Podcast Episode: Smooth Sailing: Navigating the Sea of Cannabis Investing

Omar Sacirbey

Welcome to Seed to CEO, the podcast about making your way in the cannabis business. I’m Omar Sacirbey, a veteran reporter with MJBiz, sitting in this week for Chris Walsh.

In this episode, I talk with the brother and sister cannabis investment team of Morgan and Emily Paxhia, two of the first people I spoke with when I joined MJBiz six years ago. And I’m still learning a lot from them today.

The Paxhias launched Poseidon Asset Management some eight years ago and have since grown it into one of the most respected investment firms, not just in cannabis, but in any industry. They’ve invested in dozens of plant-touching and ancillary companies and are now into their third fund.

But the path to success hasn’t been without its pitfalls – something this dynamic duo will share with listeners today. But first, a quick word from our sponsor, Melt-to-Make Gummies.

[Promo: Melt-to-Make Gummimes]

When it comes to infused edibles, gummies are king. But let’s face it, not all gummies are created equal. If you’re looking to manufacture your own all-natural, delicious and consistently dosed gummies, then Melt-to-Make Gummies can help. Melt-to-Make offers 100-gram bulk gummy pucks that easily melt down, so you can infuse your preferred cannabinoids and consistently manufacture your own delicious gummies in any size and dose you desire. Learn more at MeltToMake.com.

Omar Sacirbey

Welcome back to Seed to CEO. With us today are Emily and Morgan Paxhia, the sister-and-brother team behind Poseidon Asset Management, one of the oldest and most successful cannabis funds in the industry. Thank you so much for being with us today, guys. We really appreciate it.

Emily Paxhia

Thank you so much for having us. We’re happy to be here.

Morgan Paxhia

Yes, thank you.

Omar Sacirbey

It’s been a while, and I’m looking forward to hearing your story. But just for starters, you guys have been extremely busy the last several months. Can you bring listeners up to date on what Poseidon Asset Management has been doing over the last several months in terms of investments, raising capital and so on?

Morgan Paxhia

Sure, yeah. Well, it’s been a very, very productive time for Poseidon. It always is. I feel like we haven’t taken a break since 2013. But you know, it’s been very exciting in this last bit here with the deployment of capital in our last fund is now fully deployed.

And we’re fast at work on our next endeavor. And that’s already off to the races. We had a recent press release announcing the first investments in that new fund.

And we’ve had some new members joining the team, which has been fantastic. You know, they’ve been in the industry for quite a while, Patrick Rea and Celia Daly coming over from Canopy Boulder. And so we really have quite a robust team now.

And just continuing to find great companies and make great investments in this ever-changing and exciting industry.

Omar Sacirbey

And that’s your third fund now, correct?

Emily and Morgan Paxhia

Yes.

Omar Sacirbey

And across the three funds, could you tell listeners, how many companies roughly you’ve invested in?

Morgan Paxhia

Boy, what would you say, Em? 75 or something?

Emily Paxhia

50 to 100.

Morgan Paxhia

Because we’ve done, we’ve done a lot of individual companies, and we’ve done follow-on rounds. And so it’s … yeah, we’ve done a lot of work over the years.

Omar Sacirbey

Yeah.

Morgan Paxhia

So yeah, that’s, I think that’s a pretty good number.

Omar Sacirbey

Excellent. All right. So now before we kick into how you all built Poseidon Asset Management, I do want to hear a little bit about what’s it like working with family members? What’s it like, you know, as a brother and sister team? What are your Thanksgivings? Like, do you guys talk shop? Is the cranberry sauce infuse? You know, tell us what it’s like working, brother and sister, together.

Emily Paxhia

I can’t think of anybody I would have rather built a business with in the cannabis industry, because my brother is, first of all, a great mentor to me, even though he’s technically younger. And he’s also incredibly trustworthy, you know.

I know we grew up with certain values, and our parents, we sometimes say that our dad was principled to a fault. There’s no bending on once … on the morals or the integrity there.

And so you know, in thinking about finance and the intersection of an emerging market, for us, it was really critical to work with people we trusted. And the two of us have been, I think, benefited from that because we’ve managed to stay in the game longer than many other people. And we kind of seem to be gluttons for punishment, because we just keep coming back with more and more things we’re doing in the industry because we just can’t seem to look away from opportunities that we see.

