Justin Singer - How Regulation Unlocks Opportunity - [Founders Field Guide, EP.2]
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Founders field guide is a series of conversations with founders, CEOS and operator spilling Greek businesses. I believe we are all builders in our own way in this series is dedicated stories and lessons from builders of all types you can find more episodes at investor field guide, DOT COM. Patrick o'shaughnessy if the CEO of Shaughnessy Asset Management All opinions expressed Patrick and podcast guests are solely their own opinions and do not reflect the opinion of o'shaughnessy asset management. This podcast is for informational purposes only and should not be relied upon as basis for investment decisions, clients, Shaughnessy asset management, may maintain positions in the securities discussed in this podcast. Today is Justin, Singer founder and CEO of caliber foods and stillwater brands to leading companies in the cannabis industry. We start our conversation with a fascinating discussion on how regulation creates or destroys business and investing opportunities, and then go on to discuss the INS and outs of the cannabis industry. In detail, you'll be able to tell quickly how high quality justin is a thinker and operator, and you'll learn a ton about this nation business. Please enjoy our conversation. suggested. I thought that an interesting place to begin our conversation is with your prior life and this interesting view you have around changes in regulation creating market opportunities you could highlight what you mean by that relative to say new technologies creating opportunities in the early stage space or in the nascent equity space. Wise regulations. So important wonder some of your favorite examples of that I am a little odd in that I've got the classical business and legal education sort of the antithesis of what the last fifteen years have driven people. Towards, but it's actually given me. I think a much more holistic view of where markets come from. That's not inside out from a technology perspective. It's much more outside in like what else is involved in creating this market that started the initial interest was in the mid two, thousand and two thousand and I was in law school and I was looking at telecom market. So there is all the spectrum auctions going on. There was where did the property rights in the advertising time reside are owned by the content owner are they? Owned by cable provider or are they owned by somebody else? These are all big questions and they all determined both the quality of what was going to be able to what the axes of competition were and what the ultimate growth potential the market was. So you put that altogether at in a little mix of time spent in early stage seed stage venture at I ventures, and the synthesis of all that believe the best venture opportunities are where you have the overlap of massive extent demand known demand and some sort of regulatory. Unlocking event. So my favorite examples I mentioned things with Telekom, the broadband spectrum auctions back in the eighties to nineties those really opened up a whole marketplace where lots of fortunes were made lots of economic activity. You look at the version of capital gains, tax rate versus ordinary income, and you saw the explosion funds industry that comes after that. Another one that I really like is the reorganization turnaround industry where with the passage of the bankruptcy laws suddenly able to build all sorts of industry whether it was high yield debt or. Whatever it might be, but it was built on top of this platform of certainty where everybody knew how things were going to function in different scenarios. Same thing can be said more closer to my industry supplements, which for better for worse exploded after the passage of the dietary supplement, health, education. Act, to Shea back in ninety three, basically every massive market they look at you can trace to. Some sort of regulatory and locking event, and lest we ignore what's going on today I think we just saw in the last couple of months lots of people saying you wouldn't have the modern Internet without section to thirty of the Communications Decency Act. Well, I don't know that that's quite the argument favor that people make it out to be. It is an argument, an admission that regulations matter. Does it follow that VC's or I guess all investors should have an analyst just tracking new regulatory changes and serve trying to match those against demand. I don't know if you can do it with an analyst like I think it behooves VC's to actually pay attention to the whole picture I'm bear on things like autonomous cars and it's not because I don't believe the technology possible because I don't think the insurance questions answerable and I think the legal questions are answerable around it. That's not because I have some special understanding of the laws around this. It's just I have seen laws matter. Not at the margins they matter at the core technology alone never creates a market there has to be some enshrinement of the competition of that technology of the ways that you wanted to go in the law, and that's the platform which companies can stand and fight each other and develop activities. Do you need a dedicated personnel because it's also sometimes hard to predict Priori which technological changes or which legal changes are going to lead to massive