Podcast

Narbe Alexandrian, President & CEO, Canopy Rivers

April 29, 2020

About

Narbe discusses the Canopy Rivers investment portfolio, their vetting process, and the 5 distinct waves of the cannabis industry.

Transcript

Jeff Ragovin: I’m your host, Jeff Ragovin and welcome to the Alchemy Podcast where we’re on a quest to explore the intersection of cannabis, compliance, and creative in the marketing world today and beyond. Welcome back to another episode of Alchemy. Joining me today, Chad Bronstein, founder and CEO of Fyllo and Narbe Alexandrian, president and CEO of Canopy Rivers. Great to have you both on the show today.

Narbe Alexandrian: Thanks for having me. Really, really looking forward to it.

Jeff Ragovin: Awesome. So for our listeners tuning in, Canopy Rivers is an investment and operating platform focusing on opportunities in the emerging global cannabis sector. And Narbe, aside from Canopy, you’re on the board of directors for NCIA and you’re also a seasonal instructor at the Schulich School of Business teaching entrepreneurship and venture capital. So I think it’d be awesome if you can maybe kick us off and share with everyone a little bit more about Canopy Rivers and really what it was built upon.

Narbe Alexandrian:  Canopy Rivers started in April of 2017. At the time the cannabis industry looked very different. Canopy Rivers was part of Canopy Growth internally, and Canopy Growth is looking to make acquisitions within the cannabis space in Canada. As you can imagine at that point in time, cannabis legalization in Canada was expected to be about a year from then in the summer of 2018. It ended up being 18 months from that point in time because governments always delay these types of things. And Canopy Growth was looking to make acquisitions in order to build up a supply to handle that amount of demand that Canada was gonna produce. At that point in time, they were looking at certain acquisitions. Some of the operators they were speaking to were open to being acquired, other operators wanted to ride the wave of legalization.

For anybody in the cannabis industry, you know that there are a lot of folks in here that have been waiting 20, 25 years to launch a legal cannabis business and they’re weren’t really willing to just give up their business at that point in time to someone else and live under someone else’s strategy. So the idea there was, why not create a venture arm that goes after strong operators and backs them with cash and gets a minority interest off of them while Canopy Growth then goes and buys full companies that want to be integrated and want to share the same strategy as Canopy Growth. So the analogy there was why not own the gas station on both sides of the street and own the traffic that goes through that street corner.

Fast forward to now, Canopy Rivers has seen over 2,000 pitches to date. So we’ve spoken to over 4,000 entrepreneurs. We have a database of all of these companies to know really where things are headed. We have 18 portfolio companies that we’ve invested in throughout that period of time, and they’re across a wide variety of areas within the cannabis value chain from cultivation to extraction to pharmaceutical formulators to granted developers to retail to distribution to technology.

Our thesis internally has always been that vertical integration doesn’t work. Now, if you take a step back into the tech industry, where I came from, you go back to the early 2000s where the dot com bubble really burst. At that point in time, it was very hard to launch a internet company. If you’re gonna launching a snowboard equipment eCommerce shop you have to do everything yourself from build the actual inventory and find the brands, but also you have to create the website, the eCommerce platform, the payment rails, the server firms to house the data, the CRM system to look at customer information. You have to basically build all of that from scratch.

Fast forward to now, we have an industry where everything’s a turnkey solution. You can use Shopify for e-commerce, PayPal for payment processing, Amazon Web Services for your servers and everything’s in the cloud. The same thing’s happening in the cannabis space. Instead of these cannabis companies emerging that are going to the public and saying, “Hey, look at me. I’m doing everything from cultivation to extraction to creating CPG brands, doing medical trials and owning retail.” And instead, what you’re seeing is a new wave of companies were saying, “I’m gonna stick to what I’m really good at, the one to three things. I’m either gonna be a brand to consumers or I’m gonna do clinical trials and go after pharma space or I’m just gonna be a retail store.”

And that really resonates because in a world where capital is very difficult to capture within the cannabis space, especially right now, and on top of that, you’re not seeing the same talent that’s in the traditional space coming into the cannabis space. You really need to have a focus within your business model, and that’s what we go after. So we go after businesses that are focused one to three things and they practice what we call horizontal integration, which is really specifically focusing on what they do best.

We are lifecycle investors, so we invest anywhere from call it a million bucks all the way… Our biggest check we’ve written is $50 million in a single deal. We like to take minority positions, board seats and get control over, not full control, but with some partial control over the money that we put into it. And our view is that this is just the first inning of the cannabis industry. There’s gonna be way more companies out there that really own a piece of the market itself and not necessarily the companies that we see right now aren’t gonna be the ones that are gonna be the biggest winners.

