Getting Into the Weeds With Scott Greiper of Viridian Capital Advisors, Pot Financier
Scott Greiper is the president and founding partner of Viridian Capital Advisors, the first investment bank dedicated solely to the cannabis industry.
In addition to investment and advisory services, Viridian has pioneered the following of cannabis companies by creating the Viridian Cannabis Deal Tracker, which, according to the company website, “monitors capital raise, mergers & acquisition, joint venture, and licensing activity for both public and private companies in the legal cannabis industry,” and the Viridian Cannabis Stock Index, which trails the stronger public cannabis companies. Greiper spoke to the Commercial Observer about where the industry stands today.
But first, let’s start with what Viridian does, exactly.
“We’re an investment banking firm,” Greiper said of his seven-person company (they also work with seven outside board advisers), based in Manhattan. “We launched Viridian about three years ago to help raise capital for cannabis companies throughout the world, primarily focused in the U.S., Canada, Israel and Australia. We help companies make acquisitions of other cannabis companies, go public or dual list their securities in more than one country. Then, our advisory practice is about professionalizing these businesses before they go out for capital. That means making sure there’s a real board of directors, which we help build in some cases, and helping ensure there are financial controls in place. We also help with developing forecasts and budgets.”
Greiper, who says he doesn’t touch the stuff himself, began working with cannabis after being asked to advise a company in the field.
“That request came as a result of our other practice, Secure Strategy Group, which is an advisory, investment banking boutique serving emerging growth companies in the physical and cyber security market,” he said. “The engagement with that company led me to a six-month deep dive into the cannabis industry, at the end of which I realized the emerging and significant opportunity in cannabis, and the value we can provide to investors and businesses in the cannabis market.”
That market is anything but small fry, as the cannabis investment landscape is huge.
“We tracked about $3 billion of investment capital that’s been invested in the industry over the last three years,” Greiper told CO. “For the size of the cannabis market in terms of sales, last year it was just over $7 billion in the U.S.”
Of course, a bank that traffics in money whose legality is questionable—at least on a federal level—is exposed to risks of all sorts, predictable and otherwise.
“The biggest risk is management,” Greiper said. “Cannabis companies have uncertain and increasing competition, and testing requirements for potency and pesticides and the like are evolving, so you have an uncertain regulatory environment. You have to have management that is able to navigate a changing, dynamic environment. Make sure there’s a CEO and a team in place that has a demonstrable track record in building businesses. Many cannabis operators have great knowledge of growing the plant, but they don’t have a track record of operational success outside of the industry. If I was an investor, I would bet on a company whose senior management comes from outside the cannabis space.”
One of the cardinal rules of investment in cannabis has been that investors should steer clear of companies that “touch the plant”—i.e., growers, dispensaries, etc.—as they’re the ones most exposed to potential legal ramifications. But the question has become murkier as more and more states legalize. While differences in state laws can be vast, in general, cannabis has been legalized for recreational and medicinal use in eight states and Washington, D.C, and for medicinal use only, with varying caveats, in 21 more.
“It goes to your level of risk tolerance,” Greiper said. “The majority of the institutional investment community is not investing in cannabis because they’re, [for example], a $50 billion fund, and they manage money for university endowment funds and state pension funds and insurance funds…By charter, they can’t invest in casino companies or tobacco companies, and cannabis is going to fall within that. But what we’ve seen over the past year, based on the data in the Viridian Cannabis Deal Tracker, is that the most capital is going to companies that touch the plant. Cultivation and biotech are accounting for about 65 cents of every dollar invested in this space, and they touch the plant. There is a higher risk to that, but so far the returns are accounting for that risk.”
This raises the old public-private question: Just what are the special considerations when taking a cannabis company public?
“The valuations of public cannabis companies are extremely high right now,” Greiper said. “It’s like the dot-com companies in the late 90s. Everything became company name dot com, and you went public and had a $50 million valuation. That’s where we are in cannabis right now. There are a zillion companies, canna-this and canna-that, and you get very high valuations in public markets because people love the unfolding of this industry. The downside of being public is, there’s a cost. For a smaller company to be public today costs probably around $250,000 to $350,000 a year just to pay for factors like public accounting. And, you’re very exposed when you’re public. Every quarter, the world is going to know what revenues you generated—or not.”
This doesn’t sound very different than what a lot of startups have to deal with. But unlike with other startups, traditional venture capital firms have not embraced their inner-stoner by throwing gobs of cash at the weed industry. However, Greiper added, “We do have probably 10 or 12 early-stage private equity funds that are strictly focused on cannabis. We have one of our own. It’s called Viridian Ventures.” (Greiper is mum on how much money that involves.)
But that could always change. “Investors chase growth. If the returns of…this industry continue on the pace they’ve been running at for the last four years, I don’t see how the professional investor can stay out of it forever. That said, in the U.S., the federal illegality is a concern. That’s why up in Canada, where you have a fully federal medicinal legal market and, next year, a fully federal recreational legal market, the institutions are in. They’ve been supporting the huge pace and size of capital raises.”
But the big thing to note is that the business remains unspoiled and largely underdeveloped.
”There are investment and business opportunities in this industry that are in some of the largest investment verticals in the world—real estate, biotech, agricultural technology, software,” Greiper said. “They just happen to be within the cannabis market. So there are opportunities in this sector for experienced professional investors that are already investing in real estate, biotech, software, etc., where they’re going to see a very familiar set of terms and structures. It’s not as far afield as some might think.”