Editors’ Note: This is the transcript version of the podcast we posted last Wednesday. Please note that due to time and audio constraints, transcription may not be perfect. We encourage you to listen to the podcast embedded below, if you need any clarification.
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Big, big, big private equity outside of cannabis and big, big, big banks are starting to flex their muscles a bit to say, we even want some of us. That’s great. I love hearing that. So, I feel like I’ve heard that more than I have ever before. I mean, there were all these rumors a couple years ago that Goldman and Blackstone have been building up these, you know, cannabis teams within their shops to start underwriting immediately. I mean, I don’t know whether that’s true or not, frankly, I don’t care, but one thing I do know is that they wish they could be investing in this space.
Rena Sherbill:
Hi again, everybody. Welcome back to the show. It’s great to have you listening with us. As always, super happy to bring you my conversation today with Matt Hawkins, who’s been on the show a few times before. This is another one of our conversations from the Benzinga Conference, so obviously recorded before Biden’s announcement around, you know, decriminalization matters pertaining to cannabis, which has caused some volatility up and down movements like we’re used to in the cannabis sector. This was recorded before that, but I think really pertinent to the moves and machinations that are happening with the legislative process and how that does or does not impact the sector.
There can be momentary movements where little measures are made that don’t seem to do much, but long-term, you know, setting a path forward. So, very much what we speak about today, Matt also gets into StateHouse where he’s Chairman. Also, he’s Founder and Managing Partner at Entourage Effect Capital, so gets into what he’s looking at across the states, across the industry. I think it’s a great conversation. Hope you do as well.
Matt, welcome back to the Cannabis Investing Podcast, always a pleasure to have you on, but super excited that we’re talking face to face.
Matt Hawkins: Yes. I know. It’s great to finally meet you, Rena.
RS: Yeah. It’s great to meet you in person. So, we’re at this Benzinga Cannabis Conference in Chicago, been talking to a lot of people about a lot of different things, but I would say the overall message is how to survive within this market capital constraints, price compression, margin compression, investors petrified out of their minds wanting to get out. How are you thinking about both StateHouse, both Entourage Capital, and just a player in the industry? How are you thinking about it?
MH: It’s hard, and it’s not just the, you know, the micro issues of our industry, but it’s the macro issues of just the – this is probably the first time since we’ve been investing in cannabis that we’ve had, you know, something like a downturn brewing. The inflationary pressure, you know, that trickles down throughout everything, but also you think about all the ways that the macro issues like war in Ukraine, for example, I mean, the fertilizer cost has skyrocketed. So, things like that come and impact the industry. So, it’s really, really hard not to mention. I’ve been saying this, you know, today and last night is that this is the hardest it’s been to raise capital since I’ve been in the business and that’s been since 2014. And so, it’s not just for a, like, a fund with a track record for example. It’s – if we’re having a hard time raising money, think about what it’s like for, you know, an entrepreneur who’s bootstrapping their business. And it’s just it’s, I get the frustration, but it’s real, it’s there, and it is survival.
RS: I just want to ask, this is a harder time to raise capital than, like, 2014, 2015 because people haven’t been burned, would you say?
MH: I think absolutely. And I think that there was the, you know, the novelty of investing in cannabis. You had a lot of wildcatters. We’re like, sure, I’ll give this a try. Now, the biggest issue I feel like we have in cannabis is that there’s not enough new investors. You’ve got a lot of people that are sticking around because they’ve been burned and they want to try to, you know, do it again. And then, for example, like, in our [second firm] [ph], we had a lot of new investors and it’s, you know, and but we’re just not seeing as many new investors come in and our third fund that we have historically. And I think that’s just across the board where we are. And that’s just going to be that way until something happens legislatively, unfortunately.
RS: Yeah. I mean, it’s – do you feel that it’s going to be federal legalization that is the catalyst?
MH: No, no, no. I think it’s going to be, I think, you know, when the SAFE Banking Act passes, that that’ll be the…
RS: That’s already bolder than many people.