Which is really how we got into this, is we kind of had that moment where, really, uh, it’s really early and, you know, we had to look at all the potential downside concerns of what this could be like if it didn’t work out. But really what we said is, “Wouldn’t you hate to wake up in 10 years and read about somebody who launched a firm investing in this industry, and it wasn’t you because you thought about it one day, but you didn’t do it?”

You know, we work really well together, because we have different strengths and different areas where we fill in for each other. And I think that’s one of the big parts of it. And then, early on, in working together, I think we also figured out it was really important to give each other kudos for doing good work, because it’s hard, and no one else is going to tell you you’re doing a good job if it’s not your business partners. So I think that’s a really important part of working with a sibling, but also with anybody.

Omar Sacirbey

Good. How about you, Morgan, any thoughts on that? You know, what makes the relationship in this team work?

Morgan Paxhia

We laugh. I mean, we don’t get to be in the office together too much. But when we are, as always, we always have good laughs. And that’s something I think is really good.

But no, I just generally, you know, I love being in business with my sister. I feel like we are incredibly productive, we work well together. And, you know, the cannabis is, we’re still in this period of time where it’s federally illegal, people are still going to jail for it, which is completely insane. But for those of us that are operating in this industry, there’s kind of a social contract of, that’s the only law you should be breaking. And I have no concern with, obviously, with my sister that that social contract is upheld. And I can’t say that about everybody in this industry, unfortunately.

So I think that’s something that’s really important. It’s still as early, and there still is a lot of challenges. And you know, when you’re in the trenches or thinking big picture, we’ve, we’ve built this together.

But even thinking before we did Poseidon, you know, Emily always talks about how, you know, growing up we sailed together – and we still sail together. And sailing is a really interesting sport in that it’s there’s an element of physical, there’s an element of team, there’s an element of a lot of mental input. And you know, there’s just so many variables. And I think that’s really interesting correlation to cannabis, where it is just, there’s … we’re constantly thinking pragmatic and analyzing what is going on. And so just having kind of that background together is, I think, is a really powerful combination.

Emily Paxhia

You know, we came from a family of a family business and watched how that played out. And I think we modeled a lot of what we do today in terms of what we thought worked well or didn’t work well and avoid those pitfalls.

Omar Sacirbey

What made you think this is something that cannabis is something that we have to get into what made you want to take that leap, especially in 2013?

Emily Paxhia

Well, so it actually started really in 2012. And, you know, my previous career was in market research and consulting. And my job was to find new opportunities for companies to address different market segments to launch new products or develop new products to address consumer pain points. And all of that is about establishing a product market fit really, if you just boil it down.

And you know, moving from New York to San Francisco and seeing people line up outside of retailers like Spark and Apothecarium, and the profiles of the people who are standing outside of those stores defied what I think the war on drugs did in terms of cementing a negative stereotype around the type of person who consumes cannabis.

And so, you know, I called up Morgan – again, kind of going back to who can you call up with an idea about trying to participate in something that you’re just really starting to understand, that’s pretty controversial. And so called up Morgan, and I think that we, we clearly both have an entrepreneurial spirit because he just, he took it. And he took it so seriously, which is also just a very respectful way to interact with business partners, to take their seemingly crazy ideas seriously and put weight on them.

Morgan really was the person who thought of creating the fund structure around it. So Morgan, I’ll let you take it from there.

Morgan Paxhia

Well, it even goes back before 2012, you know, with, with our parents. We lost our parents to cancer, and, one of the moments for us that was very important. Well they were both believers in cannabis and thought the war on drugs was ridiculous, which they’re absolutely right. They were trying to educate their kids in a time of the DARE programs and the misinformation, obviously, which still continues to exist today. But they were trying to open our eyes to that. And understanding our mom knew about hemp from a nutritional perspective and from a, you know, industrial application perspective, I mean, they, they were very progressive people in that aspect -and consumers of cannabis as well.

