MJBulls: Cannabis investing and cannabis fundraising

Entourage Effect Capital | Matt Hawkins | 2024 Preview

Episode Summary

The podcast episode features Matt Hawkins, co-founder of Entourage Effect Capital, discussing the challenging landscape of the cannabis industry in 2023, marked by financial struggles and limited investment capital. Hawkins highlights the potential impact of rescheduling cannabis, particularly the elimination of tax burdens, and discusses the upcoming opportunities in 2024, including the launch of a new fund with a substantial institutional investor. The conversation ends optimistically, focusing on the potential growth and investment prospects in the cannabis industry in the coming year.

Episode Notes

"Reshaping Cannabis: Predictions and Potentials for 2024"

Dan welcomes back Matt Hawkins, the co-founder of Entourage Effect Capital. The conversation delves into the challenges faced by the cannabis industry in 2023, marked by limited investment capital, portfolio management struggles, and fundraising difficulties, impacting both private and public sectors.

Hawkins discusses the impact of rescheduling cannabis, highlighting its potential to eliminate tax burdens under Section 280E, potentially leading to substantial financial gains for businesses. They also explore the upcoming opportunities in 2024, including the launch of a new fund by Entourage Effect Capital with a substantial institutional investor committing a significant investment, which could reshape the landscape for investing in the cannabis space. The discussion emphasizes the potential changes in legislation and the prospects for investment in both private and public cannabis companies.

The conversation ends on an optimistic note, focusing on the potential for growth and investment opportunities in the cannabis industry in the upcoming year.


Matt Hawkins - https://www.linkedin.com/in/matt-hawkins-11288a2/

Entourage Effect Capital - https://www.entourageeffect.com/


00:00:05 - EBITDA and Profitability Discussion
00:00:38 - Introduction to Raising Cannabis Capital Show
00:00:50 - Guest Introduction: Matt Hawkins
00:01:41 - Rating the Cannabis Industry Growth in 2023
00:02:11 - Investment Challenges in the Cannabis Industry
00:03:17 - Impact of the Macro Economy on Cannabis
00:04:03 - Legislative Optimism for 2024
00:04:25 - Excitement for Rescheduling and New Fund Launch
00:05:47 - Institutional Investor Involvement
00:06:45 - Impact of Rescheduling on Cannabis Businesses
00:09:08 - Investment Opportunities in Cannabis Stocks
00:09:32 - Private Company Investments and 280E
00:10:06 - Opportunities in Fund4 for Investors
00:10:49 - Accredited and Qualified Investors
00:11:00 - Timing for Investment with Institutional Partner
00:11:27 - Federal Legality and Institutional Capital
00:12:42 - Closing Remarks and Future Discussions

Episode Transcription


Today on the MJ Bulls Raising Cannabis Capital Podcast, we are joined by another former guest, Matt Hawkins, the co founder and managing partner at Entourage Effect Capital.

Matt, welcome back to the show.

Thanks for having me again, Dan. Always a pleasure.

Well, it's fun , to have you on, and it's really fun to kick off a new year. With somebody that has as much experience as you do, and I thought maybe we would take a trip down memory lane. We'll talk a little bit about this past year. And then more importantly, we'll talk about what we can look forward to in 2024.

I was thinking maybe on a scale of 1 to 10. So you've seen this. So many years in the cannabis industry. But if you were to rate this on a scale of one to 10 with one being the worst year for growth in the industry and 10 being the best year in growth in the industry, rate 2021 or 23. I should say,

23, It was pretty bad. Next to 22, it was the worst. 

22 and 23 were for us, I think just the biggest struggles. Some [00:01:00] companies, the tier one guys Can survive and have survived in some cases thrived. But I think for your, middle of the road and even folks like us that are managing capital, it's it was tricky both from a portfolio management standpoint and from a fundraising standpoint, it's,

In that there was a limited amount of investment capital , or is it more the industry is just going through this flush out phase 

It's absolutely both. It's really hard to manage legacy assets when there's no fresh capital coming in behind it. I mean, look, the bread and butter of private equity and venture capital is to exit when new money comes in.