MH: It’s got to. I mean, look, the reality is, is that there are, there’s too much going on out there that is, you know, that are, you know, there’s a reason why, it’s funny they call it the SAFE Banking Act, while there is, we were talking earlier with someone else about just how this is a major safety issue. I mean, you’ve got, you know, dispensary is getting rated, you know, on a nightly basis across this nation. And it’s like and so it’s just becoming more bipartisan.
I mean, and I think that if, you know, Cory Booker, you know, God love him, he’s just – I think he’s starting to realize that, you know, he’s not going to get everything he wants, you know, on the social equity side of things, but they are two different issues. I mean, this is a business needs this to happen. And do we all want social equity and social reform and also the moving of the, you know, eliminating all of the sins of the war on drugs? Of course. But it doesn’t have to happen together.
So, there’s just, but a lot of this is just political posturing and it’s – but I really feel like we’re closer now than ever. And it’s also because politicians will have to start listening to their constituents. And when you think about it, look at look at all the states that are now online, they weren’t online just as recently as a year or [indiscernible]. Got all the northeast. You’ve got the most of the Midwest now. These are huge population, you know, centers where – that have votes.
So, I feel good about it. I don’t think legalization is going to happen anytime soon, but I do think a banking [indiscernible] or something like that will pass. Hopefully, within the next six to nine months, maybe soon.
RS: Yeah. So, speaking of the Northeast and, you know, states opening up, even states that a year ago we wouldn’t have thought, regions that we wouldn’t have thought, but something that I think is concerning is how these things are rolled out. You talked about, you know, marrying the social equity with the financial reform, with the legalization, and we’ve seen something like that in New York roll out where, like you said, I want social reform. You want social reform. I don’t think anybody in this hotel doesn’t want social reform, but what is it due to the legal side of things? What is it due to the industry when it’s rolled out together? So, with New York, we have like a delay in the legal rollout, but now it’s, kind of a free for all in terms of the illicit encroaching on the legal market. How are you approaching that, both from the Entourage side, from the StateHouse side?
MH: Well, on the Entourage Effect Capital side, we are waiting to see what happens in some of these new and emerging states. I mean, we’re not going to be, you know, the ones that come in and back somebody with a brand new license and that’s just not what we do. We look for established operators that are looking to build scale in the states they’re in. So that probably means we’re not a player in New York right away because the reality is, just like you said, I mean, there’s a [indiscernible] brewing in the state of New York because they want to have all these things and they can’t have their cake and eat it too right out of the gate, and the regulators are in over their heads.
RS: Do you think that’s proving that out?
MH: Absolutely. Absolutely. But it’s, I mean, the regulators note in California, but look, it’s taken – it took this long to get the cultivation tax repealed, but it’s still a mess. So, just because you know that something’s wrong doesn’t mean to get fixed. I refer to a – there’s an amazing article in LA Times. I think it was over the weekend about, it’s on the illicit market and how damning it is, and how dangerous it is, and how powerful it is. And if the State of California had listened to that, I don’t know what else is going to get their attention.
RS: You know, I was talking to somebody a day about that, and they made a good point that I personally hadn’t thought about that. I usually think that it’s companies sometimes playing both sides of the fence, the legal and illicit market, but also government is really making killing on both sides, both clamping down on things, and then also getting these onerous tax. I might not have a question there. It might just be pointing that out how crazy it is?
MH: We’ll think about it, it’s the same way with the federal government. I mean, they’re making so much money onto 280E, what’s their incentive to get rid of it? So, it’s just the whole thing is so screwed up and it’s so disappointing because this is a, what, a $25 billion, $30 billion industry right now domestically on the legal side. There should be $70 billion right now. And it’ll get there, but, you know, it’s just sad that we have governments that are getting in the way.
I mean, that we’re supposed to be – there’s supposed to be a capitalistic democratic world we live in, [in our world, the United States of America] [ph], but that’s not the case in cannabis. We are being prevented from capitalizing on the opportunities that exist because our own government is preventing that from happening.