Chad Bronstein: No, that’s great to hear, Narbe, and interesting. Canopy Rivers has an amazing name in this space, and you guys just launched that whole kind of landscape. Kind of like from the old technology road, where we have the Luma landscape. You just did that for cannabis, which I thought was really interesting and good for people to see. But in terms of how you guys are vetting new companies, can you walk everyone through the vetting process? You guys don’t just, you said vertically integrated, but you guys do also outside of like MSOs in the retail side of it you guys do a lot of ancillary investments. Can you talk about how you’re vetting new opportunities?

Narbe Alexandrian: Yeah, so we never say no to a single pitch that comes to the door because you never know who they know or where they come from or who they can link you up with later on. There are… Our deals come through three different prod platforms. So one is through inbound. So we have people on our website that go in and fill out a form and they send us a deck. Then we have referrals, those come from the banks and the lawyers, but a lot of them come from our portfolio companies as well. And I always believe, and Chad, you know this too, that founders you know the founders very well. When a founder of one of our portfolio companies comes to us, like say Sai from HeadSense says, “Narbe, you have to check out this company. We’ve been working with our dataset and we really like it.” And that’s something you really want to tune to because they know how the industry works and if you can really trust their judgment there.

And then the last piece is outbound. As a venture capitalist, you can’t just sit back and wait for the deals to come to you. You have to really go chase deals. And my, anecdotally, how I like to explain it to my associates is if we go back to 2011 and Uber is launching a series A or series B, they’re not going to call venture capital funds and say, Hey, I’d like to pitch to you because by the time they’re out there series A, series B, they have venture capitalists knocking on the door asking them to take their money. And that’s the same case in the cannabis space. When you have a strong entrepreneur and a strong operator, these are folks that are getting hounded by investors both in the cannabis space and outside the cannabis space to ask for them to take their money in order to invest in the company. So the same thing applies here. So we rigorously try to contact every single company within a certain vertical and narrative interests before we make an investment.

Chad, you mentioned the map that we made of the tech companies. There’s over 250 of them. We’ve contacted all of these companies or have some type of a relationship with them because we were interested in the tech space. And we’re in this very opportune time in the cannabis space where if you really wanna get deep on biosynthetics or you wanna get deep on tech, you can actually go out and contact every single company out there. It might take you a month, a month and a half to do so, but through those conversations, you really see like who they’re scared of, what competitors they keep bringing up and that really just keeps pushing you towards a smaller set of companies that really dominate that piece of the vertical.

Chad Bronstein: I think that’s a great and I think from the cannabis space, like what we’re seeing right now is just a lot of M&A activity as well. And I think your landscape gives a lot of people the ability to go in and hone in on if they need some additive approach to their technology, then they know they have a map to do that now. Like I said, I think it’s very valuable. How many opportunities do you guys look at because a lot of people wanna hear that just so they know. You said you look at every opportunity, right? So at what percentage of those opportunities do you actually invest in?

Narbe Alexandrian: Just under 1% is what we invest in. So at a single day, a person would look at six to seven pitches. So we’re consistently on the phone and listening to stories. And this is different parts of the world, it’s not just North America. So whether they be in… Like I was just talking to a Chinese extractor out of China that has one of the only licenses for a GMP EU certified CBD extraction facility with government connections, with a ton of family money, but they just want that stamp of approval from a North American cannabis fund or company. So we’re looking at deals all the time.

It’s nonstop and you really learn a lot and you really wanna develop relationships with those entrepreneurs too. So if we find an entrepreneur that is very strong but he might not be the great investment for us at that point in time, we want to help them link them to other investors that we know, we wanna help them in any way operationally because truly like their success is our success as well. And they might find something that can help ourselves or as well as our portfolio company. So it’s a very much more of a longterm focus than a lot of investors you see in this industry currently.

Jeff Ragovin: So hopefully after this broadcast we don’t get thousands of people reaching out to you. But there might be some interesting ones to look at. Can you talk a little bit, this is obviously something that is pretty public and people know, but you guys collaboratively work with Canopy Growth. So can you talk a little bit more about how that works?

Narbe Alexandrian: So a number of our portfolio companies have a relationship with Canopy Growth. Whether that be an offtake agreement, whether that be full control by Canopy Growth, in terms of what they produce and how they sell it, all the way down to using Canopy Growth as one of their customers or even a vendor. So our view is that if you’re a small company playing in a certain niche space, so you’re not vertically integrated, you’re horizontally integrated, there’s one to three things you’re doing very well but you need to rely upon other companies for the other stuff.