shifts section thirty as like a very strange history the section that has remainder is the least important part of the communications. Decency Act was struck down. Do a lawsuit with Belfort's actually a really fun little history there. Can you describe that history? I'm unfamiliar with this entire area. So what is section two thirty wise important. What's the story there with the caveats that I have not refresh my memory on this stuff in a long time. So I might get some of these details wrong and I encourage everybody to go look it up and fat me on this but there were basically three different. Parts of the communications. Decency Act is passed during the Clinton era and the idea is the Internet is coming up we need to preserve decency. We need to watch out for porn all of the bad stuff, and that was really the thrust of the communications decency act more of like a more realistic view of how do we prevent things that might be dangerous to children from getting online as part of that there was this threat of case. Law that had been coming up though is distinguishing between the publisher in the platform trying to figure out also, there's also debates around like whether it's an interactive website or read only website law in general is always trying to make analogies to prior technologies. In prior cases, the Internet was no different especially age of BBC message boards, but would ultimately happened is then I think it was Yahoo Stocks Jordan Belfort of Wall Street's people from his firm. Were pumping up penny stocks on the forums, doing pump and dump with them and Yahu got sued as part of it that they were the publishers and therefore had liability for this and the rolling ultimately came down was no publisher can't be held responsible least. They aren't strictly liable for the content on the platform. There's more nuance around it than just that it abroad level that is it's and that sort of became the basis for things like. For US generated content for facebook for twitter that there was a leaf that there was this broad exception where they couldn't be held liable for the content posted on their platform and that unlocked lot of activity around UGC I think without that term without that clause surviving and remaining surviving clause all this because all of the decency parts of the CD were all struck down on constitutional I. Many reasons. Then you would have a very different Internet's I would argue about but I know many people would argue differently. Is kind of a coupled with this idea of regulatory change being important is just the basic idea of rule sets to begin with a loved expand a bit more on that. You know use clever examples from like half a block together how soccer came together and how this relates to what we think of as free markets. So talk about kind of. The relationship between rules, laws and free markets as a lawyer like I've just been taught. There's no such thing as a free market you want a free market go to Russia. Whoever's the biggest gone winds? That's a free market. If you want the rule of law if you want the bundle of rights for property rights that is infringing on the true free. Market, but it was also creating a shared platform of understanding from which people can transact. These were the same insights that underlie the original stock exchanges. Somebody was there to put down and build trust on their common laws how you create contracts that could be exchanged. The example that you mentioned about football thing that I always like to say twenty two guys. Beating the shit out of each other in a field doesn't we suddenly become the super bowl ever choirs rules that requires regulations, requires contracts. All these things have to be commonly agreed to the early days of Football College football in the late eighteen hundreds people dying quake constantly there's no rule book. It just became a free for all enough players enough kids. That somebody said okay. Let's put some rules in place here. What is I down actually mean what is a catch actually mean how many downs are there? Once you got the shared set of rules than the play all became much more constrained around those rules wasn't just a free for all where whoever was live at the end was the winner you actually had to abide by certain things and those rules have to be tweets over time. People learn to exploit them. This is not some system where there's a perfect set of rules there never is that suddenly things are all going to work in a healthy way you can create competition through rules. My favorite modern example of this is f. one racing where every couple of years they changed the rules around the build of the cars because if you leave the rules in place for too long, the cars get too fast they get. Teams that are able to exploit certain things about it. Also able to pull away you get this fundamental inequality but if you change the rules in very them up a bit, then suddenly everybody is looking at this new jumble and they're kind of on a level playing field all over again, you get a lot more competition out of that you get a lot more innovation activity. You're not just trying focusing on spending ninety, five percent of the effort to get the last five percent of the way there you're spending all your time getting that I ninety, five percent all. Over again, and that's where economic activity innovation really lies in the opportunity to create things out