In this edition of "Rising High," The Fly conducted an exclusive interview with Patrick Rea, Managing Director of Poseidon Garden Ventures at Poseidon Investment Management, an investment firm focused on the cannabis industry. Here are some highlights:
FIRST-MOVER ADVANTAGE: Poseidon was founded in 2013 by siblings Emily and Morgan Paxhia and launched its Fund One in 2014, making it one of the longest running dedicated cannabis investment funds. The firm launched its Fund Two in 2018, a venture capital fund focused on Series A and later companies, as well as the AdvisorShares Poseidon Dynamic Cannabis ETF in 2021.
“We have been raising and deploying funds since 2014,” Rea said. “We’re on our third fund and our approach is really professional. We’re SEC compliant and we focus on fair terms, returns for investors and basic stuff like governance and accountability. We’re trying to build a fast-growing, sustainable industry one investment at a time.”
He added that Poseidon was a first mover in the cannabis investment space and the team’s collective experience serves as a key differentiator that sets the firm apart from others in the field. “Our partners have invested in over 170 companies in the cannabis industry,” the managing director said. “We have a very nuanced understanding of the mechanics of the industry as we’ve invested in and been part of businesses in almost every part of the supply chain and every category of consumer products. That experience really helps us set ourselves apart.”
CANNABIS INVESTING: The Poseidon team has focused on a diversified strategy covering a range of company stages and industry subsectors across the capital spectrum and Rea said every investment in the cannabis industry is different. “You need to have fresh eyes when you view any investment, but certainly we are digging deeply into the fundamental economics of every business we invest in,” he said. “We consider entry point valuation and market comps and valuation for exit as well as the unique market size and nuance to that.”
The managing director noted that launching a cannabis business and dispensary in Massachusetts is very different from doing the same in a place like Colorado or San Francisco. “When you get down to it, there are very different dynamics in each state market and they make investing a very difficult undertaking for investors in the cannabis industry,” he said. Although Poseidon focuses on a diversified strategy, Rea said there are preferences and biases that have been built up and changed over time.
“In emerging markets, certain areas need more investments than others at different times and some areas will yield more return than other areas of business or investment at different times,” he said. “The evolution of the market really dictates when and where you should invest.” The managing director said as the cannabis space continues to grow, capital markets operators have faced a lot of pressure. “Operators are looking to slim down their teams and increase their spend on technology which allows them to operate more efficiently,” he said. “So we do like the ancillary products and services sectors right now. We also love the data and data science sectors in the cannabis industry.” Those sectors produce a lot of rich data, which can potentially generate a lot of value for operators, Rea said, making finding the right teams in those sectors important. “With the licensed operator sector, there are some businesses that touch the plant and focus on cultivation,” he said. “It seems like every state that legalizes, cultivation wholesale prices come up and then they go down. Cultivation is an area we haven’t leaned into recently.”
Poseidon does believe retail presents many opportunities within the industry, the managing director said. “Having a location for your dispensary on First and Main, a really strong operating team that has a background in cannabis and a focus on retail is detail, we like that,” he said. “Also contract manufacturing. We keep spending a lot of time on brands to understand how that is going to play out, but there are still limitations to building a brand in the industry.”
POSEIDON MASTERMIND: Poseidon offers a program for cannabis founders called Poseidon Mastermind, designed to spark collaboration and boost growth. The program offers access to networks, key trends and peer-to-peer support.
“The Mastermind program is really unique in the industry,” Rea said. “What we try to do is focus on a relevant topic impacting the cannabis industry or businesses in general. We bring together founders and facilitate conversations around those topics, where the founders are happy and willing to share in exchange for learning what other founders are doing.”
He said Poseidon will be hosting conversations this month on Chat GPT 4, Auto GPT and the effect they have on the industry. “We’ll have retail technology companies, cultivation technology companies, payments companies and licensed operators all on this call,” the managing director said. “All thinking about and learning how this new technology is going to impact their positions. That’s the magic of Mastermind.”
INDUSTRY COST CUTS: A number of multi-state operators have recently announced cost-cutting initiatives including reduced footprints and headcounts and Rea noted investors leaning into the industry have declined in the last two years.
“Certainly public market stock prices have really fallen off and we are not seeing movement in D.C.,” he said. “We see a lot of talk, not a lot of action. There is a large investor community that wants to invest in the cannabis industry but are being held back by rules and regulations at the federal level.”
As a result, MSOs have had to decrease costs as capital is not as freely available, the managing director said. “What that signifies is just a new phase of proving that good operators can run great businesses with less capital flowing in from the outside than it did before,” he said. “In these times, you find out who are the good operators, because they can do the same or more than others. It is going to be a nice, good shake-out.”
ECONOMIC CONCERNS: When asked about how rising concerns around inflation and recession will impact the space, Rea said no consumer product industry is immune.
“If flat is the new up for your industry or sector, that’s a good thing,” he said. “But the actions or results of inflation and recession that we typically see is consumers trading down from super premium to premium products or premium products down to value products.” The managing director said consumers generally will switch to cheaper products that give them a similar or acceptable experience to products previously used. “We see more trial,” he said. “There are cannabis companies out there that can decide to meet the market where it is today. And they will perhaps be able to win consumer loyalty for their products and brands through this downturn and come out the other side even stronger.”
LEGALIZATION: Following the mid-term elections, Republicans won control of the House of Representatives while Democrats retained control of the Senate and Rea noted the control is constantly flip-flopping.
