s been their most memorable investment? And it can be something great, it can be something terrible, it can be something totally non-market related, but as you look back over your career so far, what’s the first thing that comes to mind when I say, what’s been your most memorable investment?
Ryan: I have a lot of memories from the last few years in the cannabis space that I’d need to wade through, but I’ll give an example, because it was the first thing that came to mind, of one of my favourite examples of how to leverage who you are and what you care about relative to an investment opportunity. So, I met, maybe four or five years ago, two co-founders of a company called Trendy Butler, which is a men’s clothing subscription box company similar to Trunk Club or Stitch Fix, one of those. From the outside, looking in, that’s what it is. It’s actually a data platform that helps a lot of subscription box companies autonomously select the goods that they end up selling and sending, so it’s really an AI platform. But the minimum viable product was to sell a $69 box of men’s clothes, which was in the black by the first box that they sent.
And I remember, vividly, meeting these two gentlemen and thinking, “Boy, I think they’re gonna be really successful, but I have no interest in a men’s clothing subscription box company.” Because I care about people that don’t have overflowing wardrobes, and this is just for folks that wanna look a little better and have life be a little easier. And so, we respectfully parted ways for a few hours. And then, at the end of a conference, we ended up meeting up for drinks. And I told them that, boy, what I think could actually make them more money is if they created a clothing give-back loop where every time Trendy Butler sent you an article of clothes that fit really well because of their selection platform, that person who received it would put in the box that was just sent a pair of pants or a shirt or whatever that didn’t fit so well, and then we’d get it dry cleaned and send it away.
And Trendy Butler did something along those lines, and we ended up creating a partnership with a group called Orphaned Starfish Foundation, who’s really incredible, and I encourage everyone to look it up, training students in South and Central America, training them up for jobs as they exit the foster care systems and orphanage systems. And Trendy Butler created this partnership with them where they’d give them all of their returns and some of the sample clothes. And it created just this amazing feedback loop and give-back loop.
And, while the company has gone on to be quite successful. I’m really proud of the group and what they’ve evolved to be. I ended up participating fairly significantly in resources and time, at the beginning of the company’s lifetime. And I look back on that really fondly because I care not for excess in life, and so I didn’t like, necessarily, what they were trying to achieve because who cares about an overflowing closet? I just don’t think that’s necessarily right, in our times. But they were really open and courteous and excited about an opportunity to take their business model, accelerate it, and do a lot of good. So, there’s an example.
Meb: Very cool. It seems like they might even be a Los Angeles-based company if I’m looking at the right place.
Ryan: They are. They are.
Meb: Well, I’m gonna have to go knock on their door, and I’m gonna go dump a bunch of my unwanted clothes there because that’s…
Ryan: Dry clean it first. Do them a favour.
Meb: That’s my favourite thing to do with my wife’s closet is, any time she goes out of town, I just pick a few of her least favourite. She doesn’t notice, and she’ll never notice because she doesn’t listen to the podcast.
Ryan: Oh, that’s kind.
Meb: So, that’s how I clean out space. Ryan, this has been a blast. Where is the best place, if people wanted to keep up with what you’re up to, your thoughts, your ideas, writing, anything else that’s going on? Where can they find you?
Ryan: I’m a bit allergic to social media, but I’m fully google-able because I get pulled to speak a lot around the world on this stuff. So, I’ve started to write a few white papers that I released on LinkedIn, and then different groups do pick it up. So, you’re welcome to just type in my name and “cannabis” or anything else, and it’ll all come up. I’m searchable.
Meb: Great. We’ll add a link in the show notes to your LinkedIn. Ryan, it’s been a lot of fun. Thanks for taking the time.
Ryan: Thank you, guys.
Meb: Listeners, you can find the show notes. We’ll link to a lot of what we talked about today. www.mebfaber.com/podcast. You can find over 130 shows in the archives as well. Subscribe to us on any of the platforms: iTunes, Stitcher, and my favourite, Breaker. Thanks for listening, friends. And good investing.