RS: It’s like everybody’s getting screwed. I mean, yeah. Yeah. People…
MH: But the ones that are doing it illegally are the ones that are benefiting the most, and that’s just inherently wrong.
RS: And it also feeds into the iniquitous cycle because they’re not getting full benefits as business owners, it’s only going to be a short time that they’re able to make money like this. It’s just all yeah. It’s all messed up. So, speaking of messed up, which brings me to California, how are you thinking about that state? The illicit market is, you know, as we’re talking about?
MH: Well, it’s the main reason why we did with StateHouse (OTCQX:STHZF). You have to be big and have scale in that state to succeed. Otherwise, you’re going to go away. I mean, there are – I mean, I’ve heard horror stories just today about companies that are just going to go away and some big names.
Now, I mean we’re not perfect, but we’re a whole lot better safe we were, you know, prior to putting these things together, but it takes incredible business acumen to now integrate and take care of the operating inefficiencies and seeing where there’s opportunities to, you know, to marry the companies together and save money, reduce cost, reduce overhead, and we’re starting to see the benefits of that, but it’s not easy. But I’m so glad that we have that scale right now and being completely vertically integrated [indiscernible] capture margins at every level which, you know, isn’t the case for most of California.
And they’re going to pay the price unfortunately. That’s exactly what California doesn’t want from a regulation standpoint, but they’re it’s – they’re what exactly what they think they’re trying regulate out, they are just enabling and enforcing otherwise.
RS: Yeah. So, what do you think changes there or how do you think it changes? Is it just safe banking? Is it federal legalization?
MH: I think safe banking is the first thing because it will allow for companies, both small and large to reduce their cost of capital. Hopefully, that will give them access to small business loans, hopefully, banks will start to lend on, you know, commercial rates. I mean, look, there’s no working capital lines in cannabis. There’s no, sort of factoring. I mean, there’s no, I mean, think about how that impacts your cash flow. And so, if we could just have access to those products that’s a huge deal. And that helps companies that have 500,000 in revenue, and it helps companies with 500 million in revenue. So, it’s just a necessary tool that every other industry has. And why can’t we.
RS: So, as you mentioned integrating your assets last time you were on, we were talking about integrating those assets and how it’s not a simple thing, integrating assets, it’s teams, it’s people, its cultures, how are you looking at that? And is it something that you’re still looking at? You talk about the distressed asset. I think anybody paying attention sees a ton of distressed assets. Are you guys still on the hunt?
MH: I would say that we’re cautiously on the hunt. I mean, we’ve executed on the strategy of getting where we need to be. Now we need to increase our retail footprint. We need to maximize, you know, the abilities we have at the wholesale level from our farm in Salinas. That means finding some brands that perhaps could utilize our raw material to flow through the system. And we need, you know, more sources of, you know, for consumer purchasing, you know, it’s retail or need to get more, you know, delivery.
I mean, there’s a lot of things we need to be doing and increase our online presence. I mean, all that stuff that’s just – that and luckily at [indiscernible] is a, you know, a retail right at his core. So, but from an acquisition standpoint, you know, we’re going to ease our way into this and it’s, you know, we don’t have the luxury of having a, you know, a great currency right now. Like, no one in cannabis does. It is like as we’ve been, you know, there’s no reason our stock should be as low as it is, but – and we don’t want to use it as currency to where we would if it was much higher. So, we just have to wait and see.
RS: You mentioned about wholesale, and some people are moving away from it with the pricing, is that something that you’re still confident is…
MH: The only reason why we’re doing is because we’re making the stuff for ourselves, and we can capture that margin. If we were to, if I mean, I would never ever want to be just a cultivator. Not just in California, but anywhere and it’s like catching a falling knife. I mean, it’s going to be a commodity in every single state. And in some states, it won’t exist after federal legalization.
