Investing In the Future: Q&A with Christian Groh of Privateer Holdings

With the dawn of the era of legal recreational cannabis sales, the business climate for cannabis is undergoing a sea-change from the nervous and sometimes risky investments that characterized the beginning of the Green Rush in 2009 to today’s now widely accepted and ready for primetime industry, one that has entered a new faze — investment from the “straight world.”

Fears and rumors have swirled around the industry for years, predicting corporate demise and price gouging of patients as the industry came above ground, but instead the cannabis industry is seeing the rise of old-fashioned American entrepreneurs, just like the tech industry.

And, what better industry matches the Pandora’s box of possibility that is the cannabis industry but the tech industry, a young and thriving industry characterized by innovation and creativity?

Privateer Holdings, a private equity firm specializing in investment in the cannabis industry, was formed by Brendan Kennedy, Michael Blue and Christian Groh, who met while working in finance in the Silicon Valley. Kennedy has compared today’s cannabis industry to the tech industry of the mid-’90s. As Privateer, they raised $7 million in their first round of investing in 2013 and plan to be a major player in new cannabis markets as they open. In 2012, they made their first acquisition, the popular strain database Leafly.com.

Christian Groh

Cannabis Now Magazine spoke with Christian Groh about recreational sales and the prospects in the booming cannabis industry.

Cannabis Now Magazine: You were quoted on the Adam Carolla Show saying the cannabis industry was the future, what do you mean by that?

Christian Groh: I think there is a lot of value potentially to be had from the cannabis industry; it operates on so many different levels. It is a legal question, a political question, a medical question and a social question. There are a lot of economics at the root of all of those and if you start peeling back what the industry is and what it can be there is a big future in it. There is a lot of potential on all those fronts I just mentioned. A lot of good can come out of this.

CNM: You also predicted that the next state to legalize would be Oregon and that California won’t legalize until 2016. After watching what happened in Denver on New Year’s Day, do you still think that?

CG: I am still confident that Oregon will be the next state. I know there has been a lot of talk since then about California but I would probably stick with my 2016 opinion —although I guess since last summer I wouldn’t be as staunch in suggesting that it won’t be until 2016. I think I would point out there is a lot of momentum towards this year.

CNM: We started this year with a huge amount of momentum, but a wary eye on the past. A lot of companies started popping up when the Green Rush started in 2009 that have failed, based on today’s market what elements of the industry do you see as being the most financially viable?

CG:  If you look at the product for what it is, it has a lot of components to it. You take it from seed to shelf and then all the ancillary businesses that support that—I think there is a viable market in all of those businesses. I think the public perception is changing; people on the outside looking in are starting to look at this.

CNM: There were a lot of different businesses that came up around cannabis: hydroponics and growing to paraphernalia, foods, medicines all the way down to lotions and hand creams. Privateer has invested in the cultivation side in Washington; do you see that as the most profitable element of the industry?

CG: We do. When you ask these questions I guess I pause because we look at this through a different lens. Most people talk about Colorado, Washington and the United States. We look at it at a global level. We have some projects in Canada, some in Spain and obviously the U.S. [Cultivation] is the foundation of all of this. Ultimately we are going to see brands that emerge from this industry, pretty mature mainstream brands. That has been our focus; the [cultivation] piece is an important aspect of that.

CNM: 2009 is generally considered to be the beginning of the Green Rush after the Ogden Memo was released California and Colorado’s markets exploded. A lot of the businesses that opened during that time shut down due to bad business practices or were closed by law enforcement. Are investors today less worried about enforcement of federal law?

CG: Fundraising has become easier as a relative statement. We started doing this around that time and the conversation has definitely changed. Something as simple as just saying the word “cannabis” or “marijuana” out in public is different now than it was back then. It is still very complicated and I think most savvy investors are still doing their due diligence and research to make sure they are making the right investment. From our perspective, there are a lot more that are expressing interest, for sure.

Everything we do is 100 percent legal; we do not violate any state, local or regional laws. We don’t touch the actual product, and so we are in a different category than a dispensary or people who do grow. As that tide changes we will be in lock step with the laws. We have a fiduciary responsibility with our investors. We cannot get over our skis, per say, and jump on an opportunity because we think it will have a huge economic impact. We have to look beyond that and make sure we are doing everything above board and within the legal limits.

CNM: If you are saying it is about having a financial impact, wouldn’t it then be considered unwise to invest money in a business that could be completely shut down at any time?

CG: I am not saying it is unwise; it is just not within our risk profile right now. You will see there is a lot of money blowing into Colorado and Washington since last November because the laws have changed. Although they have changed at the state level the federal laws have not changed and we abide by that. There are going to be plenty of people who see the opportunity although it is still federally illegal.

CNM: One of Privateer’s first acquisitions was Leafly.com, what attracted you to Leafly?

CG: A lot. We liked the clean design, the clean interface. We really, really liked the entrepreneurs. They were three developers working at Kelly Blue Book, kbb.com, which is a pretty mainstream company. They were doing Leafly on nights and weekends. They had a similar vision as us, they based Leafly on their current and past experiences and they wanted to make the industry better.

That is really what they did with Leafly, they were able to aggregate a lot of data, they colonized a strain database and they were very smart about it. They realized that the consumer or the patient wasn’t ultimately going to look for the closest dispensary; they are going to want to become educated and learn more about the actual product.

The model is amazing because they really empowered the customer, the patient. Right now they have hundreds of thousands of crowd-sourced reviews on dispensaries and strains and so we have a lot of aggregate data all pointing to highlights and lowlights of strains and dispensaries — it empowers the consumer, the patient, which really hadn’t been done before.

For lack of a better term the model [prior] was a “drug dealer model.” You call up somebody and you meet them somewhere at a particular time and you have 2-3 choices and a here is the price. That was how the consumer made the purchase.

Now, it is really becoming more consumer-driven, especially in dispensaries today, there are choices. They have a variety of strains and edibles, but not only that, there is testing and ratios and levels, there are different forms of ingestion. That to us is really important and that is what the model should be. It really should be a consumer-driven market, the business owners listen to the consumers and adapt. Really that is what Leafly is doing in a broader sense, it is empowering people to make informed purchasing decisions.

CNM: Which is probably one of the best outcomes of a legalized cannabis market.

CG: We totally agree.

CNM: Do you think the alcohol industry has any reason to be worried that cannabis could cut into their profits?

CG: I don’t know if worried is the right word, it think it’s a reality. They should really start looking into this as a viable alternative that consumers are going to use whether they act on it or not, that is really up to them. I don’t know if ‘worried’ is the right word but I am sure there is a lot of due diligence taking place at high levels within the large alcohol companies.

CNM: Your partner, Brendan Kennedy, compared today’s marijuana industry to the tech industry in the mid-’90s, in what ways is the cannabis industry like the tech industry then and what lessons can the cannabis industry learn from tech?

CG: There is just a flood of entrepreneurs that are entering this market.

People are starting to understand its not just people rolling cannabis into paper and smoking it, there is so much more beyond it. Nobody really knows what this industry is going to look like. Nobody has a crystal ball. There are a lot of people out there with opinions and ideas and we are starting to see those entrepreneurs enact those ideas, which are great for us, we come from traditional private equity backgrounds and we love that. We love people that are trying to make change and are disruptive and listening to the consumer and acting on that. We are seeing a huge influx of these new business ideas coming out and we think that’s great.

CNM: How do you think the rollout in Washington is going to go now that we have watched what has happened in Denver?

CG: We are very bullish on Washington, we are excited about.

Originally published in issue 10 of Cannabis Now Magazine.