In the high-risk, high-reward world of cannabis investing, those pondering where to place their bets have a growing field of opportunities to consider.
When it comes to handicapping the countless startups looking to break into the booming industry, few investors can match the depth of knowledge and endurance possessed by Patrick Rea, CEO and co-founder of CanopyBoulder, a Colorado-based, marijuana-focused business accelerator that invests in early stage companies and offers them guidance.
“The only sound investment strategy in the cannabis industry is through diversification. Simple as that,” Rea told Marijuana Business Magazine.
Since launching CanopyBoulder in 2015, Rea and his team have evaluated more than 1,000 investment opportunities and assisted firms in raising more than $150 million to help launch more than 75 companies.
Focused on seed-stage funding opportunities, the accelerator primarily targets ancillary cannabis firms with roots in tech, data and industry solutions. The firm also recently launched CanopyVentures, a $50 million venture capital fund focused on “growth stage” cannabis companies.
Rea shared his insights on the Canopy investment strategy and some of the lessons learned along the way.
CanopyBoulder is an accelerator – how does that differ from an incubator?
Accelerators and incubators are similar and different at the same time. Increasingly, hybrid models are being developed that take the best part of both and combine them into one. Traditionally, an accelerator invests and provides structured mentorship to the companies that are part of the program. This is in exchange for equity and is usually backed by investors, cities, universities and large corporations. An accelerator also usually has a defined beginning and end. Incubators often do not start with investing but trade office space and professional services for equity. Incubators also do not usually have a hard start and finish and provide a much less structured timeline compared to accelerators.
What’s the best cannabis investment you’ve made and why?
Among our portfolio companies, BDS Analytics, Wurk and Front Range Biosciences are all CanopyBoulder investments and are all doing very well in their respective niches. But they are just a few of the CanopyBoulder alumni that are performing well in the market. The best investment we’ve made is launching CanopyBoulder. We had to capitalize the company first, and that was a significant commitment in time and money, spread over the period of about a year. During this time, we undertook a comprehensive review of the cannabis industry and looked for a problem that we could solve where we would also contribute to the long-term viability and profitability of the cannabis industry. It was quite an investment to start.
What attracted you to those companies?
Each of these three companies are “racetracks” versus “racehorses,” meaning as the greater industry does well, the companies do well. They all provide critical infrastructure and services to the industry that span all cannabis markets in the U.S. and beyond. But each group has a really strong team, and in any early stage investing, the quality of the team is paramount.
What’s your biggest investment mistake and how did you overcome it?
I invested a small amount of my personal capital into a publicly traded social network for the cannabis industry. I regret that. The lesson learned was that the only sound investment strategy in the cannabis industry is through diversification. Simple as that.
What’s your top tip for best judging the credibility of valuations?
Entrepreneurs want a premium, and investors want a discount … because of (the legal status of) cannabis. If investing in the cannabis industry isn’t your full-time job, and you are confused about the credibility of the valuations you’re seeing, then you need to build your network and ask other investors for help. With 80 company launches and 100 investments, we can usually build a reasonable valuation from existing comps in our portfolio. Other investors are using MRR (monthly recurring revenue) to zero in on a valuation. Ideally, a valuation should be justified by at least three valuation methods that triangulate on approximately the same number.
What products or sector are you most excited about?
I’m excited for growth in the hemp industry in 2019 and beyond. I’m also closely watching how the federal government will handle legalization. Which agencies will be tasked with regulating this sector? FDA? Department of Agriculture? FTC? Who gets a seat at the table will significantly impact how the hemp market evolves, and how quickly it grows.
You recently launched CanopyVentures. Can you offer an update?
CanopyVentures has made two investments so far: BDS Analytics and PathogenDX. They are both great examples of the CanopyVentures model: excellent teams, strong corporate governance, openness to input and the commitment to grow into $100 million-plus businesses.
What is one of your top investment goals for the next year?
Work with both early- and growth-stage companies via the CanopyBoulder accelerator and incubator cohorts in 2019. We’ll be running an incubator program in 2019 as well as an accelerator program. Not much will change with the four-month accelerator program, but in reaction to demand from growth-stage companies to work with us, we plan to run an incubator program in the fall.
This interview has been edited for length and clarity.