And then when our dad was in hospice, you know, there was a nurse that actually offered to get them cannabis from just even from a palliative standpoint, and, and just hearing that from, from that aspect was … I was 12 years old. So I was obviously really young, but it was just a very clear moment because hearing it from a nurse when you’re in school, you know, and you’re seeing the commercials on TV, the stupid frying pan of the eggs and all that ridiculousness. But that was just kind of like that, that clear moment forever.

And then, I’ve always been a fan of investing, started out as a hobby when I was a kid and started buying stocks with lawnmower money, and then became professional with it, started was that 2007.

And then yeah, when Emily had this idea, I was like, Oh, my gosh, this is such an interesting idea and just had to pull on that thread a bit. I couldn’t believe it, when we were starting to do research, and there was nobody doing it. Like, how many times in life can there be something that seems so apparent and massive, and nobody was doing it? So it was just like, once that, we were like, we have to, we have to do this.

Omar Sacirbey

Fascinating. And did you ever, you know, think that oh, maybe, you know, no one’s doing it because there’s so much potential to get in trouble? You know, aside from all the valid points you all just made about, you know, palliative and compassion and just common-sense perspective that cannabis brings to medicine. Were you ever thinking, you know, there’s a big risk here? Or was that something that that that didn’t play into your decision making so much?

Emily Paxhia

I mean, we looked risk, right, you know, we looked that gun right down the barrel. I mean, that … and I think that’s like a big, that’s a huge part of investing, is, is you can’t ignore the risks, because then you will have survivor bias. You’ve got to look at what, what could go wrong and what, what didn’t go wrong but could have, you know. I mean, there’s a lot of ways to think about that. But yeah, we looked it right in the eye.

And the way we approached it was to just be pragmatic about it and to try to evaluate just exactly how we thought that could play out. But I mean, if you see our offering docs, they are just absolutely filled with risk considerations around this industry. And it’s, I mean, that was something Morgan and I had to take very seriously because we didn’t know, because there was no real support around it. And we were like, we could be made a case out of if it was something that ended up not being really appreciated.

There’s something about being, you know, out there to holding your hand up saying we’re doing this, but our whole thing was like if we, if we create an institutional firm around this, and we go right at it, and we have good lawyers, and we … transparency with the regulations, do all of our filings. Like, there’s a lot of firms who don’t do all of that. And we have always just operated right down that line, because we’re like, there’s no flex here. There’s no flex. So we’re very serious about our approach.

Omar Sacirbey

OK. You know, the opportunity obviously outweighed the risk, and you guys decided to proceed with setting up Poseidon Asset Management. How did you do it? What are the first steps that you take?

Emily Paxhia

I mean, our first step was to get a good lawyer. And that, you know, it wasn’t easy at the time, because of exactly what you’re talking about. Like 2013, people weren’t running to support a new firm launching to invest into the sector. So that was our first step, though.

And then from there, we just worked our network and connections, and we got connected with our back-office administrator, got connected with, you know, our auditors. But it wasn’t easy, especially back then. It’s a whole different world.

Now you have the whole world of service providers available to you. But that was our first, first intro to rejection. And then, “Congratulations, emerging managers, go out and try to raise money in an emerging market as emerging managers.” I don’t know, Morgan, what do you think about that?

Morgan Paxhia

I mean, absolutely. First things. First, is having good lawyers, the lawyers have done a great job building businesses in this industry as well.

But even before we engage lawyers, we did a lot of research about fund formation and how to build an asset management firm. This was our first fund, you know. I worked for an investment firm before, but they didn’t run private funds. They were just running traditional, you know, accounts, doing, you know, discretionary investment management.

So we did a lot of research on fund formation. How much does it cost? What do you need? What service providers do you need? And what are expectations for startup expenses? There’s a ton of information out there. And it’s actually pretty good, from what we were finding, for expectations of how much does it cost to form all this stuff. How much do you need to hold back for, you know, living? And, you know, what can you expect for scaling?

So we had built all of that into our consideration when doing this, which was also really helpful in how we built the first fund and why we chose do it as a hedge fund versus our funds two and three. And, you know, it was, it was the right structure at the time. It was an incredibly complicated vehicle. But it afforded us some tools to be able to scale.

But yeah, so that was, once we started plugging in all the pieces and, and built it. And, you know, we had a timeline of when we wanted to launch. I mean, we just take it just like anything else like, and you just work backwards from there. And, you know, work through our steps to, to do that. And, but we didn’t have any anchor investor, we didn’t have any initial capital other than our own. And we just got to work.