So, I’m out on that. But if you had the opportunity to vertically integrate, why would you not want to do that? And that includes, I would put retail on that basket too. I don’t think I would want to invest in just a retail outfit. You need to have – if you can go out and get other parts of the value chain, you know, why wouldn’t you?
RS: When did you stop investing in cultivation?
MH: In fact, the only straight cultivation play that in fact it was my very first investment. It was in a Washington DC medical – one of the only medical licenses in the district. And they were the first one issued. We backed them, and we had a very, very nice exit, but we thought when the underwrite was for a lot more than that. And I realized what was happening and not to mention, you know, the signs of the commodity, but just the pains of learning how to grow this stuff. This is not, you don’t flip the switch. I mean, crops and crops and crops are lost on a daily basis across this nation. And so, it’s a fickle plant. So, that’s – those are some reasons.
RS: I know a guy who made a couple nice exits in other businesses and he was saying to me, “It’s like, yeah, I think I’m going to start to get into cannabis now.” And I was like, well, meet a really great grower or a really great operator and put yourself in there. I was like, I would not start your own thing right now. This is like a…
MH: I would caution him from that.
RS: Yeah. Yeah. Yeah. But I think it’s like getting to the mainstream of, like, cannabis, you know, look, it’s all everywhere, but I think the money to be made was already. And now it’s like, I mean, obviously, there’s more money to be made, but I think the strategy is ever more important, whereas I think at the beginning of the cycle, it was like, okay, I put some money in. I’m going to take some money out, and now you’ve really got to know something to get your money out.
MH: Oh yeah.
RS: So, how do you see a growing, like, in terms of StateHouse, how do you see that growing out of California, within California?
MH: Well, we’re going to stick with California for at least the time being. I mean, we want to be the dominant player in the state. And we’re, you know, we’re pretty close to, I like our set-up more than I like our competitors’ setup. So…
RS: Why? Can you extrapolate on that?
MH: Just from what I’ve said, the fact that we are completely vertically integrated, we can, you know, grow our own product, sell our own product, be very, very cautious with what third party products we have on our shelves. We control our shelf space. We, you know, if we make mistakes, it’s our own fault. We don’t rely on others. So that to me is a lot more comforting than relying just on cultivation or just on retail or, and so, I feel very good about where we’re going, but we have to execute. And that means, you know, preserving capital, that means getting to, you know, cash flow positive sooner rather than later. And it’s just blocking and tackling.
RS: Yeah. Has there been since coming on board at StateHouse and since, kind of acquiring some outfits and also just merging cultures and stuff like that, has there been stuff that you’ve moved away from that you feel like doubles down on the ability to thrive and a really constrain market?
MH: I think so. And a lot of that’s, you know, personnel decisions, culture, and a lot of those things that doesn’t happen overnight. I feel like we’re getting to that point now. You know, the best practices, taking what’s good with some of what – one of the companies did, you know, versus what someone else did, taking ideas from elsewhere, and so a lot of that’s going on right now, but it’s not easy. And you’ve got, you know, three, really four companies with sublime and it’s, you know, there’s a lot of egos, a lot of different personalities. And so, it’s you know, it’s – we’re getting there. If we’re not there, we’re certainly right close to it from that standpoint.
RS: So, looking like a year or two out, not making any predictions about what’s going to pass because, you know, who knows, but how do you strategize for the next coming years? And what do you think StateHouse looks like in terms of size, in terms of scale, what do you think changes we might see?
MH: We’ll have to be careful with what, you know, not giving guidance and all that.
RS: I’m not trying to…
MH: No. I just, but it’s, you know, it’s funny, I said this before, I was like, I’m, I hate – this is what I hate about public companies. It’s like, because I’d love to tell you everything you want to know, and I just, I’m constrained by, and it drives me actually crazy. So, you know, we’re going to – a lot of organic growth, you know, a lot of, you know, a lot of cost cutting measures that gives the point to where I think we’re going to be able to be, you know, have some wonderful, really nice EBITDA next year.