So whether that be bringing inputs into the company from Canopy Growth or the rest of our portfolio or outputting the product into a retail channel of Tokyo Smoke, like Canopy Growth owns their Tweed Store, the companies are integrated. Now, there’s always that option of getting deeper integration, which is like the IP sharing piece, which have does it as a different deal structure because you don’t want that to run away with the portfolio company away from where it was actually created. So there’s a lot of different structures that we can play. It’s a bit of a bespoke model that’s different on a case by case basis that allows these companies to get help from the largest cannabis producer in the world.

Chad Bronstein:  So in order for any company to be successful, but in cannabis specifically, what should cannabis companies strategy for growth and profit be?

Narbe Alexandrian: If you’re a company that’s confined to a certain space, so you’re cultivator that has X square footage of facility or if you are an extractor that has X amount of output, you need to be profitable because you can’t really scale indefinitely. But if you’re a tech company like yourself, Chad, that you have the ability to scale because a lot of your capital is tied into laptops and people coding that then it’s not a matter of profitability it’s more so growth. So it really depends on what part of the industry you’re really looking at.

And in my perspective, like if you were to drill down either side of profitability and growth, if you look at any companies in the cannabis space, my number one advice would be to just obsess over the customer as much as possible. A lot of times we’re seeing in this cannabis industry right now someone’s bringing out a topical or a patch or a joint, and it’s like what they have envisioned in their head. They’re not talking to any customers, they’re not differentiating themselves with their marketing pitch or the niche they’re going after, they’re just creating another product that’s gonna be sold in a dispensary. And I just don’t see that being a…

The strategy that one wants to use. In my view, companies that are obsessed over their customer, of understanding who they’re trying to sell to, how their product experience has been, offering to even take back the product if they don’t like it. You need to be creating a long-term relationship with your customer, understanding the data, where they shop, what else they buy, if you’re kinda go after the yoga mom and they’re like a soccer dad, it’s about what is it about that brand that resonates with them? Really try to understand it. And that’s the way you create a CBG company, that’s the way you create a company that, even B2B company, that it resonates with your customer.

Chad Bronstein: I agree with you. You could have a vision, but your vision has to change and evolve, like you said, and be obsessed with the customer ’cause if you build a platform that is not what the customer is looking for, you’re pretty much fucked long-term. So I agree, when we first jumped into this, luckily we had a lot of good advisors just to really make sure that we’re evolving and building-based off of the customer’s needs, but I couldn’t agree with you more on what you just said about being obsessed with the customer.

Narbe Alexandrian: Yeah, it’s totally. And you see this a lot with tech companies as well, they’re usually run by strong software engineers and you go in for the pitch and they sit down and they just start off with the product. This is my product, look at all the bells and whistles, add these features, I’m integrated here, I have customers here, but they don’t necessarily take a step back and start with, “This is the problem I’m trying to solve. This is the issue that my customer faces, this is a research I’ve done to understand my customer, this is what they like about the current offering, this is what they don’t like about the current offerings, and this is where we’re gonna play and differentiate ourselves.” And heads up, we’re head of the pack because we’ve developed a patentable process that nobody else can come and capture. It always helps to start from the pain point and the customer, rather than just going straight into the product, the product might be great, but it could be great in your head and customers don’t wanna pay that dollar amount or they just like to free version that Google offers instead. And you really need to understand what the pain points are and what the value components are before you even start building the product.

Jeff Ragovin: Awesome. So, Narbe, I want talk a little bit about some of your portfolio companies. You guys invested in Headset. Most people know that Headset is really a data intelligence company that’s really offering insights into the cannabis market trends and all of that great stuff. Can you tell us a little more about that investment and really what the growth plan for that company is?

Narbe Alexandrian: Headset originally came from a tour that I took in MJBiz in 2018. At the time I was walking through the expo-floor and I bumped into what is now the second largest beverage manufacturer in the US for cannabis. And they had this blueberry cola they had at the exhibit, it was un-infused ’cause we can’t infuse them for the exhibits. And I think we took a sip of it and it tasted pretty artificial and super sweet as well. So we asked them how they came up with the flavor. And the rep just jumped into this story about how they had this really strong connection to a flavor house in Kentucky, and they sent them the blueberry cola flavor and they mixed it with cannabis, and they put it on the shelf and it was selling. To us, that sounded completely backwards to all the major CPG companies that we speak to, the big family brands that tell us that takes them about two years to come up with a product because they have to start from the customer and then work their way into product and then work their way into how they brand that product. So it kind of seemed upside-down.