And there just, there hasn't been any, short of our own. And so we've had to use our lucky we've been in private equity long enough to know that you need to have reserves set aside for follow on investment which we've [00:02:00] done, but you know, we don't have an endless supply of capital any of our funds.

And so that's the hard part. And then in public companies, the trick is, same thing is that you need. Fresh buyers to come in and bolster the stock. And we haven't had that either. So it's just, it's a perfect storm of not enough capital support of arguably, 30 billion industry.

Sure. And it's a reflection of the overall economy, I suspect, 

would argue that it's much worse. Or I think that it's the macro economy, even though there's a lot of money on the sidelines. There's still capital available for financing events, even it all be it expensive because rates are higher. This is where, not being able to go to the bank and get a line of credit is a big deal.


And having to spend now even higher. rates [00:03:00] because the cost of capital has gone up so much, your nine, 10 percent interest rates are now 13 to 15%. And that's that becomes on, untenable.

Yeah. Well, let's talk about brighter things to come. , we're starting off a new year. And there's a lot of optimism about some of the potential changes in legislation coming that could happen within this year. And so if, I don't like to put anybody on the spot, but I'm gonna, why do we, what

going to do it anyway, and come on, you might as

I'm gonna do it anyway.

What do you think about 2024? what are some opportunities?

it for a couple of reasons. One, I, I do think rescheduling is going to occur at some point. I mean, I think it's just the tea leaves or that people are reading just seem to be too too transparent that something's on the horizon. I don't know about Safer, quite frankly.

I mean, the reality is that if rescheduling occurs and 280E goes away. That's an unbelievably huge win

[00:04:00] Yeah,

and we'll be riding the windfall of that for better part of the next two years. So I'm excited about that. I'll be surprised if SAFER happens, but you know, it'll be a pleasant surprise. But I'm excited because we're going to be launching our fourth fund and we have a large.

Institutional capital partner that's committed a big chunk of money to see our next fund and we should be launching it in the first quarter. So that's going to give us the ability to do what I take very seriously, which is support the industry with capital. And we've been working on it for the better part of 2023 and got kind of the okay to start talking about it a bit and we're just, we're tickled to death, but again, we gotta, I gotta get it totally closed in the first quarter, but I think it's good.

It's it, all indications are that it's going to happen.

well, there's a lot of exciting things to unpack there, but I [00:05:00] think what really caught my attention is an institutional investor, because that's a rare bird in this industry.

It is and once we announce it you'll see some of the reasons why they're coming in, but can't say a whole lot more about other than it's a very large employee pension fund that is ready to deploy. Several hundred million dollars initially into the space and hopefully billions of dollars in the years to come.

Well, there's nobody better to manage that for the first big that I know of institutional investor. It's great that they're in your camp because I know you're going to steer them in the right direction. Let's talk about rescheduling. Just let me just follow up a follow up on that one. For the listeners that aren't familiar, like what would be some of the immediate impacts of rescheduling?

Go all the way down micro to a, to the individual dispensary owner, even the MSOs. How does that affect their bottom line?

So anyone that touches the plant is subject to [00:06:00] section 8, 280E of the federal tax code, which was set up in the, Drogon Wars days in the sixties, if not earlier than that, it may have been way earlier than that. But the nuts and bolts of that Section is to prevent drug, businesses that are effectively selling and producing illicit drugs is to not allow them to expense basically anything on their tax returns.

And so, so ironic, because you wouldn't think a drug dealer would be filing tax returns, which makes this whole thing. Sideways to begin with, but it's been so penal on the industry that it adds like at least another, sometimes 30, 40 percent of a tax rate on top of what your art, the burden you're already carrying at the local state and even federal level on top of that.

