A $200 million marijuana VC breaks down how he picks what companies to invest in

Cannabis

The dealmaker behind one of the most active marijuana venture capital funds describes his outlook for the industry in 2019.
Canopy Rivers, the venture arm of Canopy Growth, announced a $6.8 million investment into Greenhouse Juice Company on Monday, on top of participating in a $12 million funding round for marijuana analytics startup Headset earlier in January.
He gives his outlook on the cannabis industry and explains the investment themes he's watching.

It's been a hot few weeks for venture capital deals in the marijuana industry, and one firm has been behind most of the headlines.

Canopy Rivers, the venture arm of marijuana cultivation giant Canopy Growth, has so far participated in a $12 million funding round for marijuana analytics startup Headset, invested $6.8 in convertible debt into Greenhouse Juice Company to develop CBD beverages, and landed an $80 million loan from two of Canada's largest banks for a joint venture — all in the last two weeks.

The firm has raised $200 million so far, but some of that has already been deployed, a Canopy Rivers spokesperson confirmed.

The Greenhouse deal, announced on Monday, falls into what Canopy River's VP of business development Narbe Alexandrian calls "wave three" of the nascent cannabis industry.

"We look at the cannabis industry as coming in waves," Alexandrian, a veteran of OMERS Ventures, Canada's largest VC fund, said in an interview. "Wave number one was cultivation, wave two is ancillary technology, wave three is CPG [consumer packaged goods], wave four is pharma, and wave five is mass-market, where you have your Coke and Pepsi-type oligopolies in play."

'If you talk to a beer company, they don't own any hops farms'

Right now, it's all about CPG, Alexandrian said.

"We're really looking for brands in this new wave of cannabis," said Alexandrian. It comes down to simple supply-and-demand economics: being only a cultivator doesn't cut it — wholesale marijuana prices will eventually fall, and margins will collapse.

"If you talk to a beer company, they don't own any hops farms," said Alexandrian. "What they've developed is a strong marketing presence, and created a product that commands a premium because of the brand."

That's what led to the Greenhouse deal. Nominally an organic juice company, Greenhouse owns 15 brick-and-mortar stores as well as an e-commerce platform. But Alexandrian said they can easily plug CBD products into their suite.

"The technology behind how they develop their products is what really got us going," said Alexandrian.

CBD or cannabidiol is a non-psychoactive compound in marijuana that's become a trendy ingredient in food and beverages. The company aims to market CBD-containing products across Canada — and eventually, in every jurisdiction where the substance is legal.

"They've done a fantastic job of creating a brand locally, and we think that can be replicated over and over again," said Alexandrian.

Creating the 'Nielsen' of cannabis

In order to make decisions about what products to develop, or what new markets to enter, they need data. That's where Canopy Rivers' Headset investment comes into play.

"Our thesis behind that was: there's a lot of companies out there in the industry right now that are posting large growth and high revenue numbers, but they don't follow the same DNA as traditional CPG companies where you do two years of R&D before pushing out a product," said Alexandrian.

Because the cannabis industry is so new, there are scant data to base decisions off of, so companies just push out product and "hope someone buys it," said Alexandrian.

Headset wants to provide that data — what Alexandrian calls the "Nielsen" of cannabis — to help brands and manufacturers understand trends, customer habits, and what the market looks like before making costly decisions about developing new products.

Overall, Alexandrian says it's "such a greenfield" for investing in marijuana.

"If you believe like I do, that legalization is going to spread and the end of prohibition is inevitable in a lot of the industrial countries in the world, it's very early in the game and you can get a lot of value for both companies and shareholders," said Alexandrian.

And that data is going to be crucial as more traditional CPG companies look to either make strategic investments or acquire marijuana companies outright as more markets open up. Expect these companies to become Headset's clients, the startup's CEO, Cy Scott, told Business Insider.

"We're getting a lot of interest right now from consumer-packaged-goods industry companies like beverage/alcohol, tobacco, pharma, and even financial services who are all interested in the cannabis industry," said Scott in an interview.

Already major food-and-beverage companies have either pursued joint ventures or taken equity stakes in marijuana companies.

Bill Newlands, the incoming CEO of Constellation Brands — the beverage maker behind Corona — said on the company's earnings call earlier in January that marijuana "represents one of the most significant global growth opportunities of the next decade and frankly, our lifetimes."

Last year, Constellation closed a $4 billion investment into Canopy Growth, paving the way for other major corporations to move into the industry. Molson Coors entered a joint venture with Hexo in August, and Heineken's Lagunitas Brand has developed a hoppy, marijuana-infused sparkling water beverage for the California market.

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