Omar Sacirbey

Just you and Emily? Or, I mean, were there any, like friends and family funds or anything like that? Or…?

Emily Paxhia

I mean, we have friends and family, sure.

Really, you know, actually, honestly, I think we didn’t even want to like … we decided to just go our own. And so we’ve seeded it with our own capital. We’ve invested in, we have invested or we’ll be investing in every vehicle that we put forth, because, as Morgan says, we eat our own cooking, and it served us well.

I mean, we believe this is a thing that will create generational wealth, and it has for us. And Morgan really articulates important points, because there were a lot of work sessions where we were, you know, we sat down and subdivided the sector. I mean, can you even imagine it was such an emerging market, people just thought it was one thing? And we sat down, and we said, no, this is software, this is ag tech, this is, you know, industrial hemp for building or carbon nanotechnologies. This is you know, everything, this is logistics. We subdivided the ecosystem. And that’s really been a blueprint for how we approached it.

Morgan Paxhia

Yeah, it’s a great point, and it gave us a tremendous amount of insight into where returns were being generated and how things were going. And that was really formidable for future funds.

 

Omar Sacirbey

Going back to how you all were starting that first fund, and you, you know, noted that how you started it with your all’s capital. What was sort of the beginning amount that you launched with, just to give listeners a sense of “OK, I can do it with this much?”

Emily Paxhia

We were just talking about this. Yeah. Go ahead, Morgan.

Morgan Paxhia

Well it depends on where you are, as San Francisco happens to be quite an expensive place to do business. Legal rates are a little bit higher here. I think all said and done, I mean, it was how much did it cost? Was it like, I would, seven figures?

Emily Paxhia

It could cost you $50,000 Or $100,000 to stand up a fund.

Morgan Paxhia

Six figures, yeah.

Emily Paxhia

I mean, I think the reason, Morgan, I’m rounding down for people now is because they do have a, I mean, we exist, other firms exist. They were writing the risk factors for cannabis for our firm.

Omar Sacirbey

What’s the next step? Did you start looking at, you know, certain types of companies? Did you have something in mind? Or did you start bringing other investors on or did that come later? Wat’s the next step once you have that first, first seed money in there?

Emily Paxhia

So yeah, we opened with the markets opening when Colorado opened its adult-use stores. And that was like, “Hold on kids, we’re going for a ride!” with our capital. So Morgan can tell you, that was an exciting day.

But concurrent to that, as we were working on pitch materials, because we knew, you know, obviously, we’re going to invest our capital and grow our capital. But we needed more. We needed investors so we could go after the opportunities we wanted to. So first thing we did really was go to the Arcview event in January, which is where we met Patrick, one of our new managing directors at Poseidon.

Omar Sacirbey

This is January 2013?

Emily Paxhia

‘14. Yeah, we were there. We had our pitchbook. We still have copies of all those pitchbooks. It’s cool to go back and see how we were talking about things back then. And, and yeah, at the same time, we were there looking for deal flow. So it was … but yeah, Morgan, I mean, that first day of trading, I’ll never forget that.

Morgan Paxhia

Oh man, it was nuts.

Omar Sacirbey

So take us back, take listeners back to what that was like.

Morgan Paxhia

Well, we had been running a little bit of our own money, you know, before the fund just trying to get used to things. See what was out there. I remember, you know, Saturday morning, Sunday mornings reading Ks and Qs  of just horrible companies. Just, just the worst – which I think 100% of them are gone … other than GW, which is I know is now GW Pharmaceuticals. But GW was a great example of a company that we were very early in buying into.

But yeah, that was, you know, that early ‘14 was the first cannabis bubble we had. And I just remember, we were jumping in the mix, and stocks were going up 50%, 75%, 100% a day. So just trying to like figure these things out. Because like, these things are all garbage. But you know, for us, it was just, riding that initial enthusiasm was a really powerful way to generate some early return that we could then recycle into real opportunities on the private side.

And that was really the power of fund one, was being able to, to leverage public market enthusiasm before there was fundamentals, which it couldn’t be more different today. But that’s what it was like in those early days.