of whole cloth. But you still need some shared basis of what is right what is wrong? How are we going to interact with each other? How are we going to exchange things? Wonderful Book it's called reinventing the bizarre Stanford economist from around like two thousand, seventeen, thousand, eight, the talks about just the limits of markets they can be used they can be misused, but you have to make a conscious decision about how you use them if you want to get a economic activity result. Other any other interesting angles on the regulatory changes that have happened recently before we move onto the cannabis space for the majority of our conversation that you've washed with interest in this could be say in the last five years crypto and blockchain are looking for the same thing. They're desperately trying to get the Fed to declare them store value. I don't follow the space nearly as closely anymore every time you hear blockchain here, shitty database. They also clearly recognized that some sort of government sanction is required for this to be what they all believe it can be the obvious one is Uber. Car shares this whole industry arose because we weren't enforcing laws around taxis and how they worked around employment. Demand contractor you look at Uber I don't see technological innovation or left unstuck logical innovation although there is some like the distributed dispatch technological innovation. But fundamentally that whole business that entire when I say that business multibillion dollar behemoth of business that it is the capital horde that it is is built around a use of independent contractors at a scale that has never been done before men that is built on on a legal issue. You see now ab five is out there in California and they're claiming that it's going to kill the business clearly laws matter. They would not have been able to build that business in the way that they did if they were required to employ the full time driver's. Got To build a very different business that was very favorable bolts who their capital because of that independent contractor relationship and interpretation that was at odds with the pre existing definition of what contractor was. Let's move on to your area of interest and operations specifically today in the cannabis space. I don't know that I've ever done a full episode on this topic I don't think. I have. So I'd love you to begin by maybe your origin story why you got interested imagining a lot of perceived opportunity is the potential for regulatory change but talk through your initial interest in them we'll get into everything you've learned since it's a story I. Think Lot of investors would recognize themselves I got interested in the space towards. The end of two, thousand, thirteen, I was teaching entrepreneurship. I was kicking around town doing strategy operations, work variety startups, and I was looking for what to do next and as part of that, I was kind of interesting getting back into investing but I didn't necessarily want to go back into venture. I. Wanted to broader mandates. I have always kind of felt allergic to the silencing of technology as its own sector was companies that put themselves up Technology Migrate You'RE RIGHT CG company that uses technology just like every other TV. Using technology and being technology to different things. So I was looking for something broader than that. 'cause I I love technology. I've been deep in it, but I see it as a tool to affect other things not as an end in itself and part of that process of pitching myself to funds was developing bitches on market places and market spaces than I. thought the funds invested into the spaces and I was really interested in were under banked and cannabis with. In Washington on the verge of legalizing, which they didn't January twenty fourteen and I kept in glass out of the room nobody was taking me seriously like I got a lot of stone jokes but I kept taking it really seriously I'm a big fan of the early days of venture back in like the Don Valentine days everything was unstructured. There are no clear deal terms. There's no standard sheets there was no anything just the lack of structure. Was the opportunity I'm like a big believer that once there's a vault guy something all of the real opportunity is gone. There's been evolved guide for venture for fifteen years. Now, there was no vault guide to cannabis is all brand new and was changing rapidly and that was really attractive and the fact nobody could have built up expertise in this already because it hadn't existed was a real attractive thing to me. So started looking at the space. I in a search vehicle format, we were thinking about it as a fund manager, which was my background in line with that was looking at different companies to invest in we're trying to be safe by investing more on the technology side trying to avoid plant touching operations dealing with all the legal complexities of touching the plants given state level laws was a big concern and a couple things happened is more or less all the same time I. We saw this race to potency going on with edibles wherever is trying to shove much THC as possible into the smallest container. Possible. We also made the decision that like, Hey, if we're going to be in cannabis, let's be in cannabis. Why are we nibbling around the edges? Let's take this full risk Michigan take a risk, just do it, and then the third thing that