Following the legalization of recreational cannabis in Canada, and the huge influx of business that it has produced, investors are now looking to build a similar industry in the United States, which many expect to be following suit in the next few years.
The question is, what is the best way to fund it?
Paul Rosen - Chairman and CEO of the Tidal Royalty Corporation - believes the answer lies in Royalty Financing.
Rosen is an attorney by trade, but always considered himself “more built for business.” After establishing several self-funded businesses, he first became interested in the cannabis sector in 2012, after he began to pay more attention to Canada’s shifting policy surrounding the substance.
“Once I heard the phrase 'commercial production license,' I immediately started a company,” he said.
That company - The Cronos Group - went on to become a major player in the Canadian cannabis industry.
“Cronos taught me a lot of things. It taught me how to contextualize what I like versus what I didn’t like, but what it really taught be was the primacy of capital in regard to cannabis businesses”
He hopes to replicate his success in Canada by entering the emerging US market, which he believes is poised to “explode.”
His new company, Tidal, provides a different kind of financing from the typical equity investment model. The financing made available through Tidal Royalty is called Royalty Financing, which Rosen describes as “putting up meaningful amounts of expansion capital, anywhere between $10-25 million, and in return, [they] take back a percentage of the revenue our capital creates.”
Rosen is not only drawing from his previous experience in the cannabis industry for this latest venture. When looking at the prospect of royalty financing, he found an interesting correlation—the mining industry.
“We figured out that there was a correlation between how the mines operate and how cannabis operates. What do they have in common? One, they’re both very expensive to develop. Two, you know if you can get your product out of the mine or out of grow room, you have an audience, or a market for it. No one has to guess, 'Boy, I wonder if I pulled gold or lithium out of that mine, if I could sell it.'”
Since cannabis, like mined gold, has proven value in the marketplace, it’s virtually guaranteed to bring in money. The only problem is determining the best way to “build that mine,” so to speak,
Rosen’s belief is that those who are looking to build their businesses would much rather pay out of their revenue, instead of going with the more traditional equity investment model.
“My prediction, as a stiff-necked entrepreneur, is that if entrepreneurs had the option between taking the money and issuing shares or taking the money and paying out of revenue, they’d prefer to pay out of revenue because they don’t want the friction or the interference of a shareholder. That’s how I feel. I like to run my own company without too much interference.”
That isn’t to say that the company is loose with its capital. In fact, Rosen stresses that they are more likely to be conservative with their investments than if they were an equity investor. The reason being that they cannot simply sell their shares and move on if things don’t work out.
“We don’t have shares to sell. So we really have to make the longest-term calculation that the asset is viable, and that it will be producing revenue for years and years.”
When it comes to supporting businesses that will continue to grow and build revenue over several years, Rosen says that now is the time to invest in the United States.
“Whenever you have an explosive industry and a shortage of capital because of some policy risks, that’s very exciting for me,” he said. “If it was legalized, there’d be more competition from more conventional capital.”
He reiterated that the current climate surrounding the cannabis industry in America is quite similar to the situation in Canada several years ago. Despite the bluster coming from Attorney General Jeff Sessions and other opponents of legalization, federal legalization is “inevitable,” according to Rosen, who think it's likely to happen within the next two to four years. At that point, it will be too late for new investors to make their mark.
“We’d all like to go back to 2014 and start buying all the cannabis stocks in Canada. You can’t do that, but what you can do is redeploy our capital, our strategies, our intellectual capital, and get the same results I did before in Canada.”
Which is not to suggest that the Canadian and American markets are identical. There are some marked differences in the approach of both countries, especially in terms of regulation and branding.
Canada’s attitude, which Rosen describes as “paternalistic,” is to start with heavy regulations before opening up once the market grows. Conversely, the US market is starting with very little regulation in their current state-by-state program. Rosen believes that they will then begin to add rules and regulation as the federal system begins to come into its own. Eventually, he expects they will begin to harmonize.
As for how this will impact the current market, Rosen has some thoughts. Based on his observations of the current markets, the recreational industry will begin to totally overtake the currently legal medicinal industry.
“What we’ve seen from Colorado is that the recreational market begins to cannibalize the medical,” he said. “All this really means is, right now, in Canada, the only way to get cannabis is through a medical program, and a lot of people who have a medical document probably would be recreational if they could get it. On the other hand, if you have anything that is truly medical, then you’ll never leave your preferred medical supplier because why would you ever switch your medicine?”
Considering cannabis will continue to play a major role in both medicine and recreation, it begs the question as to how big the industry can actually get, especially compared to other industries within these sectors, such as Big Pharma, Alcohol and Tobacco.
But Rosen doesn't think medical marijuana alone would be enough to overtake Big Pharma, though it could “take a big bite” out of its business. He was more confident in the overall value of the commodity however, stating that, once legal, its success will be unparalleled.
“If you add up all the whole cannabis economy, it will be bigger than any of those three industries.”