Jeff Howard is today's featured Cannabis Investor. The HempTown USA Cannabis Investor Series is back for the third year. This year, the Series is featuring eighteen of the cannabis industry's top investors who review the previous 12-months and share their 2021 investment strategies. On today's episode Dan Humiston is joined by Jeff Howard from Salveo Capital. Produced by PodCONX
Jeff Howard is today's featured Cannabis Investor.
The HempTown USA Cannabis Investor Series is back for the third year. This year, the Series is featuring eighteen of the cannabis industry's top investors who review the previous 12-months and share their 2021 investment strategies. On today's episode Dan Humiston is joined by Jeff Howard from Salveo Capital.
Salveo
[00:00:00] Dan Humiston: Today in raising cannabis capital, we are continuing this year's cannabis investor series with another former guest, Jeff Howard, the managing partner at Silvio capital. Jeff. Welcome back to the show.
Jeff Howard: Thanks, Dan, how are you?
Dan Humiston: I'm fine. It's good. It's good. It's good to hear you. Good to have you back a lot's changed since we talked in December. That's for sure. Uh, I want to talk about that, but before we do, let's talk about Sylvia real quickly. When you were here last, you talked about why. You have such stringent due diligence process, which at this time last year may have seemed a little unnecessarily conservative, especially for the early stage companies.
But now you're looking like Warren buffet. Uh, can you start by giving us an update on your portfolio companies?
Jeff Howard: Yeah, no, thanks, Dan. And thanks for having me back. Um, yeah, certainly interesting times since December. No question about that. Um, you know, so, so our, our process, um, You know, from the [00:01:00] beginning and through, you know, current day has always to always to bring kind of an institutional investment lens, you know, to, to the cannabis industry.
Um, you know, not withstanding the fact that, you know, the industry now has been a long, you know, been around for a number of years. You know, we still believe it is still. Fairly early in the investing, investing space, um, within cannabis. And so we've always wanted to bring, you know, an institutional level of due diligence to this space.
So we, we feel we've done that. We built, um, in addition to doing co-investments, uh, amongst most of our existing portfolio companies and our main fund, uh, in that main fund, we've built a portfolio of 21 companies. Um, and within those 21 companies or amongst those 21 companies, I should say it, it, it, it, it crosses the entire cannabis ecosystem from non plant touching, tuck, ancillary businesses, uh, to, uh, you know, direct plant [00:02:00] touching cannabis brands to, uh, vertically integrated MSO.
It was vertically integrated SSOs. And so. And so, yeah, and so, so, so we feel that, you know, based on being in the space and investing in this space for a while now, one of the earlier one of the earlier investors in the space, uh, and having good exposure across the entire ecosystem, in addition to the priority that we put into our kind of diligence process from our prior lives, um, We felt it was appropriate before, you know, the craziness of 2020.
And to your point, you know, I think it's, I think it's showing, showing to have been prudent now within those 21 companies, to answer your specific question about how the portfolio is doing the portfolio is doing well. There's obviously, you know, uh, you know, better performers, middle of the road performers, and some that, that are, that are, that are doing fine.
Um, And we can get into that. And, and, and I'm sure you'll ask down the [00:03:00] road that all kind of has to do with where the
industry is with accessing capital and so forth.
Dan Humiston: Yeah. I mean, we, we heard that, I mean, last year we talked about the deal flows and users like Dan, their system ever, a never ending stream of deals that, you know, how has that changed this year? I mean, how, how has the deal flow compared to. Today, compared to where it was last year.
Jeff Howard: Right. You can hear me right down. Great. Um, so it ha it has changed, uh, yeah, last year, you know, obviously the industry is I've been floated and, and, and, and the public markets have somewhat dictated even how the private markets, uh, have been flowed as far as access to capital and deal flow, uh, et cetera.
So, so, uh, you know, when we spoke last time, obviously pre COVID, uh, there was a tremendous amount of deal flow. [00:04:00] Because the industry and it still exists to this day, although obviously we can get into it more with specific COVID and how COVID has specifically affected the industry. But, you know, even the, in to the industry to this day, you know, six, seven months into COVID, um, in, in, in our most recent rally in the cannabis public equity markets, uh, the industry is growing faster than it still has access to capital and some of the capitals punitive.
And so. There is. Um, so a lot of companies, you know, early on through, COVID just being precautious and we advised, you know, as most funds and institutional investors did once COVID hit, you know, it, it, you know, there was a slight pause from, you know, you know, deploying new capital and looking at new deal flow, as opposed to, uh, You know, really circling the wagons and protecting the existing portfolio and providing financial and operational guidance to our existing portfolio companies, uh, and, [00:05:00] and strategy.