happened was my grandmother asked me for a pop Ronnie and those three things. All happened within a week of each other and what was really interesting with my grandmother is the she didn't want to get high. She just wanted to feel better and I couldn't offer her anything that would make her feel better had this one brown is hundred milligrams that cut him up into twenty pieces. I individual bag need half a morsel and wait two hours scared the hell out of her shoes never gonna try even offered her joint. And she was like, no, I'm not a marijuana user self identity was a big part of the. So we started looking at this as an opportunity and in terms of functional foods these are compounds that we know have effect. There's no question about it. Well, that's usually the biggest question with any new foods or supplement is, does it do anything in this obvious THC does something? How can you put it into formats that are mass acceptable that? Don't change people's identity and that are consistent enough that they can feel comfortable using it anytime during the day and that we can feel comfortable investing and building our brand against because we know that experience is going to be the same from day to day. That's we oriented ourselves very much as food company focused on cannabinoid rather than it cannabis company playing with food, and it's been like that ever since you said before we started recording that. In the early days and maybe still today this industry is filled with a lot of bullshitters I'd love to hear your take on sort of what the evolution has been like of the quality of the industry participants. Before we get into some of the kind of market sizing stuff which I find fascinating I don't want to denigrate the early participants in the industry. Anyway I don't think they were more full of ship than today's participants as participants are. But they are also full of Shit. It's not even intentional most of it is just. Ignorance or just arrogance gotten a lot of people who are like I'm well aware of how this market works. That's great. I've been here six years I've been studying everyday my wife and I don't even know that I know a thing about it yet good for you I'm proud of you. So in the early days had a lot of people who were renegades they were doing something that was quite strictly illegal when we. Joined the industry in twenty fourteen I like to joke that we were taking handcuff risk at that point we were but not nearly to the extent that people were a couple years before us, you had to really be comfortable operating without any sort of business controls operating fully cash don't worry about accounting just flying by the seat of your pants operating that business and I think when that all went legal a couple of things. Came pouring in and they looked at the marketplace and they treated the way they normally look at marketplace their new to let me see what the leaders are in like to invest money in them. Well. They forgot that it doesn't really work the largest players in an illegal market who have been given. The color of law are still the same people they were before they were given the color of law. They just were people who are willing to take risks that nobody else was willing to take criminal risks and nobody else's only Dick. Those are not generally the traits associated with building a responsible business that has cost controls, good accounting practices, governance, good project management but they were characteristics of the early markets. It was really interesting early days back at the beginning of twenty fourteen went to what was. Then probably like the world's largest marijuana conference, which was held at the Airport Holiday Inn Express Logan Airport in Boston and it was me and a room with thirty is fifteen of them were stoned out of their mind talking about the great shatter and flower that they were growing another five of them were lawyers and doctors understood what this could do and we're really interested, and then the rest of them were real estate guys who owned a bunch of warehouses that really wanted to get grows in them. So they get that really good cannabis IRA and everyone was shooting for in those early days. It's obviously changed dramatically I think up until last year at least or up until this year, he had a lot of people who still thought. This was all just going to be easy I graduated from Grad School rain to the teeth the great recession two, thousand, nine, I had to advanced degrees and no work experience. So I got a very clear taste of what things look like in a down market and I think there are a lot of people in this industry now, who have no conception of what a down market is at the whole promise of marijuana and imagination that is just suddenly going to legal and everything is GonNa Change I. Now these things are complex. The retail system is complex, the distribution system complex, the production systems all have to be brought up individually. There is a lot of people up in the early days who thought they could be I and be the Warren Buffett of we'd never mind none of them even knew what Warren Buffett did they just going to integrate everything I'm going to take peace from everything and it's going to be fantastic. Yeah. But then you never do anything well, and everything is expensive and none of the accounting actually works and what if the market changes? It's just There are a lot of these hopes