So we took a step back and asked yourselves, “Why is it that cannabis brands are just flying blind into the shelves instead of actually coming up with a concerned effort to understand trends?” And data was what was lacking in industry. So, we took a step back, we looked at every single company in 2018 at the time that had the word data in their description, which was about four dozen of them. So 48 companies in total. And every time we talked to a company, they would talk about competitors in the data space and they’d bring up Headset, and they would be on that those two by two matrices of the competitors that are there. And once you see the logo enough, you start thinking about if everyone’s looking at this company as a potential competitor, there must be something special that’s there. So, I linked up with Sai and I kept bugging him over and over again to invest in the company until he opened the round, gave me a call, and the whole thing worked out.

But I love that Headset is the real-time data, you actually get an understanding of what’s selling yesterday or today within a certain region, within Colorado or California, and that resonates really well to understand different trends. One of the trends I like to talk about is CBD to THC ratios. So, CBD products are ten to one, versus CBD-products that are nine to one, nine parts CBD to one part THC. The nine to one sells about 68% better than the ten to one does. There’s no reason to it, it’s just the kind of consumer seems to like that smaller number and not get intimidated by the ten and rather purchases the nine. These are consumer insights that we’re just starting to gather right now in industry, and they’re very powerful to give to the next generation of entrepreneurs trying to come up with hyper-focused niche products.

Chad Bronstein: That’s great, Headset has a great reputation in the market. So definitely a smart investment on Canopy’s. So another success story you guys have, so we’ll call it out, is Green House Juice. Can you share more about what you guys achieved with the brand so far and what the goals are for 2020 with them specifically?

Narbe Alexandrian: The founder of Green House Juice, Anthony Green, he’s a local entrepreneur within Toronto, created the largest cold press juice company in Canada. And we originally invested them, he had a number of corporate stores within the Toronto and surrounding region, that had a really great brand presence. And for those who don’t know Canada that well, Toronto has one of the highest population, if not the highest population, out of any city in Canada, so it was an opportune business that was showing a lot of growth. They had strong unit economics from the get-go and they presented us an idea of getting the product into grocery chains, but as well as pivoting that off into creating a CBD beverage and then creating a second line of product called Herbert, that would go off to the THC side.

And the company’s been executing to above planned. They’ve had a tremendous amount of growth over the last year as they’ve inked a number of supply partnerships with the largest grocers in Canada. So they’re nationwide right now, from that perspective. And then their sister brand, Herbert, was recently launched into the US, as well as their launch into Canada. And they’re kind of create a product for people that have THC in it, but also other herbs that help like ashwagandha, or dandelion, or passion flower, that help with areas of relaxation and sleep. So it’s not just about cannabis, it’s about what type of mood you wanna get into through this function drink.

Jeff Ragovin: And there’s one more question as far as another portfolio company. High Beauty was one of your top picks, at least in the cosmetic cannabis space, and I’m just curious how you went about selecting that brand as an investment opportunity.

Narbe Alexandrian: This was back in 2018… Early 2019. We had a thesis around cosmetics, specifically topicals within the cannabis space. So we went out and we launched this outbound strategy to talk to every company we could that was touching anything beauty-related, from Josie Maran, who was the bigger brand that was doing something with sativa seeds, all the way to the Lord Joneses of the world that were very specifically focused on CBD. And what we really liked was Melissa, the founder of High Beauty. So Melissa is a 30-year veteran in the cosmetic space. She’s launched… She was a founder of Juice Beauty, which is a multi-billion dollar brand in the cosmetic space. Juice Beauty helped incubate and launch Goop cosmetics, which is Gwyneth Paltrow’s line, also a multi-billion dollar cosmetics brand in the space. And Melissa always had a passion for cannabis and what the seed and actual plant can do for beauty.

So what we really liked about the strategy of High Beauty was we could always create a CBD product or CBG, CBN, any of the cannabinoids, however the strategy there was to utilize her relationships with some of the larger retailers: Macy’s, Sephora, Urban Outfitters, Anthropology, Hudson’s Bay, Shoppers Drug Mart, Amazon, to get product in. So, we first started with a sativa seed oil product, 100% legal. Gets them in the door, gets shelf space, creates that rapport with that retailer. And now the company is pivoting to launch a number of brands around CBD, CBG, CBN, and CBC, so the minor cannabinoids as well as CBD, in order to get into the traditional cannabis space. So, to backtrack, the strategy, we call it internally a “Trojan Horse” strategy, of getting through the door of the retailer and then bringing in the cannabinoids after that, after we’ve created that rapport, and it’s worked very well for the company today.