Um, and so, and so a lot of the, you know, the industry wants COBIT hit, uh, deal flow, naturally dips, uh, as people are more concerned about just, um, you know, return, reducing burn and, and, and not necessarily not necessarily knowing how COVID was going to affect the industry. Uh, Uh, so, so, so, so deal flow has, has gone down, uh, as a result of COVID and it's also COVID related.
And that's also because again, back to the point of still there, you know, there is more capital, but it's still, it's still constrained. And so a lot of companies are, are deciding to. You know, w waded out, uh, not, not raise capital at, at punitive terms in their minds or, you know, bad deal terms for, for the companies themselves or the founders themselves.
And so, so it's been a combination of kind of macro, external events, and then also, you know, unique, you know, unique specifically to where the cannabis [00:06:00] industry is. And it's in that cycle.
Dan Humiston: Yeah, it just it's. I know. I mean, this is unprecedented times. We it's, it's hard to really compare this to any, anything else, but it seems like with all the. Positive stuff that we're hearing about the industry. I mean, for just, just the fact that it was deemed essential, seems like that would make investors more optimistic.
It seemed like that there was a flow of money into the industry would be. Improved, but I'm hearing that valuations are flat or even down. And it just, it doesn't make sense. W w w w well, I, other than the fact that there's not a lot of cash in the industry, but awareness is, is, is that true first off? And why?
W why is that right now?
Jeff Howard: There's two components to that question. One, one is, one is where the capital is coming from in the industry. Um, and two, I do think that. I do think there's been a [00:07:00] couple of different bifurcations in the industry over the years, the last 12 months. And it's something that we at Salveo had been talking about for awhile as have others that the initial, the initial bifurcation, um, Started when there was, you know, a cyclical flow of capital, um, uh, out of Canada and into the U S market cannabis market, pub public and private markets.
So, you know, Canada obviously legalized in October, 2018, there was a massive amount of capital put to work leading up to that. And then folks. You know, investors turn their attention to the us market. And then, and then as time has gone on, which is natural as markets mature, there's been a bifurcation in names and the, in the U S market, you know, you know, you know, uh, and mostly this is concerning MSOE, publicly traded on my sows, but, but, but it does apply to, uh, bifurcations that are occurring in the private market between the larger companies, profitable company companies are [00:08:00] cashflow generating.
Uh, companies, um, that have access to capital, um, that are, that have enough scale that are attracting, you know, a significant amount of capital versus the rest of the industry, which is, which is still struggling to, to access capital. So, so how does that affect valuations? Um, you know what, you've also seen again, most, mostly in the public markets, you know, Th the retail investors in public public cannabis, uh, public equity, cannabis companies, primarily in Canada, you know, just got totally burnt.
I mean, they totally got, they got torched. And so, you know, retail is largely out of the, you know, largely out of the market. Um, Uh, you know, U S institutions don't really like putting money to work on the CSC. Uh, and then, and then you have, and the U S market, because, you know, it's still federally illegal.
You have, you know, the big, you know, [00:09:00] profitable, you know, revenue generating Amisos that because it's federally illegal, it can only list OTC in the U S market. So you have a whole entire swath of retail, mostly Robin hood traders that don't have access to OTC. So as a result of that, yeah. It kind of puts a lid somewhat on valuations because there's just, there's not the institutional capital that should be there.
Um, uh, that should be there and it's not going to be there yet until something changes and changes at the federal level, which, which we can talk about that too.
Dan Humiston: Yeah, well, just to follow up on that. But that hasn't really changed from this year to last, I mean, last year we had basically those, that same environment existed, but the valuations were higher last year. Is there, is there, is it just all COVID related?
Jeff Howard: Uh, no, I don't think it's, COVID related. I think the industry, you know, the industry is changing what it value, you know, how it values companies and what, how it prioritizes, where investment [00:10:00] dollars go. So it's not just scale. I mean, like in, in Canada, for instance, I mean, you know, there's still just a massive over supply oversupply of flour in Canada.
There's not enough retail in Canada. The, the export market hasn't been as strong or has come as quickly, um, uh, as, as it once had. And so, and so it gets back to the bifurcation. So, you know, it's, you know, the way, the way investors are looking at the, you know, investible companies, public and private, it's being much more, um, The investment community is being much more, um, uh, selective and picky and, and changing how it values and how the D and the types of deals they're putting together for these companies.