and dreams. The didn't bare. Any relationship to how the world has ever worked in reality. I would love to walk through the industry a little bit for the initiated myself included I think of as sort of supply chain and value chain. What is sort of the end to end industry look like what are the major stops along the way, and then we'll get into caliber and stillwater. There's two things we got to differentiate. One is the CD industry versus the teach industry. Those are wholly different industries with. Wholly, different infrastructures and wholly different regulatory structures. Let's start talking about the THC industry because that's the one that runs tried to nationalize you though it is federally illegal and when you look at the THC industry, you're really looking at fifty different industries. Each state has its own set of laws and has its own market structures. Someday, there is just going to be an absolute glut of economic research papers on the natural experiments. Of, new markets with different market structures in the context of marijuana, which products they create in which behaviors they incentivize. So I talked to Colorado directly in a couple of other but in Colorado at least there's a three tiered system that's based on the same model. As alcohol a cultivators you've got processors and you've got retail. There's a couple of other that come up. But broadly speaking, you've got tears, you got the. People grow the pot. You got the people, extract the pot and make the products. Then you've got the people who sell it there is no like distribution infrastructure. There is no co-manufacturing construction. This was a big learning for us in the early days when we first came to Colorado and said, we WANNA, launch microdots t product we talked to people who are in CPG and they were like, Oh, you've gotta go find yourself. Well. Come in aren't legal allowed to manufacture marijuana in Colorado. To Go and get licensed to be marijuana manufacturer, and you can't manufacture anything else to get that license you have to attach to real estate well, that real estate's based on whatever the city ordinances are might have to be thousand feet back from. Imaginable, whether it's schoolyard to halfway house to open space that might one day be zoned residential. Then you have to find a building that doesn't have a bank note on it because at the bank has a mortgage on it, they're gonNA veto the lease. So you've gotta find a wholly-owned building that meets all the setbacks and is in a city or county too. Narrowly state that legalizes it's the state that allows for legal reasons, cities and counties that legalize. So you've gotta find it in a city or county that has legalized has rules that you can actually live with. So that's all part of getting the license huge. Then you've got to start producing your stuff. From the beginning we do not want to cultivate, we looked at cultivation as a commodity you do really well in the early days when the prices are high demand is high supplies low and everyone will just buy out anything on the shelves experts date on that markets mature, and you could make a lot of money as a retailer but you also. have to understand the most customers in this market are either tourists are highly price elastic. So it's really hard market to make that in. We were more interesting brandon goods because we felt like it was going to be much more generalize -able beyond one states we felt like that was really the linchpin between what we viewed raw-material just they can avenue eight. And a finished good product that actually had a consistent experience around it and really been the locus of our investment already ever since as just understanding how to qualify a good cabinet. What does that actually mean the raw material? These are things we've got a ton of food scientists now offer major companies and like to say they're very good at qualifying agricultural. Materials, they have learned how to do that in the large food and cannabis has its quirks. Fundamentally you're qualifying an agricultural commodity trying to convert it into something that is useful for processing, and then you're trying to actually manufacture it, and there's a really interesting side conversation to be had about things that held the cannabis industry back. One of them is the. US over the course of the last number of decades has evolved to a CO manufacturing infrastructure for consumer goods. So the same it's sort of a store rates. Aws has with technology where you used to have to build everything soup to nuts, manufacturer all yourself, and then the came these people who built the manufacturing infrastructure and you could rent time on. Their lines. So you didn't have to investments well, all the equipment that they had to rent time on was national scale even if the state allowed you to work with them, turning on their lines would produce ten times more inventory than you could ever sell. So there was this mismatch as an aside beyond that to the equipment manufacturers themselves stopped manufacturing small-scale. Equipment it was really hard to just find stuff that could be used in a single state environment. So there was just a lot of complexities to be worked out in this market for it's actually function because everyone was trying to assume like, okay. What I see in CG that's GonNa work in THC, it's like well now there's fifteen reasons why that structure. Doesn't