But yeah, those first few days. I mean, if you could imagine what it was like. First-time fund managers, stocks moving like crazy. You know, those early, early months of returns were so critical, as we were trying to show that we were executing on what we were looking to execute on. You know, trying to make sure we could get access to some of these like, obscure names, and they’re like, “What are you talking about? What ticker is this thing?”

Yeah, well, I mean, we always kind of talk about is, you know, building the spaceship as it was taking off. That was what it was like. Back then was, you know, bubble gum and duct tape and, you know, just kind of scraping together while things were, you know, fully on the, on the jet pad with the engines on full blast.

Omar Sacirbey

Now, you mentioned, one of the things you were doing at the time was also putting together your pitchdecks. What did those look like at the time? How do you, you know, again, in 2013, 2014, how do you sell investors on a fund that’s going into cannabis?

Emily Paxhia

We had to talk a lot about what we thought was coming. And we weren’t wrong. We actually called it pretty well. I mean, just talking about it being, you know, the next great American growth sector, that it’s a consumer sector in the end, and now it’s just proving out.

We, we always joke that, you know, a lot of other industries, you have to launch something and see if there’s product-market fit. With cannabis, there’s been product-market fit forever. And there was a really strong illicit market because of that, because people wanted it, and it wasn’t available to them. So you just have to kind of look at analogues in history and try to extrapolate what you can. And I think, you know … I watched, repeatedly, the Ken Burns Prohibition documentary, because it’s very relevant to what we’re seeing here. Even, you know, back then it was the mob that was, you know, the gatekeeper of alcohol during Prohibition, but now, it’s been the cartels this whole time. And so, it’s not hard to think about what that looks like, and what that market did once it came back above board.

And so I think that, you know, that’s, that’s … we did a lot of work on, on just understanding how these things happened. We looked at it like a consumer category, like a wellness category, like a pharma category and, and then went from there. And so we did, I mean, we did have the Arcview market research reports, which were great at the time, but and then there was also political trends that were pointing in the right direction, like what we had going with Colorado, Washington State. And, and we, we had a belief that if those states turned on, and there was a net positive effect to having a legal program, that it would make it easier for these things to move.

And then the other thing we did is we immediately leaned in on organizations like the National Cannabis Industry Association, Marijuana Policy Project – I was on the board of that at one time. And it was just really important to us because we realized and understood that the closest you could get to understanding the regulators, the better off you were in understanding how these things would move.

So yeah, our pitchbooks were very much around what we thought was going to happen with market size. And talking about the different ways that we were going to approach it in terms of those subsectors that we were talking about, and kind of talking about a first-mover advantage to be the ones to be standing there writing the check and having the opportunity to kind of drive the investment terms.

Morgan Paxhia

I was going to say, just one of the things that we always, to your point, Emily, of how things came true. One of our core kind of tenets was capital as a change agent. And, you know, to the point of, yeah, it was completely risky back then. But we believed that if we could, if we there were others that believed in this becoming a real industry, and if we could somehow work with those folks to point capital into the direction of companies that were also moving the industry forward in a legitimate way, we could have a real lasting impact on de-risking the industry. Right? And, and helping it to become legal and available to more.

Omar Sacirbey

You all are making valid points that have proven to be true. But again, you know, 2013, you know, not everybody saw things that way. And I could imagine that a lot of people were thinking, this sister and brother are nuts for getting into an industry that is federally illegal. They’re going to be in… Well, I mean, did you run into resistance from people who were saying you’re going to go to jail?

Emily Paxhia

Oh we did.

 

Morgan Paxhia

Though. We’re like … yeah, you’re throwing your life away. You’re going to go to jail. You know, what are you thinking? Our, some of our earliest investors were lawyers. So they clearly understood the difference. I mean, they were early to educate us about the difference of perceived versus actual.

Emily Paxhia

Yeah, perceived versus actual risk.

Morgan Paxhia

And I thought that was just a really validating point, from our perspective. Listen, it still is illegal, still federally illegal. We’re not done, we’ve got a lot of work to do. And that’s why I say it’s just… We live in this completely insane world where companies are and people are doing fantastically well, while people are going to jail.

