Where are the best cannabis investment opportunities? As one of the earlier cannabis investing pioneers, Rick Batenburg the Chief Investment Officer at Cliintel Capital Management Group has invested in earlier every sector of the industry. He explains to Dan Humiston why they believe that established brands have the greatest upside potential. He discusses their plans for one of their portfolio companies, The Clear, and shares details about their latest funds investment thesis. Produced by PodConx MJBulls - https://podconx.com/podcasts/raising-cannabis-capital Dan Humiston - https://podconx.com/guests/dan-humiston Cliintel Capital Management Group - https://cliintelcapital.com/ Rick Batenburg - https://podconx.com/guests/rick-batenburg
Where are the best cannabis investment opportunities?
As one of the earlier cannabis investing pioneers, Rick Batenburg the Chief Investment Officer at Cliintel Capital Management Group has invested in earlier every sector of the industry. He explains to Dan Humiston why they believe that established brands have the greatest upside potential. He discusses their plans for one of their portfolio companies, The Clear, and shares details about their latest funds investment thesis.
MJBulls - https://podconx.com/podcasts/raising-cannabis-capital
Dan Humiston - https://podconx.com/guests/dan-humiston
Cliintel Capital Management Group - https://cliintelcapital.com/
Rick Batenburg - https://podconx.com/guests/rick-batenburg
Dan Humiston: [00:00:00] Today. MJ bulls. We are joined by Rick. Battenberg, the chief investment officer at clientele capital management group. Rick, walk them back to the.
Rock Batenburg: Hey, thank you so much for having me on again. I really appreciate it. Really enjoyed the.
show last time.
Dan Humiston: Well, so much has changed since the last time you were here, which crazy enough is, was almost to the day. Exactly. Two years ago, I was just looking at my notes for our listeners who missed it. Last time. Clientele capital is one of the early cannabis VC firms, which was launched back. I believe in 2015.
Rock Batenburg: That's right. We actually made our first investment privately in 2014, but we formally formed the fund in 2015.
Dan Humiston: Well, back then, there weren't many cannabis VC firms. Everyone was pretty much a generalist, but we're seeing more and more firms are more niche today. What is your investment thesis today and has it changed much over the last seven years?
Rock Batenburg: Yeah.
absolutely. So previous to this I worked for Merrill Lynch and I did a lot of the syndicate work. So the IPO's and the buying of the new issues, [00:01:00] I looked at a lot of deals and I happened to be in Colorado at the time. And really thought there was a capital inefficiency in cannabis, which was really the opportunity.
And what I mean by that was at the time you had to be a two year Colorado resident to invest into legal cases. And I had theorized that by using a blind pool venture structure the marijuana enforcement division of Colorado would allow us to have a licensed person at the, at the head of it.
As long as the fund contributors, the LPs didn't have any control over the assets. And really the reason I did that was. There was no diligence baseline in the cannabis industry. Really, nobody knew what a good dispensary or a manufacturing grow, what anything should do. Right. And I knew that there was going to be changing regulations.
So try to create the most flexible funding instrument that I possibly could to navigate through this, this new world. So we've actually became the first qualified institutional fund in the United States to hold a license inside of a fund. And, and so when we talk about change We bought everything in the supply chain.
And that wasn't really [00:02:00] because we necessarily wanted exposure to everything. It was because we really needed to understand the business. So we bought everything. So grow extraction, dispensary, packaging, hardware, compliance, training, everything across the supply chain of cannabis. And we operated the businesses to establish a diligence baseline.
Do we did that for about two and a half years. And then we really figured out we're going okay. Where in the supply chain of cannabis do you want? And what's going to be the most important component of that supply chain in the next 20, 30 years. And where we kind of landed on was you don't necessarily want to grow in the grain for the grey goose, and you don't really want to own the liquor store that only has geographic loyalty.
You really want to own the brand and the distribution, because that has the most scalability. And so we got a little more focused with our allocation strategy and started looking for brands that we thought had the most. Appeal to new users without alienating existing users and, and the category we chose was a vape.
So we found the clear out of California which got widely popular in the California medical market. From 2013 when it was [00:03:00] invented until now obviously one of the, one of the biggest brands in the world now. But the reason that was important, cause we started with the brand right.
