Traditional Investors are Making Their Methods Felt in the Cannabis Industry
Newcomers find an edge to bridge business understanding between cannabis entrepreneurs and skittish investors
Are traditional investors ready to throw their hats into the cannabis market?
Yes and no.
All you have to do is look at the Tilray run recently – crashing from a high of $300/share to $99/share in just a few days in September – to see why they are not jumping in just yet. Too much regulatory and legal uncertainty. Too much volatility in how the company stocks react, even with the guidance of leaders who have outstanding pedigree in business development.
Ruth Epstein is taking her shot. Epstein is a Harvard MBA who spent ten years working with Goldman Sachs in investment banking. She currently serves as Chief Financial Officer/Chief Operating Officer of Treez, creators of a relatively new point-of-sale (POS) enterprise retail management system launched in 2016 in Oakland, California. Treez, which was founded by two energized entrepreneurs - John Yang, Chief Executive Officer with a background in software engineering, and Shareef El-Sissi, Chief Product Officer with deep cannabis industry experience - is going after the same market as competitors like GreenBits, Cova and MJFreeway.
On August 31, Treez closed a Series A funding of $11.5 million, led by Intrinsic Capital Partners, including a $10 million investment by Intrinsic, along with investments by AFI Capital Partners and Welcan Capital.
Treez is currently being used in over 100 of the largest dispensaries in the country. The new funding will allow them to pursue market expansion opportunities and invest in partnerships, acquisitions and product expansion.
Epstein’s solid investment background provides a source of comfort to skittish investors. “I have been told by investors that it’s nice to be able to talk to someone who speaks their language,” Epstein says. “Most entrepreneurs in the cannabis industry grew up in cannabis and they have a very different way of looking at business. The fact that I come from the traditional capital-raising world means I just have a better understanding of what makes investors comfortable – what they are looking for in terms of financial information, organizational structure, controls, corporate governance and how they manage the risks inherent in this industry.”
Epstein got involved with Treez as an investor at first because she was very intrigued by the opportunity, especially after the leading POS system developer, MJ Freeway, ran into serious trouble with data handling issues in 2017. “I liked the way Treez’ founders combined deep knowledge of the cannabis space and enterprise technology expertise. I thought the marriage of those skills was really compelling and different from what others in the space were doing.”
She realized that the company was short-handed, much like many startups, and wanted to help them raise additional capital, working with them at first on a volunteer basis. It soon became clear that it would be a full-time gig – not only helping Treez raise capital but helping to create the necessary financial controls and organization to facilitate the company’s growth. So she joined the company as their interim CFO/COO in January.
Treez’ initial capital raise in 2016 and 2017, totaling about $3.5 million, did not come easy, even with California’s looming 2018 legalization. “What we discovered in that seed round was that it was more difficult to raise money, and took much longer than we had anticipated,” Epstein says.
The checks were relatively small, many at $50,000 to $100,000. “So when we decided to go to market with a larger Series A raise during the second quarter of 2018, we were pleasantly surprised by the new level of interest,” Epstein says. “It had taken us 15 months to raise around $3 million, but in just three months, we were able to raise $11.5 million.”
She says that, today, she is starting to see more traditional capital coming into the market, which in turn is driving other previously-sidelined investors to get involved, with some reacting to the performance of Canadian stocks and the opportunities those companies represent.
Epstein says that MJ Freeway continues to be a major competitor in this space – they just secured $10 million series C financing - but Treez leadership is “seeing them less and less” in deal discussions. “They never fully recovered,” she says. “But we are going up against a changing cast of characters.”
Other POS companies such as Green Bits in Portland, Oregon, and Flowhub in Denver, are all after the same customers as Treez, which positions itself as a more enterprise quality platform for larger, sophisticated dispensaries. “It’s really a premium product,” Epstein says. “It’s much more than just a front-end cash register. Treez is designed to be a retail management solution, providing enhanced functionality that offers significant business efficiencies in terms of workflow improvements, as well as data for inventory and personnel management.”
As the industry grows in states where both medical and recreational use are legal, there are more dispensaries that have multiple stores in one state, or stores in multiple states. For example, one of the clients of Treez, Surterra Wellness, has 25 licenses in Florida. They operate ten wellness centers across Florida, and recently closed a $65 million Series C equity fundraising effort. “There is a consolidation of dispensaries and a growth of enterprise retailers beginning,” she says. “Treez is perfectly positioned for that consolidation and growth, and that is where the market is going. That is the target.”
The Treez platform allows dispensaries to scan IDs, which not only ensures compliance but also allows a busy budtender to know more about their customer instantly. The software also stacks discounts without the budtender having to do the math. “For instance, imagine that you are a veteran and it’s Tuesday and you are buying a vape product’,” Epstein says. “The software automatically creates a discount on that purchase, making the dispensary run much more efficiently. With the exponential growth in the number of consumers, that’s a critical success factor for dispensaries.”
The future of Treez, like many companies in the cannabis industry, is a bit of a
moving target given how business developments go and the volatility of the cannabis stock market. Epstein says that she would have said earlier, “with a have a high degree of certainty”, that within a couple of years, Treez would be acquired by a large traditional technology company like Oracle or SAP.
Epstein now expects that the company may choose to go public in a couple of years if the market holds. “Ultimately, we want to be in the business-to-business space and create this linked ecosystem of growers, manufacturers and dispensaries, scaling up to become the largest, most successful technology platform for cannabis.”