Emily Paxhia

I had to like write emails to people and like apologize, kind of like, I’m sorry if you’re horrified by what I’m doing. But I swear, I’m not a drug dealer. I’m not trying to get this. The opposite is true. I’m trying to get this into a legal and regulated market. I’m trying to invest in good companies that create jobs and have tax contribution to society.

So but it was funny I did, I had to a few of our extended family people, I had to like write letters, kind of like mea culpa. Like, please, I promise we have a good intention with what we’re doing. We’re not trying to be bad people. So that was a little frustrating.

Omar Sacirbey

Don’t ostracize us.

Emily Paxhia

Yeah, yeah, it’s … but you know, I did have a really funny experience. A couple summers ago, I was in the UK at a family office event. And these guys were talking to me, and they were like, “Oh, you’re in a cannabis fund?” He’s like, “That’s a bit of a naughty fund.” I was like, yeah, “We’re a bit naughty,” like.

Omar Sacirbey

That’s one way to put it. One way to put it. Yeah. Now, you know, when we sort of fast forward a few years, you know, from 2013, 2014, when you guys are, you know, getting some maturity, get looking into opening those second and third funds. Tell listeners a little bit about how, you know, setting up a fund nowadays is different than what it was in 2013, 2014.

Emily Paxhia

Yeah, I mean, look, not barring what’s gone on in Canada, cannabis is proving out to be an amazing industry. It’s like the highest-growth consumer segment really here in the U.S. And with healthy EBITDA margins, and interesting metrics, considering how challenging it is to run one of these businesses and the cost of capital and the cost of doing business that requires. So we just feel like, just on those measures alone, there’s just going to be massive unlocking of upside. And there will be more competition, which will make for different dynamics and pricing and, and everything. But there’s a lot of good things to come from this.

The other thing is, I mean, yeah, like Headset just revised to their market potential for 2022, from $20 billion to $30 billion, Cowen is now targeting $100 billion by 2030, which I actually think if you extrapolate the growth rate, it’s it’s coming in a little low. But I think, you know, that’s all just in the U.S. alone. We haven’t even touched or scraped the surface of this global industry.

So but the way it’s changed is that we’ve actually been able to point to tangible results of how this is working, instead of saying this is what we believe will happen. We can say, this is what has happened. And this is what we thought would happen. And this is what’s happened. And then we can also point to our own experiences and demonstrate our own growth with our other vehicles and talk. I mean, you can’t say past performance indicates future performance. You can’t say that, and you shouldn’t. But you can just point to the fact that you have been able to navigate through these very difficult times.

So a lot of that has, it’s nice to be able to talk in terms of concrete, you know, facts about what has happened. So, so that’s how a lot of how it has shifted. I don’t think actually, though, that has actually gotten easier for many people to raise money in this market, because there’s just not a lot of capital coming into cannabis. So a lot of us funds are running after the same groups of people, because it’s just, there’s just not that many out there who are allocating to the sector yet. We do think that will change drastically.

And and also, most of us don’t have institutional players in the funds. We have managers from institutions who have invested into our funds, which I think is a great endorsement of the strategy and of us as managers. But for all the reasons we’ve talked about, you don’t have the institutional or like that retirement, you know, you don’t have those same pensions is what I’m trying to say. You don’t have those big pools of capital coming in. So it doesn’t make it  …

Omar Sacirbey

You mean like a CalPERS or something?

Emily Paxhia

Yeah, I mean, Morgan, any different thoughts there?

Morgan Paxhia

Yeah, no. I mean, it’s, it still is a limited opportunity set, from a capital perspective. You know, every year ebbs and flows, and there’s periods of time where there’s more capital flowing, and … You know, there’s there was a lot of money invested from this kind of set pool. And it’s, and it’s waiting for its liquidity, right? We need to get the velocity of money out for folks that are in a lot of these funds. And a lot of private companies that haven’t had exits yet.

You know, if you think about anyone that’s deployed capital to private companies last two to three years, a lot of them have not had exits yet, which is totally normal. It’s just, you know, for private companies, that’s, you know, their own life cycles. But when you have a limited pool of capital and you’re relying on that pool to, to, or considering them as investors in the future, there’s a need for liquidity.