Great adoption with new users. It's in a format that people are familiar with and it didn't alienate kind of heavy users cause it's very strong. And for us, it was about the brand and establishing an emotional relationship with the consumer. So looking for brands that had that emotional relationship with the consumer and then additionally, Penetrating as many shelves as possible.
So to be ubiquitous, you want to be everywhere. So the strategy for us, for the fund was really going okay, how do we navigate this changing environment? Because we know that the regulations and the market is not going to be the same in 20 years, from a regulatory perspective. So it is our thesis that Colorado represents the best tendency and economics for consumer driven market theory of all the different markets.
Because you can't move to UHC over state lines. You really don't have the ability to [00:04:00] produce the same product overstate lines, because this is organic products that even genetically identical plants grown under different conditions will produce different relative weight to volumes of major and minor cannabinoids and terpene profiles. What that means is that I don't care what celebrity is endorsing your brand. And I don't tell her how shiny your packages, unless you've, pre-produced the same consumer experience in multiple accessible markets. You don't have a brand which is what really was the linchpin of why we chose The clear as , the tip of the spear, if you will, to gain market share was because we can produce this product the same. Okay. Every state. So whether you buy our pen in Boston or Vegas or Denver, Detroit, or LA, it's exactly the same because we can create it from any starting bio maps. And that's really the wedge, right?
The wedges gain the consumers trust with the brand identity gained the distribution relationships to the dispensary's and then you can expand the breadth and depth of that offering. Once you've had the consumer's trust, of course, right. Then they trust the brand. And that was really [00:05:00] the fund strategy was looking for brands plural that have a really good established relationship with the consumer and, or have dominated their accessible market for a roll up strategy.
So we've kind of run in parallel to different strategies so that as regulation shifts, we can consolidate them and, and really enter the global market. So, the clearest file trademarks and, over 45 countries and approved in over 18. Although we only take a very slim percentage of the retail sales are, we don't really care.
And because the key is owning the consumer. We've maintained the equity of the, what will be the consolidating company for the next big raise. So we've held off on taking any institutional capital really so that we could maintain the cap table and maintain control as we're navigating this complex environment.
Because obviously, with a capital light model, when we taking 10% royalty on, on sales of. We, weren't trying to shoot the moon out on revenue necessarily what we were trying [00:06:00] to shoot the moon out of selling as many vape pens to as many consumers. And it's earning as many shelves as we possibly can, because we know that with ubiquitous legalization, we are strategically positioned to be.
The best option for rolling up our licensed manufacturing and moving that needle from 10% up to a hundred percent of of retail. that's kind of the, the strategy of, of the fourth fund was really focusing on brands and distribution, which obviously got more focused in 2017 with the acquisition of career.
And then in 2019 we consolidated using a 3 51 transaction as part of an umbrella strategy. Some of the non plant touching portfolio companies and the intellectual property that clear alongside some of the. Around lot shareholders that we would need to qualify for a potential public listing in the in the future when the market dictated that it was right time to do that.
So 2019, we consolidate a form clear cannabis, Inc, that maintains the intellectual. Oh, the clear and oversees the marketing, distribution, and sales of that [00:07:00] product by different relationships with either contract manufacturers or licensed partners in the state, depending on what the regulatory environment looks like.
So, creating that very flexible funding instrument was really the key to being able to make quick decisions. And that really just comes down to capital strategy. So something that's kind of interesting. About cannabis in general is that it's got a lot less to do with cannabis than you think it really does.
It's it has so much more to do with understanding how to navigate this very complex regulatory environment. And accessing funding. And so many cannabis companies I've looked at got in trouble really quick partially because of, the impact of two 80 is very real.
It really stifles business's ability to grow. And for those, with a service, we don't know what two 80 is two 80 prevents licensed cannabis businesses from writing certain expenses off against their top line revenue, which effectively raises their their tax rate. Sometimes north of 50% which can really, really make an impact on the cashflow, the businesses, especially when [00:08:00] the cost of capital, historically over the last eight years has been so astronomically high the Denmark market, the equity market, the cost of capital is extraordinarily high.