“It changes and it’s been different than what it is now,” he said. “Before we’ve had inaction and right now, we got the bill introduced for SAFE Banking. We’ll see what happens.” The managing director added he is not in the business of making predictions on the federal legalization timeline. “We’re not underwriting towards a federal legalization event in our investments,” he said. “It is something we can’t control, nor can our founders. We try to focus on the things we can control, which is running really good businesses, using capital effectively and efficiently and growing in a smart, sustainable way.”
SAFE BANKING: In April, Oregon’s U.S. Senator Jeff Merkley along with Montana’s U.S. Senator Steve Daines and U.S. Representatives Dave Joyce and Earl Blumenauer introduced the bipartisan, bicameral Secure and Fair Enforcement Banking Act of 2023. The bill looks to ensure that legal cannabis businesses have access to critical banking and financial services.
“We like to say we’re so optimistic, it’s nauseating here sometimes at Poseidon,” Rea said. “We are big supporters of the industry, we know things have to change and we want them to change. We’re doing things to help them change like getting the SAFE Banking Act passed.” However, Poseidon fully understands that SAFE Banking is a pawn in a game between the two parties in D.C. fighting for control of power, he said. “My guess is that a lot of the same things that happened the last seven times will happen again,” the managing director said. “The prediction of whether it will pass or not, I’m out of that business, but I’m very hopeful. If it happens it is nice to have and we’re ready for it, but if it doesn’t, our founders are prepared and our capital is ready for that as well.”
CHALLENGES: When asked about the largest hurdles facing the cannabis space, Rea pointed to inaction on the federal level as the biggest challenge to the industry. “We’ve got a quasi-federally legal industry right now,” he said. “38 states are medical, 22 are adult-use and more are coming on-line, evolving and adding adult-use programs to existing medical programs.” Even in states like Minnesota, Poseidon has seen vibrant distribution growth in new channels like liquor stores, the managing director said. “At the end of the day the sky doesn’t fall, there’s not a zombie apocalypse and people are generally operating their businesses responsibly,” he said. “I think we’ll continue to just get closer and closer and more and more states will add to the tally to a point where the change at the federal level will happen and it will be almost a non-event. It will certainly be an event, because there will be more investors and acquirers coming into the industry, as that is what is holding them back.”
OPPORTUNITIES: As the cannabis sector develops, Rea said he sees the biggest opportunities in new state legalizations. “That is an enormous opportunity because we are onboarding a whole new population of legal consumers,” he said. “We know that existing illicit market consumers want to buy legally if they possibly can, they just can’t.” The managing director said Poseidon is specifically excited about the Southeast turning on and the Northeast progressing with its programs. “You have to understand that all these opportunities are there, but they are limited by investor dollars coming into the industry,” he said. “For example, in Illinois there are nearly 200 retail licenses that have been issued but only 19 have been funded and opened. There is a real adjustment coming for the cannabis industry.”
Rea said cannabis is an emerging market and not everyone is going to be successful. “Regulators need to take that into consideration and create more business-friendly structures for regulations,” he said. “We’re also really excited in the ancillary space as well as data and data science to drive better decision-making operationally for businesses and also present better newer options for consumers and consumer products.” The managing director added his advice for anyone interested in cannabis is to find good people to work with. “That’s the one thing since I started in 2013 that has been the strongest signal in the noise of the cannabis industry, is surrounding yourself with good people,” he said. “It takes time to get to know good people, but once you find them you got to keep them.”
CANNABIS/PSYCHEDELIC STOCKS: Publicly-traded companies in the space include Aleafia Health (ALEAF), Acreage (ACRHF), Atai Life Science (ATAI), Audacious (AUSAF), Aurora Cannabis (ACB), Avant Brands (AVTBF), Awakn Life Sciences (AWKNF), Ayr Wellness (AYRWF), Body and Mind (BMMJ), BZAM (BZAMF), Cannara Biotech (LOVFF), Canopy Growth (CGC), Chicago Atlantic (REFI), Clever Leaves (CLVR), CordovaCann (LVRLF), Cresco Labs (CRLBF), Cronos Group (CRON), Columbia Care (CCHWF), Compass Pathways (CMPS), Curaleaf (CURLF), CURE Pharmaceutical (CURR), CV Sciences (CVSI), Cybin (CYBN), Delic Holdings (DELCF), Delta 9 (DLTNF), Entourage Health (ETRGF), Fire & Flower (FFLWF), Flora Growth (FLGC), General Cannabis (CANN), Greenlane (GNLN), Green Thumb (GTBIF), GrowGeneration (GRWG), Goodness Growth (GDNSF), Hemp (HEMP), HEXO (HEXO), High Tide (HITI), India Globalization Capital (IGC), Indiva (NDVAF), Innovative Industrial Properties (IIPR), InterCure (INCR), IM Cannabis (IMCC), Wellbeing Digital (KONEF), Khiron Life Sciences (KHRNF), Lowell Farms (LOWLF), Lotus Ventures (LTTSF), MediPharm Labs (MEDIF), MedMen (MMNFF), NewLake Capital (NLCP) Organigram (OGI), Planet 13 (PLNHF), Reunion Neuroscience (REUN), Revitalist (RVLWF), RIV Capital (CNPOF), Relmada (RLMD), RYAH Group (RYAHF), Safe Harbor (SHFS), Small Pharma (DMTTF), SNDL (SNDL), Sproutly (SRUTF), Skye Biosciences (SKYE), Stem Holdings (STMH), Sunniva (SNNVF), TerrAscend (TRSSF), Tetra Bio-Pharma (TBPMF), Tilray (TLRY), Trulieve (TCNNF), Tryp Therapeutics (TRYPF), Verano (VRNOF), Village Farms (VFF), Wesana Health (WSNAF), Zynerba (ZYNE) and 4Front Ventures (FFNTF).
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