So anyway, yeah, I think it’s, you know, obviously, it’s great having a reputation and a track record. And all that is very important in a process and a team and, and all those things. And so, you know, but there’s still I think … this year, we’ve seen a bunch of first-time fund managers come in, especially abroad, you know, so it’s just a competitive part of cannabis. No doubt. I mean, it could be one of the most competitive areas is in fund management.

Omar Sacirbey

And you all mentioned that there’s not a lot of capital coming into cannabis still, and that, you know, asset managers like yourselves are chasing a lot of the same people in are the same money. Who are those people? Who … are those, are those like family offices? Are they wealthy individuals? Are there any institutions that are looking at getting into this? What are you hearing on that end?

Morgan Paxhia

Family office and high net worth. Those are the predominant investor base, for sure. And that’s, uh, which they’re great. I mean, they, they are unencumbered, right? They can, they can play and they can participate. And they don’t have the, the wall, so to speak, that institutional capital has, even though a lot of it is purely stigma-based.

What you can actually see this, Jeffries did a great report on this last month, where institutional participation is actually. In the ancillary companies, there’s a ton of publicly traded companies, it’s something like 30, 30, low-30s percentage participation, which is pretty good. But if you look at the plant-touching companies, it’s like sub 5%, which is a monster gap. And so any material uptick in that is just billions of dollars of inflows. We think that is, that dam is building and that pressure is going to break at some point and that capital flow will be massive. And that has cascading effects all the way down into private markets, and to funds and so on and so on.

Omar Sacirbey

What do you guys think the next eight years look like in cannabis and for Poseidon Asset Management?

Emily Paxhia

What does the next eight years look like? I think we’re in for, I think we’re gonna see another rocket launch here. I really do. I think we’re kind …  we’ve been talking, we’ve been making a joke that we’re kind of flapping around in the doldrums, you know, where the wind is out of the sails for a little bit right now.

But it’s kind of a great time, because we’re doing a lot of, we’re doing a lot of work, which is good, especially as an allocator. It’s a great time to be in the industry. So we are allocating, we’re just leaning in further, while we’re waiting for this next moment where things will change and where institutional capital will come in.

And, you know, it’s interesting. At the beginning of this year, when the markets were running up, and deals were getting really kind of competitive, there was a lot of cash flowing at that time. Like, in the first, what was it, the first 60 days of the year, there was, there were billions of dollars that flew into the industry at that time, right, Morgan? I’m trying to remember.

Morgan Paxhia

Yep.

Emily Paxhia

It feels like a distant memory right now. But so, you know, we’ve been through these periods before, and it’s all about patience and focus and leaning in on your strategy. Because, yeah, like I said, at the beginning of the year, Morgan and I kind of, you know, had one of those moments where you’re like, man, if SAFE passes now, and it’s already going this hot … Like, do we get another chance to really get our chess pieces on the board, lean in, take our bites that we want to get into these companies?

You worry sometimes, are you missing your window? Which is funny to think about, because we’ve really, we’ve, the windows cracked open, we’ve jumped through it every single time. And so I think that we’ve really been leaning in and taking advantage of this time, because that’s where your, you know, domain expertise and your knowledge gives you a lot of comfort. Because you’ve been here before, and you know, how to work through it. And so, so that’s it.

But I do think we’re going to … I think back to that day, that first day of trading in the fund and what it felt like, and I think we’re in for quite a few moments that are going to feel like that, and I’m excited for it.

Omar Sacirbey

What do you think, Morgan?

Morgan Paxhia

Yeah, you know, Poseidon, we’ll just, we’ll continue to evaluate the environment, and we’ll continue to deploy funds and tools into the space. As long as we think it’s, it’s of value to investors.

I think the next eight years, there’s going to be a lot of opportunities to do so. You know, there’s a reason we came up with the hashtag “harness the green wave” or the tagline, “harness the green wave,” as we’ve caught a couple of small waves. We think the waves, as Emily’s just talking about, we’re gonna get some really awesome outside waves and, you know, see some really exciting activity.