That’s about the best I can do right now, but I’ll take it more of the macro side, like, I think my entourage had on because, you know, we’re starting to invest in a lot of other states outside California and the, you know, primarily in the Northeast and Midwest. And in some cases, even the Southeast. And building scale within those states, both on the ancillary side and on the [indiscernible] side, it’s incredibly exciting, because it’s not like California.
I mean, it is, I mean those are huge burgeoning new opportunities that we have amazing ends with. And so, some of the deals that we have in front of us right now are transformative in nature. And so, very attractive investment opportunities that have nothing to do with California. I mean save maybe one, but it’s exciting, but I just wish we had, you know, $300 million in the quarter right now and as opposed to 100 to 150.
RS: Yeah. So, you mentioned, you know, kind of one of the pluses at StateHouse is in vertically integrated. Do you feel that to survive in the ecosystem you need vertical integration or do you feel like you also look at companies that have an asset light approach for instance that makes sense for them and what they’re doing?
MH: You got to take that in a state-by-state level. For California, I feel like you have to have scale and be vertically integrated to succeed. I don’t necessarily think that’s the case in other states where there’s a little bit of licensing, I mean, if you have, if you’re in a limited license state and you are dominating right now, I mean, that’s a great thing, but that doesn’t mean it’s going to be that way forever. So, I just think that when you can capture or when you can take advantage of the ability to vertically integrate if the state laws allow you, then I just think that’s going to be a benefit to you on the long run no matter what state you are in.
RS: Do you think that there is things or a thing that investors aren’t necessarily paying enough attention to or at all, either from a product perspective, from a value chain perspective, like, is there something that we’re not looking at that you think about in terms of this is something that’s really important about the industry or something important to pay attention to vis-à-vis, like, specific to investing in the eco system? Or do you think it’s like, a matter of having patience and watching things play out?
MH: Definitely patience. I think and that’s what we preach to all of our investors now is that, you know, private equity historically has a, you know, 5 year to 10 year hold. And we feel like that there is a chance within that window that we’ll see something happen legislatively there’s, you know, something [quasi-legalization] [ph], whatever it is that will allow institutional capital to end. Because when that happens, that’s when everything changes. And that’s when you want to be in these positions where you’ve built scale in advance of that because you’re going to have big, big, big wins. And that’s what we’re betting on is that, that’s a huge [indiscernible], and we think it’ll happen. But if it doesn’t, we’re still building scale with these companies right now to where we feel like they’re in better shape than some of the smaller people, smaller companies. And they will be the ones that will be awarded whether or not it’s through institutional capital or otherwise.
RS: Do you feel like safe banking is going to be, kind of the catalyst that gets institutional capital in?
MH: I hope so, but I don’t think so. I think it needs to be, I mean, really, the Nasdaq and New York Stock Exchange need to open up. And that’s really the driver. And I just don’t, I mean, I wish I had a crystal ball. But I have no idea.
RS: From talking to the community, I imagine that you talk to that community, what’s your feeling like, are they looking at it, like, this is ridiculous, we want to put our money in already?
MH: Yeah. I don’t think there’s any doubt that, you know, big, big, big private equity outside of cannabis and big, big, big banks are starting to flex some muscles [a bit to say] [ph]. We even want some of this. And that’s great. I love hearing that. So, I feel like I’ve heard that more than I have ever before. I mean, there were all these rumors a couple of years ago that Goldman and Blackstone had been building up these, you know, these cannabis teams within their shops to start underwriting immediately. I mean, I don’t know whether that’s true or not. Frankly, I don’t care. But one thing I do know is that they wish they could be investing in the space.
RS: So, how do you see, and we can kind of end with this, how do you see it playing out in terms of the industry developing? You know, people talk about big tobacco coming in, big alcohol, what – I even like, can imagine the health and wellness conglomerate coming in, how do you think about that as the players that are making their way up? Will the top survive? Will they consolidate? Do you see a few winners? How do you look at that?