Companies have given away a lot of their equity. That's why you're seeing a lot of consolidation is the, the original ownership groups they're happy to take stock because they either tired and B they, they only own a percentage of their company. So they're not really emotionally invested in the success , of their own company anymore.
So that's kind of the corporate cannabis and kind of what the Canadian pub codes have done is really come down and try to consolidate the manufacturing and the grow. But really what they're buying is a lot of $20 an hour employees who are not emotionally invested in the success of the company.
So, it creates a an interesting environment.
Dan Humiston: Yeah, I'd say, , just based on what you just said, you can just feel how hands-on you are with the clear and all of your investments taking what you know right now in what you're seeing right now over the next [00:09:00] 12 months, do you see any new trends or opportunities for investors?
Rock Batenburg: Oh, absolutely. Absolutely. , it's very much my position that the most undervalued asset in cannabis right now are brands that are dominating their accessible market that are still private. And that really goes back to my original strategy, which is the company that owns the consumer is going to win the day.
Largely those private investments have been inaccessible to to the private investor. So finding ways to get involved with those companies and, and take positions in the private companies that are licensed that have distribution and relationships with consumers is a really big opportunity for investors that are looking at cannabis because those companies are going to grow and because.
The restrictive capital environment, they're hungry for capital. It's very difficult to raise capital. The equity market in cannabis is really tough. And part of that is the heat is kind of come off cannabis with the the ritual contraction of the Canadian pub. The multiples have come [00:10:00] down significantly.
, when we last spoke to the multiples in the cannabis space were astronomical , on top line revenue and, they've come back down to earth. So there was a lot of investors that got, I'm going to, for lack of a better term, I'm going to say burned. Their investments , are negative.
So some of the more experienced cannabis investors?
who took positions in those pub codes are, although they're watching their companies perform , from a revenue perspective, the stock has not mirrors that performance. the equity markets are tough. But that really does create an opportunity for a private investor.
That's willing to do the diligence or, if they're willing to to trust somebody like myself to allocate capital. Into private companies. There's a big opportunity there. If you have a unique diversity of skill set and information and connections in the cannabis industry, I've got a laundry list of deals and really quite good justification for why that'd be a good deal.
But you really need an expert that can navigate the cannabis industry and contextualize the opportunity for you, because it really is a, it's a complex environment and it changing all the time. So you really need someone who is hands-on to guide you [00:11:00] and those investments.
Dan Humiston: we hear that all the time that it's, this is, this is not like it was five years ago. You, you don't understand this industry you don't have time to learn it because by the time you do, it's already changed.
Rock Batenburg: It depends on how quick a learner you are, I suppose, but there's, there's always another deal, right? There's always opportunity. Cannabis industry is not done growing. It's not even close. And what's unique is that the U S being on the forefront of the cannabis space. We're going to bring a lot of these brands to the world.
And that's gonna, that's going to change the nature of these companies as well. And also a huge opportunity because the United States is biggest export is our culture. And and we're going to be exporting to the culture of cannabis to the world , by our nature. ,
Dan Humiston: . I know there's going to be an opportunity for the cannabis equivalent of Budweiser Coke or Pepsi. And so if you want to get in early, and this is still early, probably good idea to work with somebody that's got seven years of experience and we'll have all the clientele [00:12:00] capital.
Management groups info in the show notes. So if you're one of those companies, one of those private companies that are looking for investment, or you're an investor that wants to work with a good team, I'm sure somebody from Rick's team will be happy to speak to you. Rick, always a pleasure to have you on the show.
I hope your dad feels better.
Rock Batenburg: Me too. Me too. He he unfortunately golf COVID , We'll be lighting up our fifth fund you're towards the end of this quarter.
And we will be looking at accredited investor LP contributions. So if anybody at wants to allocate into a private cannabis, it'll actually have a hedged long only component as Well and really that's to maintain liquidity. And I think to really access the opportunity.
You need to be able to allocate into private and public.
And luckily I've got experience in both,
Dan Humiston: well, thanks again for being on the show today.
Rock Batenburg: Hey, thank you so much for having me, Dan, you're, you're fantastic. Your guests are you always fantastic. So honored to be a part of it, and hopefully we're going to talk about some more exciting stuff here in another couple of years.