It’ll be really interesting to see. I’ll probably be completely gray in eight years, hopefully still have hair on my head. And, but, but it’ll be, I think, yeah, I still think that, you know … one of the things I said earlier in this year, too, and I still believe, is that this is going to be a lot of fun this year. There’s just been this period that’s not been as much fun, but I think the later part of this year could get really exciting again. You know, it’s just the ebbs and flows of cannabis. You just gotta be, you gotta be in it for and enjoy the good moments, but just know that there’s a lot of work in between those good moments.

Emily Paxhia

You know what I’m excited for near term? It’s a MJBizCon in Las Vegas.

Omar Sacirbey

Oh, thank you.

Emily Paxhia

We will be there with bells on, because it’s going to be like the reunion of all reunions after this last year.

Omar Sacirbey

For sure. We are certainly looking forward to it is well!

Before I let you all go, I do have one more question for you. But first, speaking of MJBizCon, I have a discount code that listeners won’t want to miss.

[Promo: MJBizCon]

Are you ready for the most anticipated event of the cannabis business year? MJBizCon is returning live October 19-22 in Las Vegas! Check out the full conference agenda, now available at mjbizcon.com. Also, don’t forget to register before the early bird rate expires on August 5. Visit mjbizcon.com and save 10% with promo code SEED. That’s SEED.

Omar Sacirbey

Before the break, I asked Emily and Morgan what keeps them awake at night? Here’s what they said:

Emily Paxhia

Well, the Paxhias are rubbish sleepers to begin with, so … And we get up really early in the morning. So our partners have to deal with that. Morgan, I’ll let you kick it off this time.

Morgan Paxhia

What keeps me up at night? You know, one of the big themes that’s going on right now is consolidation. There’s …and that’s a theme that’s going to play out for years. It’s just inherent in a fragmented industry.

What concerns me is bad consolidation, because that’s just going to be costly to deal with down the road. And that’s going to likely diminish returns and could keep, you know, could dissuade capital if they are participating in bad transactions.

And so, you know, our whole ethos, again, is we’re trying to move capital in a positive direction, generate good returns for our investors. And if it gets all muddied up or gets overshadowed by bad decision making, that would just put a chill on the space. And I don’t want that. We want, we want a thriving, deep and strong industry.

Emily Paxhia

I always say that fear is a shapeshifter. So what used to keep me up at night, you know, about “How are we going to raise money?” to “How are we going to find the deals?” to …. So it’s, it’s changed over time.

And you know, I think Morgan makes a good point on the consolidation front. And I think, on a macro level, what keeps me up at night is a similar thing, where I’m obviously extremely pro legalization. Most importantly, I’m pro decriminalization and getting people out of prison who’ve been there and letting them get involved on a business standpoint.

But my one of my bigger fears, too, is just really bad federal legalization that does not contemplate the businesses, does not contemplate state-level importance of infrastructure that’s been built. And it does not it contemplate small business. That does keep me up at night, because I do start to see some of the folks who are contributing money into this, into legalization. And I’m trying to think about all the motives that exist as people get involved.

But what I’d like to see is an industry that does thrive with a spectrum of business, where you obviously will have corporations but you also have the opportunity for craft and small business to thrive because otherwise it’ll get very dull. And who wants to be involved in something that got boring?

Omar Sacirbey

Those are fascinating answers. Emily’s focus on the industry remaining fun and not getting boring really calls back to an important part of the Paxhias’ success. Because as Morgan noted earlier, part of the reason they work well together is because they laugh together, and they trust each other.

Trust between partners is critical, because you need unvarnished opinions in any business, but especially one as risky as cannabis. And you need hard work in the form of research and due diligence to make sure your choices pay off.

But the duo also highlighted some important threats to maintaining that success: poorly concocted federal legalization and bad deals with the flurry of activity we’ve seen recently. On both fronts, that risk has been increasing. Don’t let the desire to move fast keep you from doing things right.

Thank you for listening to this episode. Please share it with others who may dig it and leave a review on whichever platform you use to listen into podcasts. You can also follow us on Twitter. Our handle is @MJBizDaily.

In next week’s episode, we’re talking with industry veteran and co-founder of 4Front Ventures, Kris Krane. Kris recently stepped down from his role at 4Front Ventures and as president of Mission Dispensaries after nearly 11 years. What has Kris learned about being successful in this industry? And how did he turn an idea into a national vertically integrated, plant-touching cannabis operation? Join us next week to find out.