How to get Late-Seed-Stage cannabis funding Raising capital is challenging for all companies but it's especially challenging for cannabis companies because there aren't a lot of cannabis investors. In 2013 Poseidon Asset Management became one of the first firms to invest exclusively in cannabis companies. Managing Director, Michael Boniello joins Dan Humiston to provide investment insight to cannabis companies planning to raise capital and advice to would-be cannabis investors. Produce by PodCONX https://podconx.com/guests/michael-boniello https://www.poseidonassetmanagement.com/
How to get Late-Seed-Stage cannabis funding
Raising capital is challenging for all companies but it's especially challenging for cannabis companies because there aren't a lot of cannabis investors. In 2013 Poseidon Asset Management became one of the first firms to invest exclusively in cannabis companies. Managing Director, Michael Boniello joins Dan Humiston to provide investment insight to cannabis companies planning to raise capital and advice to would-be cannabis investors.
https://podconx.com/guests/michael-boniello
https://www.poseidonassetmanagement.com/
[00:00:00] Dan Humiston: Cannabis capital. We are joined by Michael Banella, the managing director at Poseidon asset management. Michael, welcome to this.
Michael Boniello: thank you very much for having me very excited to be here.
Dan Humiston: It's always great to have facade. And back on the show, your co-founder Morgan joins us every fall for the cannabis investors series. So our regular listeners know about Poseidon and your Buffalo connection,But for our new listeners, Poseidon is one of the longest dedicated cannabis investment funds.
Since 2013, they've been investing in this space and they've seen tons of deals. And that's where I want to start today. Even though you see thousands of deals every year, you only select a couple. What did the deals you invest in all have in common?
Michael Boniello: I think it really starts with the people. When I look at the management teams that Poseidon has invested in over the years, there is a lot of consistency with the personalities and the underlying drive of the founders. [00:01:00] I think it really all starts there. We see a lot of different companies in the industry.
We see a lot of different products in the industry. And one thing that I was told a long time ago by a mentor of mine which I think , is relevant and cannabis is, I'd rather invest in a peanut butter company with a great management team than a cutting edge technology company with a terrible management team.
And I think that holds true in this industry as well.
Dan Humiston: That's a really honest, straightforward answer. If you have a good management team, they can get through a lot of things that,other groups that aren't so cohesive can't get through. So I think that makes a big difference. I know a lot of companies that we've interviewed to make the mistake where they.
They don't really do their homework on the investors and they reach out or they throw a net out to investor that they can think of. not all investors are alike. Some investors only invest in non plant touching investments. Some are early stage, some are late So to avoid wasting a lot of times companies really need to [00:02:00] find investors that are good match.
And I noticed you're.Latest fund is the Poseidon garden fund. And I see that it's a late seed stage companies. Can you define what you mean by late seed stage?
Michael Boniello: sure. That's a great question. So when we talk about late seed stage, we're obviously looking at companies and very early stage, I would say that they are not pre-seed and, in terms of defining what that means to us, Late Steve Sage ultimately means that the company would have their licenses in place as opposed to being pre-licensed and going down that process, we just don't invest in pre-licensed companies because we just don't know what's ever going to happen for the licensing process in terms of being late seed stage. This would ultimately be a company that is driving revenue. The revenues might be small, but the company ultimately has good traction.
Good management team and a product that we feel could be disruptive. And that is all ultimately, one of [00:03:00] the reasons why we launched the garden fund is because we saw lack of capital flowing to the stage of company where a lot of investors are looking for later stage, whether that's series a meaning a little bit later stage, and then obviously the pre IPO and public markets.
Because of that we decided to focus on the stage.
Dan Humiston: It's not just for dispensary's or cultivation facilities or other companies that have licenses in place, you also invest in other cannabis, ancillary businesses Is that correct?
Michael Boniello: that's correct. We try to be as opportunistic as we possibly can in this industry. And one of the things that's very difficult to do in a, an emerging industry, in a brand new industry, like this is to have an investment mandate , that kind of handcuffs you a meaning. We want to be as opportunistic as we can be in this industry.
