Today's featured Cannabis Investor is Rob Hunt The Cannabis Investor Series Sponsored by TWO12 is back for the Fourth year. This year, the Series will feature eighteen of the cannabis industry's top investors, reviewing the previous 12-months and sharing their 2022 investment strategies. On today's episode Dan Humiston is joined by Rob Hunt founder of Linnaea Holdings Produced by PodConX TWO12 - https://www.two12.co/ Raising Cannabis Capital - https://podconx.com/podcasts/raising-cannabis-capital Dan Humiston - https://podconx.com/guests/dan-humiston Rob Hunt - https://podconx.com/guests/rob-hunt Linnaea Holdings - rob@linnaeaholdings.com
Today's featured Cannabis Investor is Rob Hunt
The Cannabis Investor Series Sponsored by TWO12 is back for the Fourth year. This year, the Series will feature eighteen of the cannabis industry's top investors, reviewing the previous 12-months and sharing their 2022 investment strategies. On today's episode Dan Humiston is joined by Rob Hunt founder of Linnaea Holdings
TWO12 - https://www.two12.co/
Raising Cannabis Capital - https://podconx.com/podcasts/raising-cannabis-capital
Dan Humiston - https://podconx.com/guests/dan-humiston
Rob Hunt - https://podconx.com/guests/rob-hunt
Linnaea Holdings - rob@linnaeaholdings.com
RC CI4 Linnaea
Dan Humiston: [00:00:00] Today in raising cannabis capital, we are continuing this year's cannabis investors series sponsored by two 12 with my good friend, Rob hunt, the CEO of Linnaeus holdings. Rob, welcome back. Welcome to this.
Rob Hunt: Not the next day. I'm so used to being on other shows with you that it's hard not to say welcome back.
Dan Humiston: I know, it's just going to be fun for those of you that don't know, Rob is one of the co-hosts on the deadhead cannabis show, which is another show on pod connection. I talked to Robin every week, so that's why I was, saying welcome back to the show, but this is going to be fun because we've never really had an opportunity to talk about your company, linear holdings.
I'm really glad you could free up some time to talk about it. And I've heard you describe it as kind of a hybrid half private equity and half operating company. Can you explain how that.
Rob Hunt: Sure. So, I've done the traditional private equity fund, and I've also been an operator in space. And as I got further along in the industry realized that.
there was, kind of a consistent thing that was always missing from a lot of the smaller operators.[00:01:00]
And that was an a, they they're always seeking capital would be, they're always seeking expertise. And on the expertise side, a lot of them didn't have the ability to attract, a marquee, CFO, or a marquee COO, or they didn't know where to turn for tax advice or for how to get a proper audit done.
Kind of get out of their own way sometimes. So a lot of these businesses were, reaching for the stars and trying to figure out ways to attract people that otherwise would never want to join their business because they just weren't far enough along in their life cycle. So we thought about from the perspective of, let's perhaps start a business where we say, okay, look, we can be your capital source, but if you want us to be your capital source, you're also agreeing that we're in command and take a very, very active role in your business.
And in the process, we are going to help you with your back office administration and let you really focus on what you do best. So if you're an extractor, go extract, if you're a cultivator, go cultivate. If you're a retailer, focus on, bring people to the store. But don't focus on trying to build a really large team that supports you because that support team is expensive and to get a good support team.
It, it requires, [00:02:00] something that you have based on how much revenue production, you have to actually get someone to want to drop what they're doing to come work with you. So that was the initial thesis of limit.
Dan Humiston: I like the idea of. How you're providing these key pieces to the puzzle, to these entrepreneurs, because they're really good at one thing. Like that's why you're investing in them because they're super good at one thing, but that doesn't necessarily mean that they're good at managing people or attracting people and all the other things that go along with that, which will make them a lot stronger if they have somebody that takes care of that.
And they can just focus on what they do.
Rob Hunt: Yeah. And again, from a, an investment perspective of the traditional PE way of investing outside of cannabis is that you're providing a lot of that expertise and you're thinking about, what the next step is and how you're going to unlock the value and where are you going to move that value?
Whereas in canvas, a lot of the PE shops. Either working with or speaking to it was much more analogous to venture funding. It wasn't necessarily private equity funding. And Now that was certainly gotten to the point where it is much more like a traditional private equity side, where the check sizes are a lot [00:03:00] larger and you're much further in the stage of, where you're investing.
But for a long time, it was early stage companies that were doing, 15 to 20 million in top line revenue. And they're looking for, , they'd call a series a, but it was really more of a, a pre series, a round. So on that side of , you have to roll up your sleeves and get involved.
If you actually just, write a check and expect that governance rights are going to do the trick. And you're just going to sit there and, go to your quarterly board meetings or, have weekly calls with the with the entrepreneurs. Oftentimes in my experience that wasn't enough.
