MJBizDaily Investor Intelligence

1 MJBiz Daily | Investor Intelligence mjbizdaily.com/investing I nvestors who have spent any amount of time considering the prospects in cannabis know well the enormity of the opportunities unfolding. But as the industry rapidly evolves, there’s also an increasing number of deals worth passing by. Investor Intelligence asked leaders at some of the industry’s most active private equity and venture funds to share the top sectors they’re steering clear of as they continue to build out their portfolios this year. Here’s what rose to the top: LESS BULLISH ON BANKING AND FINANCE SERVICES Across the U.S., banking and access to traditional financing continues to be one of the major hurdles canna- bis firms face. That’s led to a host of startups and financial services crafted exclusively for the U.S. marijuana industry, ranging from closed-loop payment solutions to specialty checking accounts at select credit unions. But increasingly, investors see the prospects of federal marijuana reform on the near-term horizon—a move that would pave the way for banks and institutional investors to open their doors and checkbooks to the industry. That, in turn, could decimate companies focused on alternative services in this area. “We were originally very interested in the financial solutions sector,” said Jeff Howard, a managing partner at Salveo Capital, a Chicago-based private equity firm that’s invested in a range of cannabis businesses from brands such as Tokyo Smoke to California cannabis retailer Harborside. “But now we think there is very likely a scenario that there could be some incremental reform specifically on the banking side of things that gets moved through Congress and approved in 2019,” he said. “That would be great for the overall industry, but how that affects financial providers servicing the industry is hard to predict.” However, the stage a company in this sector has reached is a critical consideration before an investor decides to walk away completely. Larger operators that have an expansive customer base “are likely sticky enough and … will be attractive for a larger financial institution that would rather buy your business than compete with you,” said Troy Dayton, CEO at The Arcview Group. “But if you’re in the early stages, you probably don’t have enough time to develop that customer base for the future at this point.” ➜ Alternative: Consider Other Regulatory Solutions Even with federal reforms, Salveo Capital’s Howard noted that cannabis will continue to be highly regulated. “We think it will be similar to alcohol, with municipalities able to make their own regulations around it,” he said. That means solutions that help firms comply with those regulations will continue to be valuable. Among Salveo’s portfolio companies is Denver- based Würk—a startup launched in 2015 focused on human resources and compliance tools for cannabis firms. That company has raised more than $18 million to date, having just closed an $11 million funding round in February led by Poseidon Asset Management and Arcadian Fund. Salveo, Phyto Partners and Arcview also participated. CAUTIOUS ON CULTIVATION Of the $13.8 billion raised in 2018 by U.S. and Canadian cannabis companies, nearly $8.5 billion went to companies that were investing in cultivation operations and retail, according to data from Viridian Capital Advisors. But as the price of flower continues to drop year-over-year—as much as 10% in some markets— investors are beginning to pull back on pure cultivation plays. “Investing in cultivation for a consolidation play is rampant, but investing in new cultivation from the ground up is really shifting,” said John Downs, director of business development at Arcview. The drawbacks include high costs and the length of time it takes to get a new cultivation operation up and running, which can range from four months to • Leading cannabis investment fund managers offer their views on the top sectors and prospects they’re letting pass by • Salveo Capital unveils why it’s become bullish on MSOs • Tuatara Capital’s Al Foreman warns of “storm” ahead in cannabis continued on page 2 March 15, 2019 IN THIS ISSUE 3 Cannabis Plays to Pass On State Market Snapshot: Ohio Spotlight: Tuatara Capital Valuing Cannabis & Hemp Cos Investor Insights: Proceed with Caution 3 cannabis plays investors are passing on By Lisa Bernard-Kuhn

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