When we first got into this industry, there weren't even identifiable sub-sectors yet. That is something that we sat down [00:04:00] back in 2013 let through to figure out, what are the areas and sectors of this industry?
. So because this industry is ever evolving, there are new sub-sectors being built out of this industry. Up until 2015 or 16, we didn't even have data. And then the industry. And so you're seeing a lot of technology come into the industry that is supporting this giant infrastructure.
And so when we think about investing in cannabis and one of the reasons why we believe in this industry is we see a multi-billion dollar agricultural and retail industry with very little and very fragmentedinfrastructure. And so what that means for an underlying investment is that we are not just looking at vertically integrated operators, meaning they control the entire vertical from cultivation, through manufacturing, distribution, and down to retail and possibly even branded products.
But we're also looking at ancillary plays. Things that we've invested in over the past have include things like data analytics, point of sale software [00:05:00] HR and payroll, software services certain portions of the supply chain, third party manufacturers for edible products. We really dug into other industries to learn, what this industry was missing and where the opportunity is going to be outside of what I call the bright, shiny object, which is, the plant itself and the dispensary's right.
Which there's a lot of opportunity there for, but there's also a lot of opportunity for the things like the infrastructure plays because the industry is absolutely going to need it.
Dan Humiston: You're taking the best available athlete in the draft. , you're not targeting a specific position. You're just going to see the best management teams, the best groups that come along. When companies reach out to you, what do you want them to include in their package?
Or what do you require? They include in their package.
Michael Boniello: sure I'll be happy to go through the steps that we take with the company when they reach out. Ultimately a company will reach out to us. And the first thing that we'd like to see is some high-level marketing piece, whether that's a one pager or a. DEC kind of discussing the strategy and ultimately what the company is all [00:06:00] about.
We'll then have an initial call with the company. It's usually an introductory call to , hear about their strategy or about their product or their service that they're offering. Hear about their history in the industry. A lot of more high level things before we start digging in deep.
And when I say digging in deep, what ultimately that means for us. Is looking at a data room. And it's one thing that I talked to a lot of companies about who are out there raising capital is to build out a data room. And it's something that I've worked with a lot of companies, whether it's been a Poseidon company or a company that I'm mentoring is how to.
Present, what investors are going to want to see initially an off bat. So we'll do a deep dive in the data room. Usually have some more follow-up calls with companies for any clarifying comments or questions around the data room and take it from there and make an ultimate decision.
Whether this is something that we want to go forward with or not.
Dan Humiston: Yeah, I'm glad you brought up the data room. I actually had that on my list of things that I wanted to touch on and, we could probably do a whole episode on [00:07:00] that, but I think that's something that not everyone is familiar with, even that term under that same Kaeding islegal representation. They definitely should have an attorney review the deal. But do you recommend that at this stage, the late seed stage companies have an attorney help them prepare their package or is that not necessary?
Michael Boniello: In terms of the data room itself there's a lot of free information out there about how to build a good data room and what. The items that would be needed to be presented in the data room should be in terms of engaging with an attorney. At that stage it's probably not necessary, but what I will say is when we get to deal terms and we start talking deal terms, and if we put an offer sheet out to it a company that should absolutely be taken to an attorney and reviewed by an attorney the data room itself probably not necessary.
But obviously everything going from there. Yeah, absolutely. You want to make sure that the [00:08:00] term sheet and that we're all aligned. And so for us, one of the most important things with working with founders is understanding what this term sheet means in the longterm. Sign the term sheet today, you're taking capital in and maybe an equity deal may be at that deal, but down the road, you're likely going to need to raise more capital.
And so for us as investors, we want to submit a term sheet that when a company goes out for a future raise. That term sheet of what we executed with the company. Isn't going to be something that challenge as a company to raise capital in the future. And when I talk about challenges, I talk about things like where early investors have rights that later investors may not have.