So it really required, getting much more involved in saying, okay, let's figure out where your real holes are. And before we make an investment, Do you do? I think I could actually add something and be creative to the business model where I say, this is something that I think I can dig into because you have X, Y, and Z, but you're missing a key component over here.
I think I can plug whether it was relationships in the supply chain or whether it was adding people that would be effective to help them reach the next set of goals. But oftentimes that was human capital related. It wasn't necessarily, visionary related.
Dan Humiston: Yeah. Now I know you've invested in like small to medium [00:04:00] size companies. And from what I understand is it's basically throughout the entire cannabis supply chain, but it's just in California, right?
Rob Hunt: Correct. Yeah.
Dan Humiston: And why is that?
Rob Hunt: Again, the private equity model that I was looking at in canvas in generals. I thought that a lot of the funds were, far too spread. So whenever he stayed, operates in a vacuum it's really, really difficult to say, okay, well, if I invest in company aid, is that any sort of synergy with company B or company C if they're located in different states?
And the answer is, unless you're investigating a tech play that can support, retail player, unless you're investing in something else that had some sort of nexus to it, that it was really difficult. So I thought, okay, let's focus in one state, let's focus. Some things that represent different parts of the supply chain.
Let's make sure you can try to provide contracted revenues throughout the supply chain between different parts of it. So that you've got one group that is looking for. Their product and you say, okay, I've got a built in buyer or, a built-in supplier. , that was a major part of it.
The other part of it is learning the regulatory in multiple jurisdictions is [00:05:00] exceptionally difficult. And even in California, there's a deviation from municipality to municipality, from county to county, from city to city. , and that's true in a lot of states. So not only do you have to learn what the state law is, you have to learn what the municipal or local level laws.
If you're doing that, in multiple different places, it's much more difficult. So if you say, okay, I'm going to pick a specific geographic area. That's one reason. The other reason is, look, California is 39 million people. It's 12% of the us population. Biggest economy in the world. It is by far and away, the most important and largest cannabis market there is, you look at all the hype that the Canadian companies got and everyone will say, oh, we invest in Canada because we feel safe that it's this huge market.
That's got, the support of the federal government. Well guess what, California is a bigger market. It's got the support of the state government. So if you're going to operate inside a vacuum and not have to worry too much about any federal intervention, you might as well do operating in the largest part.
What it lacks in oligopoly, state decided winners, it , makes up for in the fact that, asset values can be a lot lower in California. And if you actually think about it thoughtfully and you're able to build something in California, you couldn't build elsewhere.
By going [00:06:00] after , somewhat of a role of strategy.
Dan Humiston: Well in California, doesn't even have a dominant player. ,
I don't think any player has even 1% of the market. Is that your experience?
Rob Hunt: , no offense to California as a market, it's a train wreck of a market. It has been for years, you going into 2018, when the law changed to the post amendment 64, the expectation is you're going to see that the real coalescence of the legal system. And what happened in 2018, as you had, the old prop, two 15 markets still operating much less expensively in parallel path to the amendment, 64 market roll, still contending with the illicit market because California has a unique situation where it's not just a consumer state, it's a producer state as well, which means that if you want to bring flower down from Northern California, And sell it in LA, you're not passing through like six steps of middlemen the way you would to get that same flower out to the New York market.
So, the cost of the the illicit market still remains relatively inexpensive and there's no shortage of people willing to supply it. So California has been tough market for a lot of people to work with. Simply because of just how much they have to contend with, from a regulatory perspective, as well as [00:07:00] a legacy elicit or traditional perspective.
That's not getting better. And at a certain point in time, that's going to get a lot better, for that reason that it kept a lot of the bigger players out. A lot of the MSOE kind of stayed away from California, but if you look at the last year, there's a tremendous amount of attention on California going forward.
And it's not because that much has changed. Today, but the expectation is that federal legalization is probably five or six years away. Then when federal legalization happens and there's probably another couple of years after that, before you actually see the ability to cross state lines and so on.
But when that happens, you have to think, Okay.
Who's the natural supplier of canvas to the rest of the country who was a natural supplier of products who are the taste-makers and style makers. If you can make it in the California market, if you can actually put out a brand in the California market that resonates in this market, it will resonate in other places.
And we've already seen that. There's some great examples of brands have been able to migrate out of California, but ultimately this is the export markets, the rest of the country. And I look at it from the perspective. I didn't invest in New York when the New York law changed, because I thought the New York law was [00:08:00] so restrictive that anyone else getting those licenses would be putting up negative numbers for years to come.
And that's been exactly, that's been the case and everyone did it on the expectation of, okay, if I've got enough capital and I can weather a storm for 6, 7, 8 years. Ultimately when it goes to adult use recreational, I'll recover that loss in a matter of, two or three. And then, take off as long as we've got the restrictive law still in place, then we're sitting in a really good position in the same way that, for instance Florida has, and those have done well in Florida.
