Before I begin investing in a new sector, I want to talk to the smartest people in that industry.  Canopy Rivers (RIV-TSXv) President Narbe Alexandrian is one of those people in the fast growing marijuana sector.  I sat down with Narbe recently and was able to learn a lot about how this public Venture Capital firm has created some early successes, and how and his team are positioning the company as marijuana, hemp and CBD gain acceptance around the globe.

The stock made a quick 50% move once I profiled the company in early January!

I’ve enclosed most of my interview with Alexandrian below.  I think you’ll learn A LOT about the industry, how Alexandrian sees it developing and a bit more colour on what I see as the biggest catalyst for their shares this year – their very accretive investment in a company called PharmHouse.

Keith:    Narbe, I have so much ask you – especially how your team is positioning Canopy Rivers for the long term.  But first tell me how you started with Canopy Rivers.

Narbe:    I joined Canopy Rivers about eight months ago. My background has been mostly in the technology trade. I started my career at Deloitte as a Management Consultant and in M&A while getting my CPA. I then moved into the tech industry – where I’ve spent the last decade working with startups and helping them grow.

Over the last four years, prior to joining Canopy Rivers, I worked at OMERS Ventures as a venture capitalist, the largest tech VC in Canada.

I was at OMERS Ventures fairly early when we were just a single fund, $180 million of assets under management. Prior to leaving, we had raised two other funds, with just under a billion dollars of assets under management and a very strong portfolio.

I made the move to cannabis when I started seeing the same things as a I saw in the Canadian tech industry back in 2011/2012. Back then, there were no real venture capitalists in tech – companies needed to move to the US when they got to a certain size, because there was a lack of capital in Canada.

In cannabis, it’s sort of the same, but in the opposite fashion. You have strong operators that are finding angel and early stage funding, and hedge funds who are backing pre-public companies – but nobody is taking the risk in the middle of the lifecycle, writing cheques in Series A to Series C rounds, and being patient with their capital. The larger US players can’t fully participate in funding startups, due to legality issues there, giving Canadians a powerplay.

Keith:    So where do you focus all this time and effort… how do you see the marijuana business unfolding in the next few years and where do you think is the best place to put investors’ money?

Narbe:    We believe that cannabis industry is going to move in five distinct waves, in any developed country that is looking for legalization. The first wave is cultivation – these are the farmers of cannabis. First movers have historically profited the most from this, in geographies where licenses are hard to get and fairly scarce.

From there, there’s the wave of ancillary businesses. These businesses are the providers of products/services related to the broader cannabis economy. Ancillary businesses are subject to less risk from fewer rules and regulations to abide by, but represent close to three times the size of the cultivation industry. Our data shows that there are 3,000-4,000 cannabis ancillary businesses alone.

The third wave is consumer product goods. We believe that the end-consumer still doesn’t have much loyalty across product offerings yet – the industry is just too new. Over time, brands will dominate, commanding high margins and extreme customer loyalty. There’s a lot of consumer mind share for cannabis companies to capture, and until consumers see the Guinness or the Marlboro of the cannabis world, it’s still up for grabs.

Wave four is big pharma, where over-the-counter and prescription drugs will come out that help lighter symptoms, such as arthritis, sleeplessness, and inflammation, to harder symptoms such as epilepsy and cancer.

Finally, we get to wave five, which is mass market. Here we will expect three to four companies to begin mass consolidation of the industry, becoming the Coca-Cola and Pepsi of the cannabis world.

Keith:    Got it. So, to talk to me a little bit about quality of management so far in these companies that must rank range from soup to nuts. And how do you handicap that? Is that a place where you guys can see a big value-add, using your network to help put senior people in? Are teams open to that? What about that idea?

Narbe:    Yeah, absolutely. There are companies out there that have great promoters but not much substance, commanding huge valuations. Unfortunately, many of them are riding the wave of popularity that cannabis has brought on, and likely won’t be able to withstand the long-stretch. What we like are strong entrepreneurs and repeat entrepreneurs, who understand the ebbs and flows of the life of being an entrepreneur, and have made the move from a traditional industry into the cannabis industry.

For example, we could get a former Coca-Cola product manager that decides to get into cannabis beverage space, bringing in their understanding of supply chain, product development and branding. And they come and pitch us on making a cannabis product. They have the contacts, the experience and can do what a family brand like Coca-Cola cannot, which is build a business in cannabis.

Keith:    Would you be willing to give me an example of a company in your portfolio?

Narbe:    Well, let me tell you a bit about one recent investment – LeafLink International. We identified that the cannabis industry was becoming increasingly fragmented in the market. There are over 5,000 cannabis dispensaries in North America alone, and over 2,000 brands. As a retail operator, it would be impossible to keep track of inventory, re-stocking and discovering new brands.

We went out to the market – with our proprietary due-diligence process – to find the best technological solution for that need. After speaking to dozens of companies within the space, we kept hearing about how they compared to LeafLink, a company that was capturing ~50% of any given market within 6-8 months of launch. With all the problems we were seeing with the supply chain in Canada and the UK, we thought this investment was a no-brainer.