Perhaps early investors have liquid preferences where they have to get three X their money back before the next person gets their money back. Things of that nature that we found a lot of founders have gotten into these agreements and not fully understood them. And no fault of their own.
I think there was a lot of trust. [00:09:00] They were giving their investors. But that being said, the most important things with the founder and investor is that everyone is aligned in terms of how this is going to play out in the longer run. What is the exit strategy, beside and runs funds with fixed lives.
If we're running an eight year fund, we are looking for a monetizing event over that eight year period. And if the company is like it's going to take us 12 to 15 years to build out what we want to build. Obviously we're not going to be aligned there and things can get uncomfortable down the road.
So things have changed a lot in the industry. We're in the early days, founders are taking money from investors and probably not doing as much diligence because there weren't a lot of people waving money at cannabis back in. 2014, 15 and 16. And unfortunately some people got in some deals that have been challenging to them longer term.
So we want our companies to have the best opportunity to succeed, and we always make the assumption that we're not the last capital that's going to be needed for the company.
Dan Humiston: I haven't heard that advice before, but I've heard a lot of [00:10:00] horror stories. And so I appreciate you saying that because it says a lot about your approach to. Investing , and also reinforces the need to have an a skilled attorney. Look at the deal before you sign anything.
We haven't talked about people who want to invest in cannabis real quickly. Before we wrap this up, why do you recommend people work with Poseidon versus trying to invest on their own.
Michael Boniello: So one of the reasons is Simon's ultimately been around since 2013. We're one of the longest running, a hundred percent cannabis and hemp focused funds in the industry. We've. Been through a lot with cannabis. We've done a great job in terms of building the funds, building a great network with the founders so much so that , a lot of our deal flow comes from our company founders and from our board access with our companies.
So that is definitely one area of it. The other thing in terms of trying to invest in this industry on your own and something that a lot of our LPs came into [00:11:00] our funds because of was the ever-changing regulatory landscape of the industry. It's very hard to. Diligence and invest in this industry because it is so fragmented.
That you've got 50 states, you've got , 39 sets of state laws. Every state is very different. And so a lot of investors have told us, they eitherdon't have the time to do the diligence on the industry.
Or they've made previous investments and gotten burned. one example of that is a investor who made an investment in the cultivation farm and the county ultimately decided they didn't want a cannabis and shut down the operation. And that was a few years back, but things like that can ultimately happen or you could have regulatory changes that can, make a business.
That'd be a business almost overnight. And we've seen some of these events state of Washington at one point a few years back, tried to ban edibles and just making them illegal overnight. And every very edible company said what are we tradition was originally flipped back. But it's those types of things that makes it very challenging [00:12:00] because this is a new industry.
You don't have a multi-decade old data set to look back on. You don't have a blueprint like you have with other industries. And so what we've done at Poseidon. Is built ourselves not only a reputation with company founders, but our reputation with our investors. We are now on our third fund. Our first two funds have been very successful.
Our first fund we've returned over 50% of the invested capital to our investors. And there's still a lot of liquidating events to come from that vehicle. So I think, first and foremost, when it comes up beside, and I think it's our track record and our experience with the industry. And also our reputation with the industry.
And we ask investors to reach out to founders in the industry, reach out to our founders and asking them about the experience that they've had with Poseidon. And I think it goes to show with our deal flow and our network of companies that. Put their peers in front of us saying, you want to work with Poseidon, they're going to do the right things and for you to succeed here.
And that's just the reputation we've built for [00:13:00] ourselves and I've done a good job building it.
Dan Humiston: If you look at your website, your stable of companies, or, the who's who, it really says a lot about what you've done and what you continue to do. We'll have all of Michael's contact information and links to Poseidon's website in our show notes. So if people are interested in learning more about investing, or if you're a cannabis company, that's looking for that late seed.
Stage round of investment, you just click the link and I'm sure somebody from Poseidon team will be happy to talk to you, Michael, we need more time for this. We got a lot more to talk about. I'm going to have you back on.
Thanks for being on the show, bud.
Michael Boniello: Thank you so much. I appreciate it.