MH: Well, I think even with strategics like you just mentioned, they’re going to look at the bigger companies. And so that goes back to my argument about building scale is that you need to be amongst the big boys. And it’s probably a combination of the, you know, the four or five big MSOs right now and all the other outside strategics and outside capital because the big MSOs are going to benefit from capital infusions, from institutional capital. They’re only going to get their balance sheets, you know, emboldened from that standpoint.
RS: So, they’ll have purchasing power, but then you’ve also had the direct purchasing from the strategics and the direct investing from the institutional capital side thing. So, it’s a, you know, it’s a huge, huge lift for the industry when that happens. And it’s something we can – I can’t even put a dollar figure on what – of an economic impact that would be on the industry.
MH: Do you think, like, in a couple years, the mid-tier players, do you see them mostly gone and being subsumed in a larger?
RS: I don’t know about mid-tier, like, but a large single state operator, like StateHouse, I think there’s opportunities to thrive there. And then, like, we and, you know, when the MSOs [indiscernible] California, we’ll have something on our silver platter to present there. They’re going to need to do it. I mean, it’s only a $5 billion market. So, it’s a…
RS: Do you think that’s why a lot of the MSOs are staying out, like, mostly?
MH: They want, I mean, look, I’ve talked to the CEOs of those, you know, four or five MSOs, you know, reasonably often. And I know for a fact that they just want somebody to figure it out for them because they don’t want to go in and deal with the morass of the regulatory world that exists in California. But they have to be there at some point. So, we just need to continue to, like I said, block and tackle, put one quarter on top of the other and all that, you know, coach speak and see what happens.
RS: So, do you think, I mean, I’m just curious your perspective, like, it doesn’t need to be crystal ball clearly, but do you feel like the top players will be the names that we’re familiar with or do you think it’s going to, yeah?
MH: I think they’ll be included in that. I mean, I would think. I mean, I just think they’re two, they’re big companies right now. These are billion dollar companies right now.
RS: And strong operators [Multiple Speakers].
MH: And strong operators in most cases. Whether it’s, I don’t know if it’s all five, six of them, but three or four, sure. And I don’t see them going away, and I see them being sustainable brands going forward, unless somebody, like, you know, whoever pays, I can’t…
RS: Elon Musk?
MH: Yeah. I was thinking more about, you know, like a like a Procter & Gamble (PG), for example. Like, some, you know, some big, big, big company that just says, I have to have this operator and just pays an extraordinary price for it. But I just think they may be too big at that point.
RS: Yeah. Well, this has been a really fascinating conversation. Anything you want to leave listeners with?
MH: For those that are real, you know, cannabis proponents, reach out to your representatives with letters and say, what are you doing? Whether you’re a Republican or a Democrat? I mean, this is, I mean, it’s one of those common sense of things that, you know, Washington seem to stumble over, you know time and time again and it’s very, very frustrating.
RS: Anything you’ve picked up, and I really will leave it here. Anything you’ve picked up at the conference that you didn’t know before you came or heard that you liked?
MH: No. I mean, it’s – I wouldn’t say it’s all doom and gloom, but there’s a lot of people that are, you know that are trying to raise capital. They’re going to have a really, really hard time doing it.
RS: Yeah. Well, not a very pleasant way to end, but realistic nonetheless. Yeah.
MH: But let me finish this one. We are still incredibly bullish on the industry. We wouldn’t be doing this, and we wouldn’t be spending the time and energy that we do on a daily basis because there is the other side of this. I mean, this is a – we’re in a huge, huge trough here that’s going to be hard to get out of, but there is another, there is the other side. And the other side is going to be freaking awesome, but I just don’t know when it is going to be.
RS: And not everybody is going to get there intact.
MH: Not everybody is going to get there, but that’s, I mean, look this is capitalism. I mean, the cream rises to the top. And I just don’t know how big and thick that cream is. I just don’t know yet.
RS: To be continued.
MH: That’s right.
RS: Thanks, Matt. I appreciate it as always.
MH: You bet.
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