Keith:    Right. Okay. And in terms of… You touched briefly on jurisdiction. You want to maybe give me a little more color there. What are you seeing where… The international arena is obviously a little less developed, but maybe there’s more upside there because of that, or do you have to be more patient, take a longer term view there, or is there any catalyst in any of these international jurisdictions that you think that’d be coming up this calendar year that could kind of change the landscape for that particular jurisdiction, or…

Narbe:    The catalyst for international expansion is governed by regulation. In many of these international jurisdictions, they’re getting closer and closer to legalization, either from a recreational or medicinal standpoint. We’re seeing a lot of these countries are looking at Canada as the poster child.

They are patiently waiting to see how the legalization program works out, while also kicking the tires with their voting body to see how they would react to a potential decriminalization or full-blown legalization. Geographically, we’re seeing a lot of movement in the US, Europe, Latin America and Australia, with some whispers from the likes of population powerhouses, India and China.

At the end of the day, it’s a $600 billion dollar industry on a global scale, but to get there, you have to have favorable regulations.

Keith:    Obviously there’s a higher threshold for investing in a pre-revenue company. What do you look for when it’s pre-revenue, which by definition is a little higher risk, earlier stage?

Narbe:    At the pre-revenue stage, the focus is on the operator of the business because things could change and the business model could pivot. At the post-revenue stage, the focus is more on the business model and and traction.

Keith:    What do you think is the most underappreciated part of this market by the mainstream street retail… the sell-side.

Narbe:    The most under-appreciated part is how difficult it is to likely get proper talent within a cannabis company. For a lot of these large LPs, it’s a bit easier because you have an established company, established stock, a business model and so forth. In contrast, a startup has to convince someone from the traditional space to leave their job and come into an industry where it’s highly regulated and it’s difficult to bring products to market.

Keith:    Okay, for… We’ve talked a lot of macro stuff. Just within your own portfolio, you’ve kind of had a chance now to get familiar with it. And some of the stuff you were probably involved in; some of it you perhaps weren’t. Tell me a little bit about what’s your favorite investment? What… which company in the portfolio gets you the most excited right now?

Narbe:    To be frank, all of them are. I love all of them equally. There’s always a rule in VC that you can’t really pick your favorites. And I have to stick to my guns here – I don’t have a favorite. I like them all equally.

Keith:    Well, let’s talk about PharmHouse just because that’s kind of one of the bigger ones. When I did my original piece of the company, I really kind of focused in there because certainly that’s the one that I saw that had the scale to provide the biggest upside for Rivers’ stock this calendar year.

Can you run through with me how you see that investment developing. What do you see as the milestones for that company, being as it does seem to be such a big, big thing for you guys. The Street’s modeling a lot of cash flow to that play for you guys by the end of this calendar year. What do you see as the mini-milestones there is going to lead up to the street starting to recognize the value there in Rivers?

Narbe:    I mean you have the recipe for success in PharmHouse. You have a 1.3 million square foot facility with operators that have been working on greenhouses for decades and have become leaders in this space. I think the investment community overlooks how potentially large and accretive this partnership could become.

Our Pharmhouse partners operate over 30 million square feet of greenhouses across the world and CIBC estimates they do north of  USD$1 billion in sales per year in tomatoes, peppers and cucumbers.

Our partners’ geographical greenhouse footprint covers the United States including States like California, Michigan, Colorado, Florida, Ohio and Illinois. All of these states allow cannabis consumption in some form and five of them are in the top 10 most populated States in America.

This is really important as Rivers has an international non-compete with PharmHouse, allowing us to purchase up to 49% of any of these operations at book value, giving us a long-tailed call option on future US and international operations as those markets open up.

And we operate in a fantastic region, Leamington, Ontario, where you can get access to the talent you need to develop strong product, a strong management team, and a strong agricultural team. Then you bring in Canopy Rivers and the backing of Canopy Growth, which is the largest cannabis producer worldwide.

Keith:    Does the size of your facility put any extra pressure or hurdles in your way because obviously you guys are huge.

Narbe:    It’s difficult to secure an area that’s the size of three football fields than it is to secure a thousand square foot room, particularly when you need to have video surveillance covering the entire facility, laser motion sensors, and detectors through the roof. You need to secure this whereby there’s an alarm that would be triggered if anybody tried to penetrate the area.

That being said, the security team that we’ve engaged has secured million square foot facilities for Canopy Growth. So, we’re pretty comfortable with our business plan layout and making sure that we know how to pass the test, if you will, in that we’ve written it a few times. So, while it’s challenging, and it was challenging the first time Canopy went through it. Olivier Dufourmantelle, our COO, he has probably helped with the licensing of over 5 million square feet of grows across the country. We’re pretty confident in our ability to get that done.

Keith:     Narbe,  we’ve covered a lot here today. Is there something that we haven’t covered that you think is important to any part of the company or the industry, that you think is intriguing or maybe underappreciated by the street or interesting to you guys?

Narbe:    I think the one thing I’ll leave you with Keith, is that the company has grown substantially with the ~$300 million it has raised to date. The pipeline is in fantastic shape, and right now, where it’s trading in the market, investors have an opportunity to invest in a portfolio of the next generation of leading cannabis companies, all at pre-public valuations. At a high level I’d say that you’ve got more fuel and more gas in the tank, a more robust management team, a great opportunity set, and pipeline system that’s sourcing and identifying opportunities.

Keith:    Narbe, thank you so much for talking with me today on the cannabis space and what your team is doing at Canopy Rivers to make money from all that.

Narbe:    Thank you, Keith.
Keith Schaefer
Publisher, Oil and Gas Investments Bulletin