Jeff Ragovin: These are great investments, great companies. And I’m glad that we were at least able to shed a little bit of light on them.

Chad Bronstein: Right, Canopy Rivers, obviously, you guys continue to build a very good reputation outside of just Toronto, obviously nationally and globally, but what’s the plans for the next two years for Canopy? Is it gonna be a heavy focus on cannabis or do you see more evolutions like Green Juice and other brands or are you just… Let us know, it would be great for everyone to know your portfolio strategy for the next two years.

Narbe Alexandrian: So at a high level, we think that the cannabis industry is gonna follow five distinct waves, and we’ve… I’ve written something about that recently as well. The first wave is, in any geography that we’re seeing, is cultivation. And this is where the industry’s brand new to it and need to supply to really meet the demand that’s out there. The second wave is ancillary businesses called the “picks and shovels” of the core cultivation. The ancillary industry, in a mature market, is been three times the size of core cultivation, so it’s pretty big. This is where the technologies come in. This is where things like fertilizers and lighting recipes and AgTech really come into play. The third wave is CPG, consumer packaged goods. This is where the brands really are resonating with the end consumer and this is where we’re at currently. The next two waves are medical, so pure medical of a pharmaceutical type products, and we’re seeing a lot of movement by some large players, Novo or Pfizer, getting into the cannabis space. And then the last phase… The last wave is mass market. This is where the industry matures, there’s a lot of consolidation that takes place.

There’s about four big companies that dictate the majority of what happens in the world, similar to what you see in alcohol and tobacco, but as well as diapers and toothpaste and some of the more mature CPG categories that are out there. So right now it’s all about the brand. And when we’re looking at the brands that exist at this point in time, the focus over the last year has been for brands to just be the Coke and Pepsi. They wanna create mass products that are available in all dispensaries that cater to every single person that wants to use cannabis, whether it be the new user all the way to the more well-attuned user that’s out there. And our view, what was really missing are those niche hyper-focus brands that really want to resonate with a certain demographic, or a certain use case, or a certain form factor.

So, anecdotally, I always like to say that if L’Oréal was to create a chocolate bar, would you eat it? And chances are you’d say no, because it’s a cosmetics company, why would they wanna create a chocolate bar? I’m thinking lipstick when I think about a L’Oréal chocolate bar. So in that same case, why are cannabis companies creating everything under the same brand? When instead they should be siloing it off to different use cases. So we’re consistently looking for brands that are hyper-focused. I’m creating a brand for creativity, or I’m creating a brand for sleeplessness, or I’m creating a brand for athletics performance enhancement, or I’m creating a product for aches and pains from eSports and gaming. We wanna create something that resonates with the consumer and not use cannabis as a product, but use cannabis as an ingredient.

Jeff Ragovin: Great insight.

Chad Bronstein: Yeah, that was a great insight. We have a fun part of this, Jeff, is that we’re gonna go to the next…

Jeff Ragovin: Yup, time for quick-fire questions. Narbe, are you ready for this? Chad, you wanna kick things off?

Chad Bronstein: Sure. Can you describe the color green?

Narbe Alexandrian: It’s close to yellow and it’s close to blue.

Jeff Ragovin: What’s running low in your household right now?

Narbe Alexandrian: Alcohol.

Chad Bronstein We thought you were gonna say toilet paper. [chuckle] Advice for new entrepreneurs in the cannabis space?

Narbe Alexandrian: Understand your consumer.

Jeff Ragovin: Morning person or night person?

Narbe Alexandrian: Night person, 100%.

Chad Bronstein: Favorite hobby?

Narbe Alexandrian: Running. Clears the mind.

Jeff Ragovin: Favorite place on Earth?

Narbe Alexandrian: Paris.

Chad Bronstein: What’s your favorite food?

Narbe Alexandrian: Pizza.

Jeff Ragovin: What did you want be when you were younger?

Narbe Alexandrian: A teacher.

Chad Bronstein: First thing you’ll do when quarantine’s over?

Narbe Alexandrian: See friends.

Jeff Ragovin: We really appreciate you coming on and I think this show was great just because you provided so much insight, obviously, from a consumer perspective, on what to build and then also the future of this marketplace which… A lot of people are looking at understanding the future strategic goals of our space, so this was awesome. So really appreciate you coming on the show.