Every industry is only as strong as the connection between the capital needed to grow and maintain it, and the companies themselves, who allocate that capital to expand new markets, lower costs, add services and improve product offerings. In most industries, this flow has had decades to form distinct, reliable channels. Not so in cannabis, which is still forced to fumble its way through muddy waters in this stage of its life cycle. Companies that touch the plant cannot get corporate bank accounts, let alone pitch themselves to the mainline Wall Street set.
Private investments are hard enough to get done on their own. This is especially true for smaller investors trying to get access to deals, and especially in cannabis, where federal issues severely limit the pool of investors able to casually dive into the space. It takes a particular, patient kind of investor, and it also needs technology and social media platforms to facilitate the information flow between investors, intermediaries and companies.
Bridging the Gap
Fred Gross of CannaFundr is playing a key role as an intermediary between investors (i.e., the capital) and company owners. Operating as New York’s Syndicate Leader within CannaFundr, and soon to launch his own venture fund, Gross brings not only a wealth of financial experience (something the cannabis industry needs in spades), but he is putting a big chunk of his own skin into every deal he does. We sat down with him on the eve of the Marijuana Investor Summit to get his thoughts on the industry, and discuss two recently closed deals, deals he “just wishes there were more of.”
Gross is partnering with CannaFundr’s parent company, CrowdFund Connect, and its CEO Randy Shipley to curate investors with an expressed interest in cannabis opportunities. The CannaFundr technology platform provides value for investors by highlighting vetted private firms that are seeking to raise capital. Directing the vetting and due diligence process, Gross brings a blue-blooded financial pedigree to the CannaFundr platform. Along with an MBA with honors from Leonard School of Business at New York University, he spent several years running a successful foreign exchange fund before taking a long moment to reflect a few years back.
It is no easy task to swim in the pools of high-stakes forex—it requires a deep library of economic, accounting and financial knowledge, but it can often be lacking in long-term satisfaction. Gross said he was very fortunate to meet and make a connection with Randy Shipley, who was looking to create a funding model for cannabis-based businesses utilizing the same format as other popular equity “crowdsource” funding models like Crowdfunder and CircleUp. Gross is passionate about the growth potential of the cannabis industry, and is enjoying the opportunity to help busy CEOs outsource the time-consuming practice of raising money. He noted:
“In a world of uncertainty, record-breaking high equity prices, an extremely strong dollar, and very low interest rates (now with Europe initiating quantitative easing); I see no space out there as exciting as this, in terms of exponential growth over the next 5 years. I look forward to continuing to strategically align myself with those that I believe to be the best of the best in the cannabis space and focus on ancillary companies that provide excellent risk-reward profiles that I can mentor and help raise capital for. The cannabis space is just starting to boom here. I expect by 2025 that this will be a $50 billion marketplace all told.”
The Funding Model in Action
Fred Gross isn’t being paid to just carry assets (earn a management fee) in the way most mutual funds and hedge funds do. CannaFundr is investing in maturing companies that are ready to start courting long-term investors and have an eye on future public stock offerings. Gross noted that the CannaFundr sourcing model has been a tremendous help to his early fundraising efforts—the program has over 400 accredited investors and over 1,200 investors total. They can look at potential deals and participate for much lower investment minimums than the $50,000-plus rounds typically seen in the private investment space.
The first deal done by Gross’ syndicate is for Denver-based MJardin, which is actually two distinct operating companies. The first is an intellectual property firm called MJAR Holdings. The second is a cultivation management services and consumer products company, MJardin Management. MJAR Holdings leases back certain intellectual property assets to MJardin Management while having the freedom to license with other clients as well.
MJardin Management deals in consulting practices like license acquisition and support, facilities management and operational best practices. Its practice has shown success in all major markets, including Colorado, Nevada, Illinois, Florida and Massachusetts. Gross agreed, noting:
“Adam Cohen, MJardin’s CEO, entirely understands the crucial aspects I look for when investing in a company in this space – pedigree, scalability, and ability to execute. Mjardin continues to impress me with their focus, determination and creativity. They’re getting (contract) wins, often on reputation alone, and they’re the first cannabis company to split off their intellectual property from their management (“hands on the plant”) business. I believe that this was a crucial strategic move and will create value for investors in the near-term and long-term.”
To our eyes so far, MJardin is going about things the right way. It really has a chance to carve out a long-term market leading position for itself, and it is a position that it could maintain in a future with full legalization. We worry about a lot of industry participants being “pushed out,” but the information, knowledge and best practices that MJardin is collecting internally is a real asset and one that will appreciate over time.
This strategy is playing out in the new strategic alliance between MJardin and 4Front Advisors. Under the terms of the arrangement, both companies will still forge their own paths but refer clients to one another to highlight the strength of 4Front’s retail operations practice and MJardin’s cultivation and scaling expertise.
This is what Cohen had to say when asked about the fundraising process and the addition of Gross to his team:
“Fred has been a tremendous and reliable resource for MJardin, not only as an investor and conduit to other sophisticated capital sources but also as a strong ally and advisor to the company and its management team. Fred continues to deliver for us with his fresh perspectives, positive energy and deep understanding of the industry and we are most appreciative and grateful to have him in our corner.”
Fred Gross’ second deal is a closed funding round for vertical farming innovator Indoor Harvest, which is taking part in a revolution over how plants can be sustainably grown indoors. CEO Chad Sykes is bringing proprietary solutions to aeroponics through a modular, customized architecture.
Indoor Harvest is partnering with Tweed Marijuana Inc., the largest-scale grower operating in Canada today, and has a test grow operation running at MIT Media Lab’s City Science Initiative.
Gross noted that while there is a lot of competition in the vertical farming space, Indoor Harvest has the technology to really make waves:
“The Tweed pilot and partnership with MIT say an enormous amount about the company’s approach to the cannabis space. Indoor Harvest is ready to revolutionize the cannabis space with its ground-breaking technology”
Chad Sykes, CEO of Indoor Harvest, had this to say about his experiences with Gross and CannaFundr:
“Fred’s been a huge help in raising us capital through his fund. The time and human effort it takes a management team to raise capital can really take away time spent towards developing business and operations. Having someone like Fred who’s effective at raising capital is a huge benefit. His professionalism and understanding of the industry has also been a huge benefit. Not only has he been effective at raising capital and understanding the state of the cannabis industry, he has been a great mentor as well.”
On to the Summit
Fred Gross is looking forward to meeting with and speaking to investors and entrepreneurs at the upcoming Marijuana Investor Summit. His portfolio companies will be present as well to give business updates to the cannabis industry’s power players. Also in the works is a new LLC called 77th Street Finance that Gross hopes can facilitate short-term financing transactions for cannabis companies that need a boost.