And some of these companies just, you know, evaluation wise until something changes until they have access to the U S capital markets. Even if they're an ancillary company, non plant touching, uh, it's really, it's really the U S market needs to open up and, and it's [00:11:00] just, you know, it's still TBD there.
Dan Humiston: Yeah, well, I guess from an investor standpoint, it's great because you know, it's a buyer's market, I guess, and, and, um, you know, rolling right from there. What sectors do you like and what sectors are you avoiding?
Jeff Howard: Um, so, uh, so, so we still, we like, um, You know, the valuations in some, some, some degree have gotten a little frothy in this one particular corner of the market, but we still, we still like, uh, uh, a handful of private MSOE and SSS. Um, and I would say even leaning more towards, you know, SSOs in the right market, um, single state operators, um, Consolidation is going to continue to occur in the industry.
Um, you know, you have the big four MSOE that are really, you know, [00:12:00] for the most part, you know, geographically maxed out, but there are still some great, you know, single state operators, um, in great markets, um, that, uh, that, that we like, and we're continuing to continuing to track and monitor, um, You know, we still, we still like, uh, the right type of, um, uh, ancillary tech tech companies we started with, there's still opportunity in the, in the ancillary tech space.
Um, Uh, we feel that that, that corner of the industry, uh, is ripe for consolidation, uh, from, from external, uh, non-cannabis tech companies, but certainly within the tech industry tech industry tech industry. Uh, and so, uh, we spent a good deal of time trying to map out how we think that that ancillary tech ancillary side is, is gonna, is gonna, is gonna work out.
Um, it's going to work out [00:13:00] over time. Um, but in general, you know, uh, we're, we're incredibly bullish on, on, on the industry. Um, you know, uh, We think there's some good regulatory, um, things that are going to happen with it with the November election and beyond. And so, you know, for folks that have been in the industry for a while, like we have, I, you know, I think it's fair to say that some things have taken longer than what a lot of people had expected early on.
Um, but I do believe that the industry is at an inflection point and, uh, and a lot of that is going to depend on the regulatory environment at the federal level. And I think we're going to start getting some answers, you know, starting on November 3rd.
Dan Humiston: I hope you're right. I hope you're right. I, I know you mentioned earlier that the retail investors got torched in a public market last year, but a lot of them are looking at this opportunity and saying, Hey, maybe I want to get back into it, but I'd rather do it with somebody that, you know, I can let somebody else manage my cannabis investment dollars.
Why summit? Why are some of the other apps or are there advantages [00:14:00] to working with Silvio capital?
Jeff Howard: Yeah, no, thanks. I mean, it's, it's, uh, you know, uh, As, as, as much as I, and we at Salveo believe in the opportunity and we really do, we think it's a, it's a, it's a, it's a once in a, and I hate the term, but it is a once in a generation opportunity for a market to effectively, you know, Build itself up from a black market to a gray market, to a totally regulated, transparent, uh, you know, uh, market at the growth rate.
But it's that it's that it's going at. So, so as incredibly bullish and, um, And excited. We are about the opportunity that the market presents itself. It's, it's, it's a tricky market. Um, it's a tricky market. It's not, it's not, it's not, you know, it's not your typical, Hey, you know, I see the upside. So I'm going to put some money to work.
I'm going to pick the right public publicly traded cannabis company or. I'm going to try to pick the diamond in the rough and the private market. [00:15:00] Um, you know, there's a lot of tricky aspects to that too. The investing landscape within cannabis, you know, re you know, regulatory, obviously it's a very bifurcated state by state market.
Um, you know, export import markets are developing, uh, Uh, every country has its own regulatory regime. Um, you know, uh, you've got to navigate the financial system, uh, and that lack of liquidity from the public markets in the U S so, so to answer a very long answer to your, to your short question is, um, I think.
Whether it's with us at Salveo, um, or other folks in the space investment space. I know, uh, this is such a nascent tricky industry that I'd rather have my money with somebody who does this full-time and has been doing it for a while. And it has a good, not only network, a good, you know, uh, portfolio, but also, um, good visibility of deal flow, you know, across the entire ecosystem.
Dan Humiston: Well, I think that's important. And you've been doing this since [00:16:00] 2016, I think is when you started this. So, I mean, there's not many companies that have been investing as long as you have, and I have the links. To surveil and to Jeff in the show notes. So if anybody wants to circle back and continue this conversation with Jeff, I'm sure he'd be happy to speak with you, Jeff.
Thanks. Great. Thanks for being on the show. It's always great to talk to you.
Jeff Howard: Yeah, Dan, thanks for having me again and always great talking to you and thanks everybody.