So, if it gets rescheduled to schedule three, it eliminates that entirely.


what happens is you've got companies that could be. Have EBITDA of say [00:07:00] 10 million, but are losing money after taxes to where they're now not only profitable, but could be cash flowing, as the same number,

Oh my

seven, 8 million.

, it's a huge swing that it's, to me is a bigger win than anything that the Safer Banking Act would do.

Frees up cache immediately, just by, and by not even counting the operational efficiencies that it will allow you to unplug because you'll have. The cash to be able to do things you haven't been able to do otherwise. That are doing it the right way and doing it by the rules are hoarding so much cash to pay their taxes.

They can't do anything else.

it's just it's maddening, but if, but it

and mind boggling, frustrating. And the fact that we've been going at this since, I mean, California was what, 16, 2016. And so, the fact that we've been going at [00:08:00] it for damn near eight years, just in that state alone, not to mention 2012 with Colorado, Washington, and Oregon.

I mean, it just it's ludicrous. fact that you had, heroin and cocaine that are far , more dangerous than cannabis , the fact that they're even on the same level is just ridiculous.

Well, it is, but it's a, that kind of data is very exciting, especially for anybody that's interested in investing, which most of the listeners are. And I don't want to take too much time on this, but for cannabis stocks, you just mentioned , the public companies that are this would be one of those places where you would probably want to look at companies , that have businesses that would benefit from the elimination of 280E.

Yeah. Well, it's not just, I mean, this is private companies too. I mean, private companies that are, are subject to 80 just as much as the pubcos are. So it's both but yes, to your question for just, average investor who, who may want to get into the [00:09:00] game without giving investment advice pubcos or would be a great way to do it because when it's rescheduled, , these businesses are improved dramatically overnight.

Yeah. Yeah.

also lose all the tax burden that they've been accruing over the years as well. That goes away too.

Oh, wow.


You mentioned the private companies and , I know people have just gotten their lunch served to them, trying to figure out where the best private companies to invest in, especially ones that don't work with professionals like you, with this new fund for that starting, will there be opportunities for people to invest in fund for.

yeah, we're going to be able to use this capital that's coming in as the, is effectively our first closing and then we'll be able to raise money around it after that. So, obviously it has to be for qualified purchasers and folks that are have the means and the can prove the fact that they are willing and [00:10:00] able.

High net worth individuals to do so

Yeah. And accredited investors that

credit is one level and then obviously qualified purchasers. And so it's a two tiered fun set up on, on which bucket they would go into.

but what a good time , to participate when you can join an institutional investor

, luckily our third fund, we were investing at the bottom of the market as well. Well, this is obviously at the bottom of the market too. And if rescheduling happens, then. We have a window here to exploit this. And we think the timing is impeccable.

So, see.

you're, cause you're cause all of your gunpowder will be ready to go where other people are going to have to go and find it. So

Yeah. , just because it gets rescheduled, doesn't make it federally legal. So you're still going to have a lot of capital still on the sidelines. Even though it's schedule three. It's still not considered a federally legal business.

And as a result, most of the institutional capital that's on the sidelines because of [00:11:00] that reason, isn't going to, change their mind unless they take a step out and decide , like our partner we'll be doing that the time is right. And I suspect there will be some of that.

Yeah, I agree. My point was that , you're going to have a head start because everyone else is going to have to,

We hope

this, when they see this happening, well, I'm going to have links to Entourage Effect Capital in the show notes. So if there is anyone out there that's interested in, jumping in on Fund 4, I'm sure somebody from Matt's team would love to talk to you about it.

And I think people that are interested in maybe looking at, for some investments should probably start getting themselves ready because they're , might be some opportunity for a change. Cause , there hasn't been a lot of opportunities. So you might be getting flooded with some decks, which would, which is good, man.

It's always fun having you on the show. I'm going to have you back on again next year to kick off next year so that we can see how you did.

Awesome. Happy to do it.

All right. We'll have a great 2024 if I don't talk to you [00:12:00] before.

All right. Happy holidays and enjoy the new year.