Mazakali CEO Sumit Mehta discusses cannabis investment space

Sumit Mehta

Sumit Mehta founded Mazakali to counteract the negative consequences of business practices that deplete resources by making investments in sustainable cannabis and hemp.

The cannabis investment firm is based in San Francisco, with offices in Denver and Chicago. Mazakali offers capital-placement services to family offices, institutions, financial advisors and high-net-worth individuals.

Before joining the cannabis industry, Mehta spent two decades on Wall Street at J.P. Morgan, Merrill Lynch, UBS Investment Bank, Susquehanna International Group and Raymond James Financial in roles that spanned portfolio management, investment planning, capital introduction, strategic consulting, relationship management and business development.

 

What initially attracted you to the cannabis investment space?

My initial attraction to this industry in 2013 was the incredible potential it offered from an investment standpoint. As I began to realize the immense social, medical, environmental and cognitive impact that came with it, I also realized that it was imperative I invest my time and effort to help grow the industry in a responsible and ethical manner.

This epiphany led to me leaving J.P. Morgan in 2016 to launch Mazakali. Our goal is to transform the health of our plants, our people, our planet and our portfolios via the purposeful allocation of capital into the cannabis complex.

 

What is your investment philosophy?

While knowledge, access, patience, relationships, price discipline and luck are all meaningful contributors to investment returns, our investment philosophy includes a focus on scalability, sustainability and sensibility.

Scalability: The cannabis industry is growing at incredible speed, and companies that can scale quickly have an inherent advantage in such an environment.

Sustainability: Cannabis can help us meet our present needs without negatively impacting the ability for future generations to do the same for themselves. The incredible potential for positive impact across a multitude of industries allows us to do good while doing well as we revisit the inherently negative externalities of traditionally extractive capitalism. Companies that align morals and moneymaking remain particularly attractive.

Sensibility: The cannabis industry exhibits emerging market characteristics that include information opacity, regulatory restrictions, trade barriers, high fragmentation, rapid product evolution, price volatility and tax uncertainty. This makes for an exciting business environment in which it is important to remain sensible, objective and nimble, and managers who demonstrate these qualities significantly increase their odds of success.

 

Which industry sectors are good to focus on and avoid in terms of investment?

As the cannabis industry experiences incredible and perhaps unprecedented growth, it behooves capital placement decision makers to carefully consider cannabis price forecasting and its resultant valuation and sector impact.

Consumer brands that enjoy relative price inelasticity will see positive margin impact from cannabinoid cost declines, while those that serve simply as pass-through cannabinoid delivery mechanisms will see both margin compression as well as sales impact as consumers move toward health-oriented and whole-food-infused options.

Within the supply chain, we remain underweight in those sectors that will see revenue declines and overweight in those that will see margin expansion as prices continue their downward trajectory.

Outside the supply chain, we focus on scalable ancillary businesses that can either withstand corporate competition in a fully legal environment or grow to become attractive acquisition targets.

Additionally, frontier markets with meaningful addressable populations, limited licenses, capital friendliness and supportive governments can provide some relatively uncorrelated gems for a globally focused cannabis investment portfolio.

 

What are some of the typical red flags that cause you to pause and maybe eventually pass on a potential investment?

Major reasons include:

Management: The cannabis industry attracts many innovative entrepreneurs with little business experience. The industry has its share of incredible and exciting challenges, which makes it important that management have the experience and wisdom to navigate turbulent business waters.

Accounting: Look for third-party audits on at least two years of historical company statements. Review tax returns and be wary of companies that are reticent to provide them.

Legal: It is critical to engage counsel to ensure legal ownership or transferability of the licenses, patents and other intellectual property necessary to conduct cannabis business.

Valuation: Cannabis companies tend to have optimistic assumptions, and these rosy growth expectations can make valuations unattractive.

Portfolio: Our portfolios are customized and built with top-down sector allocation prior to the introduction of subsector tactical tilts. Target investments are only chosen after those two steps, and timing thus plays an important role.

 

What are some of the investment mistakes you’ve made over the course of your career? What lessons can you share for our readers?

I participated in the first dot-com boom, the real estate bubble, the craft beer explosion and now the cannabis megacycle with many lessons and much experience gained over the past quarter century of investing:

Betting the farm: Only invest what you are willing to lose—remember that, by definition, all investment for future return is based on speculation and that forces outside your control can impact your best-laid plans.

Water-cooler advice: Investment excitement combined with advertising restrictions means a large amount of word-of-mouth information sharing, a channel that often results in compromised information accuracy and poor decisionmaking.

Homework is fun: Investors are well served to create an effective barrier between excitement driven by social pressure and investment based on sound diligence. Hiring an experienced cannabis investment professional is advisable in this industry.

The beanstalk: Growth to the sky occurs in fairy tales. While tremendous growth supports major bull markets, a step back is often needed in order to take two forward.

This time is different: A phrase repeated during every bubble, with its fallacy remembered during every crash, this mantra is a deadly combination of hubris, euphoria and amnesia.

 

Could you share your thoughts on valuation?

One of the tenets of sound investing is that an investor does not pay more for an asset than it is worth. This statement may seem obvious and logical, but it is forgotten and rediscovered at some point by every generation in every market.

There are those who would posit that value lies in the eyes of the beholder and that any price can be justified as long as there are investors willing to pay that price. While this may be true in the short run, in the long run it is proven patently false.

The value of any firm is thus largely a function of three variables: its capacity to generate cash flows, the expected growth in these cash flows and the uncertainty surrounding these cash flows.

It remains important to remember that because we tend to value those metrics we can measure most accurately, we are often precisely wrong rather than being approximately right.

 

How do you view the impact of cannabis 10 years from now?

In order to place cannabis into context, think about how the world might look 10 years from now.

Employment: Technological advances will largely free us from the shackles of traditional employment and over 90% of current occupations will no longer exist.

Genomics: Advances in genomics will allow us to bend the arc of evolution with their potential to address aging, even possibly cheat death.

Nanotechnology: Innovation in nanotechnology continues to advance at staggering rates with super-flexible chips that can encircle a strand of hair along with biodegradable electrodes a current reality.

Connection: There are just over 3 billion of us who use the internet today, a number that will increase to 7.5 billion within 10 years. The innovation generated by 4.5 billion more brains contributing to our collective progress is simply unimaginable.

Artificial intelligence: Ten years from now, it is likely that the space between human and AI is blurred beyond recognition as smart devices and smart humans converge via the ubiquitous use of nanotechnology.

We will certainly do business with more strangers across greater distances, requiring us to build longer bridges of understanding across deeper chasms.

Socially acceptable cannabis consumption will add community, compatibility, collaboration, contribution, compassion and consciousness to its individual lessons of creativity and contemplation.

Investors are well served to study this generational wealth-creation opportunity and to shepherd their capital in a responsible and ethical manner for the greater benefit of society.

 

This interview has been edited for length and clarity.