Those have done well in Illinois. They'd become dominant players around the country because they had such a great opportunity in kind of an open market with very few players. Well, California, no, never had that, but as you think about what's going to happen going forward, there is a true consolidation in the California market that ultimately some of the biggest California players are going to be behemoths and they're going to start exporting to the rest of the country and whatever first mover advantage, a lot of those other guys had in other markets, you're not going to get rid of the 10 biggest MSOC.
Too big at this point to go away, but you'll certainly get rid of a lot of smaller players that built infrastructure in states. They [00:09:00] never should have built it simply because it's a lot less expensive to produce in California. And ultimately, the quality is better. there is a real thesis behind it.
A lot of this comes down to timing and it's a question when, everyone says, okay, let's refocus our California ID. And say, okay, now we're going to invest in this state and now we're going to put a tremendous amount of focus on it because we think it's ripe for consolidation when it is.
We're trying to do that to time, , the clock with federal legalization and the ability to export. So largely the reason I've looked up and your question. Nope, no, one's dominant. No, one's going to be dominant for awhile.
So it's, this is too big a market.
Dan Humiston: Yeah, it's amazing. And you mentioned the 10 biggest MSLs their path eventually comes through California. So , if you're one of the dominant players, , you're an acquisition target at some point , or you're the acquirer.
Rob Hunt: That's the whole thing is which one is it if you're making the right investments and you're building those companies correctly, you're certainly an acquisition target for any group that is thinking about, building up something in California, this large enough that I can think of a handful of brands they've [00:10:00] already rebuffed a lot of the attention that's been paid to them by the.
And said, no, we're not interested in selling because they actually believe that even if they're private value is like a fraction of what the largest MSO is value is they believe in a couple of years that they'll be a more important brand in the more important company and whether or not they're right or wrong.
We'll see. But there's a handful of groups that are doing, over a hundred million dollars in top line revenue today in California, that they think, okay, if I can survive in the California market, the next three or four years, continue to grow this brand and continue to . Become more dominant.
Let's say, get 2% market share 3% market share. Once they're large enough, then they can start going out there and start acquiring other businesses in neighboring states, whether it's Nevada, Oregon, or Washington, or whether it's going in and actually acquiring the licenses in some of these tougher to get states.
And what I'll say, and this is the belief I think is absolutely right, is the California market. So I'm going to consult. Other markets, let's say New York is only going to expand. So if you're out there and you're acquiring a license at a huge premium, and all of a sudden Hochul decides that she's going to open up that market to 20, 30, 40 new players, and you just acquired [00:11:00] a license.
Well, guess what you overpaid for that asset. And so , if you're looking at, where the market's going, you gotta think, okay, do I want to be in the market with a stroke of the pen can expand or do I want to be in a market that's already as large as it's going to be. And now it's just going to get.
, I'm much more on the side of, I would rather build something. It becomes more and more important over time as consolidation happens. And you're just working the arbitrage of taking your scale and buying businesses for significantly less on a multiple of revenue or multiples than you're producing.
And if you can work that AARP, then theoretically, you should be doing really well. The only question there is access to.
Dan Humiston: And that's what . You're going to bring to the table for a lot of these people. And before I run out of time, I want to talk about investors or if people wanted to invest, what are some of the advantages are of working with a structure like Lenay holdings versus, a traditional cannabis VC firm.
Rob Hunt: First of all, we had a much shorter horizon, traditional, private equity firm normally has a five-year deployment five-year harvest period. Linda, I built it to be in and out of the trade in five years, we're in year early [00:12:00] year three right now, but we're already starting to get to the point where we're about to start recycling some capital and start putting it that.
And also, , I don't write just pure equity checks way. A lot of guys do a lot of times now I look for things to have cash on cash returns to have participating preferred paper. I won't get involved in a transaction in California and more or less I go on the license myself. So if the worst happens, we're able to actually pick up and run the business if we need to.
And I can surround it with people I think I can put in place. So, for the most part I'm looking for investments that will have, either a near term. Or we'll have decent cashflow on the business so that we're able to to start returning capital to the investors in a reasonable period of time, but I'm not looking 10 years out.
I just don't think this, this market moves way too fast to be a 10 year life cycle. And for that reason, I think the advantage is, there is no specific lockup. The way there isn't a PD fondant really were, think about. We're not an SPV where we're going after a specific asset or going through a handful of assets, but as like an opco and the investment is in the outcome and those we harvest we'll harvest out to, to the [00:13:00] investors.
Dan Humiston: I think the fact that. Have expertise in this field and the likelihood of zero on any of your investments is so much less. It makes it a lot more attractive in my mind because , a lot of VCs expect to have some zeros where you are not accepting any zeros because you can jump right in.
I think that makes a huge difference in. For investors that are interested, I'll have Rob's information in the show notes. You can just follow up , with Rob directly. And if you're a grateful dead fan, don't forget to check out the dead cannabis show every week on all major podcast networks, Rob, I wish we had more time.
This was good. Thanks for doing a show today.
Rob Hunt: Of course, Dan, I'll see you tomorrow on the recorder. Other show.