Marijuana Business Magazine March 2020

March 2020 | mjbizdaily.com 21 Why have you chosen cannabis to launch this new way of lending? Cannabis is the ideal industry to operationalize our model. Banks are sitting on the sidelines while at the same time we’re engaged in a national discussion about access and social equity ownership. Nationally our default rate is less than 2%, compared to a 17.6% trailing 10-year default rate for SBA-backed loans. Lower default rates result in higher profitability and returns to investors. What’s more, 50% of the Illinois-based cannabis businesses our technology approved for financing are women-owned. With no human intervention, operating on its own, our technology approved as many women-owned businesses as it did men-owned businesses. Nearly half of our borrowers are minorities, which is a byproduct of our focus on social equity and the degree to which we’ve sought to remove bias from our evaluation process. Is the current capital environment in the cannabis industry affecting your ability to raise money? Alan Greenspan, the former chairman of the U.S. Federal Reserve, characterized investors’ behavior during the dot-com bubble as “irrational exuberance.” I believe the same thing is happening in cannabis. The lion’s share of invested capital is in equity, financing the operations of many multistate operators (MSOs), but if you look at the top cannabis exchange traded funds (ETFs) in 2019, they are all down—some by as much as 55%. The performance of these ETFs underlines an ominous reality, namely that the billion-dollar M&A headlines and a growth-at-all-cost mentality are destroying shareholder value with no end in sight. Several MSOs have not yet cracked the code on how to make money today, and it doesn’t appear those same companies may know how to do so in the future. And if you don’t make money, you’re not a business. You’re a nonprofit parading as a business. Smart investors understand this dynamic and are looking at better options to earn returns in cannabis. This interview has been edited for length and clarity. Good Tree Capital founder and CEO Seke Ballard is putting his company’s investment model to use in Illinois’ new adult-use cannabis industry. Ballard committed Good Tree Capital to financing 100 social equity applicants and providing them with the financial and technical support required to submit complete and compelling applications to the state. He sees the Illinois system as improving upon existing social equity programs in other regions. And so far, he likes what he sees in Illinois. “The mad scientists in Illinois have created a formula that is showing some promising early results,” Ballard said. For example, 600 of the approximately 700 applications for dispensary licenses are believed to have come from applicants with a social equity background. Illinois initiatives include awarding social equity applicants 50 out of 250 possible points in any license application. Applicants also do not have to secure real estate ahead of filing an application, drastically reducing capital costs. In addition, the $30 million Cannabis Business Development Fund provides grants and low-interest loans to social equity applicants and licensees, allowing them up to $250,000 in working capital and operating expenses. For their part, Ballard and Good Tree organized a “Hackathon” in Chicago, where a network of trusted consultants, lawyers and CPAs volunteered their time to assist aspiring entrepreneurs with their applications. In addition to the December Hackathon, Good Tree also worked with Chicago officials to organize a resource fair in February. The event was created to assist cannabis entrepreneurs with everything from navigating city policies to having criminal records expunged to securing financing and starting a cannabis business. – Nick Thomas Funding the Illinois Social Equity Experiment Nick Thomas covers finance for Marijuana Business Magazine. You can reach him at nickt@mjbizdaily.com.