The global market for legal marijuana is valued at $17.7 billion as of 2019, and Grand View Research says that number is expected to rise to $73.6 billion by 2027. A quickly evolving market, more interim and project-based executives are being called on to lead the charge.
Jon Paul started his career at Arthur Anderson in the seventies then moved to multiple Chief Financial Officer positions, before getting on the cannabis bus in 2018 when he was recruited to take San Francisco-based gummies company, Plus Products, public.
Cannabis industry newsletter Grown In interviewed Jon Paul about the challenges involved in taking a company to a listing on the Canadian Stock Exchange.
Grown In: What advice do you have for a CFO interested in the cannabis industry?
Jon Paul: We need more good talent in the industry. So many people are being helped by cannabis and CBD – so if the why matters to you, you have come to the right industry. The growth prospects are tremendous. So, if you dive in and develop good expertise and connections, it is an industry you could do well in for years to come. Realize it will be unlike any industry you have been in before. Things you take for granted in other industries are a challenge in the cannabis world – like cash management, banking, taxes, insurance, organization structure. Decide if you have a high tolerance for ambiguity. Are you agile? Can you pivot quickly to rapid shifts in the environment you work in? Expect that your days can turn out very differently than you anticipate. Can you handle that? If you still want to take the plunge, build connections with and learn from other executives who have been there ahead of you. You can’t afford to lose the time and make mistakes on your own when you could piggyback on the experience of others. It’s a great community. People are willing to help.
Grown In: What options do cannabis companies have as far as establishing traditional banking relationships and raising money?
Jon Paul: Banking continues to be a challenge but there are opportunities. We came a long way at Plus Products from when I started. Our big breakthrough was separating our traditional banking needs (everything else) from our cannabis banking (paying for hash oil and cannabis derived CBD and collecting cash from our distributors). Our traditional banking is done through our holding company with a significant Western regional bank that targeted non-plant-touching entities. The cannabis banking at our operating company level is done through a fintech cannabis banking network. The operator of the network handles the transactions and we have a deposit relationship with one of the banks in their network. Lending is available from private sources but very expensive. Cannabis borrowers pay what I call a cannabis premium. Rates on real estate, for example, are twice the normal rate for a sale and leaseback. Working capital loans are extremely expensive. So in general, cannabis firms are tied to equity or very expensive convertible debt.
Raising capital tends to go in cycles. There is always money available, but when the supply is limited due to sources sitting on the sidelines, valuations can be very tight. The public market was hot during the first 9 months I was at Plus until Q2 2019, then private capital emerged with bigger pools of funds. Later on both sources cooled, although the IPO market was still strong for SPAC’s, special purpose acquisition corporations, that raise $100 million or more in blind pools.
It remains to be seen how they will put the money to use. They need big deals, and it appears too much SPAC money has been raised. There is still private money available, but at much lower valuations and very selective. Cannabis firm owners will give up more equity in order to raise funds now. That is hard for owners that still recall the valuations that were 10X a year ago. Better to see how you can get through the valley with less capital for now.
Grown In: After reaching a peak in valuations in 2019, publicly-traded cannabis companies experienced a market collapse followed by a pandemic. Some companies are faring better than others. What are the attributes that enable some companies to continue their growth while others falter?
Jon Paul: Even before my cannabis days, I had been part of several companies in a variety of industries that delivered results far beyond expectations. It took three things: people, strategy, and capital.
People are the key. Does a company have the team that can operate with the agility that the cannabis industry requires? It’s not a space for big company people. Can they figure out what pivots they need to make? Can people at the top inspire everyone with a sense of purpose? Are they good operators who can execute and deliver results? Is there a change in one or two key spots to be made that otherwise have been holding the company back? One area that seems to be a weakness at a number of firms is good financial leadership. Underinvesting here has been a real killer at a number of firms.
Second, many cannabis firms have to rethink their strategy. It’s no longer a land grab. They need to come up with a viable financial model and come to cash flow positive sooner rather than the distant future. Without a good strategy, success will be hard work and maybe not even possible. Where can the company best compete? Are they where the best money is being made? Are they executing their strategy well or are there blind spots that keep the company from executing well?
Finally, the team also needs the resources with enough breathing room to pull off the plan. Too many firms only have 1-2 quarters of runway or they have a convertible debt overhang that needs to be renegotiated. With adequate capital, you can take advantage of exceptional opportunities now that valuations are very low.
Grown In: What is next for you and your professional interests in the cannabis industry?
Jon Paul: There are great opportunities ahead in the industry. The best is yet to come. So many more customers out there that our industry can help. I could end up joining another firm as CFO or split between multiple firms.
Adapted and reprinted with permission from GrownIn: The Cannabis Industry Newsletter, 2020.