work here. All of the tricks that you've got you've now got to figure out new tricks, none of those work any other interesting backstory or timeline points just in terms of y took. So long for this to happen, the you think are important antecedents took on where we sit today whether that's laws regulatory wars, kind of the social stigma of it. There's scientific excuse for marijuana have been sitting around schedule one for as long as it was this was known when the schedules I came out. There was Schaefer Commission report that immediately recommended rescheduling the Nixon Administration put in a drawer in the early laws all the way back to the stamp, Act Tax Act it was racism against Mexican immigrants the word marijuana prior to the marijuana tax act cannabis tincture marijuana tincture was. One of the top three most used drugs in the country you can go back to the US Pharmacopoeia and find lots of tinctures there. You can find from Bayer Cannabis tincture in them, and then it was decided that this was associated with unwanted Mexican immigrants, and therefore we need to illegalize as much as possible. Then you've got coming up on the controlled Substances Act in the late seventies, there was an interview with. AIDS he stood up admitted we couldn't criminalize being black. We couldn't criminalize being anti ward, but we could criminalize the one thing that they had in common, which is a love of marijuana and that part on crime and tough on crime mentality the racist elements, all of that just hung around for a long time, and then you just had this cohort issue where you've got. A whole generation of political leaders who still believe this is a political third rail despite the fact that it's got sixty seven percent approval among the population large and even fifty one percent approval among Republicans it's just one of the strongest mental models cohort replacement. Some things don't shift until the people who are holding them back are gone and I think this fits that bill very. It's fascinating and so screwed up in. So many ways when you really dive into the history here, it's this sequence of bizarre events that lead to a very large macro outcome. So appreciate those little touch points there. I. Think definitely something for people to go look because it's hard to believe some of this stuff until you read the laws, it's hard to believe it. It's also. It's hard to conceptualize. The concept of a drug is a mental frame and the concept of new illegal drug is a mental frame can't tell you how many conversations I had more in the early days of this company where people be like well, I don't do drugs I'm like you got a nice wine cellar over there man well, no, that's not really a drug I'm like some nice prescription opioids on your cabinet. Well, that's not really my doctor prescribed. I'm like your coffee really enjoying that caffeine right now. These are all trucks they all augment physiology. The question is really what is the safety profile? What is the effect marijuana THC? These are fundamentally no more or less dangerous than caffeine it's interesting to compare how caffeine has been regulated over time versus how marijuana has been regulated over time visit is just a very natural counterfactual. That is fascinating about what is accepted, what is rejected, and what that does to two things that have a very similar safety profile. If anything marijuana safety profile THC safety profile is better than Caffeine's. Raises an interesting question of degree. So I think the impact of smoking a joint or something at least in my experience a little bit more impactful than a cup of coffee. But I think one of the things you've learned is that ethic you mentioned understanding the actual molecule better and Sorta dosing and what that range might do to people say a bit about how that figures into the business plan the products answer to how you build the brand. I basically throw out almost all research done before twenty sixteen throughout all research done around SM- inhalable marijuana because we just don't know all joints are not the same. Every joint is different. Every person is different. The amount that you're actually consuming is unknown edibles are actually started our first opportunity to control that inputs and reduce the variable there to something that what came out on the other end was actually observable and useful. We do a lot of work at our company with some academic partners on studying the pharmacokinetics of our products. We WanNa know how much THC is actually absorbed into. The bloodstream in different formats, how much CBD's actually gets into your body? How much do you take a pill but how much shows up in your blood and it turns out that everybody is different it's wild person person variance in terms of who absorbs what and how much even in waterside overseas water insoluble formats is crazy. Some people just can't get high some people don't absorb CBD other people can only get high through edibles which absorbed through different pathways than inhalable inhales, and this is all great science that should have been done thirty years ago, but has been delayed until now. So look. At a lot of the old studies, I'm just like I don't know what to draw of that is because you've there's a question of magnitude I think it's almost criminal to ever talk about direction of effect without talking about magnitude of effect, and this is in pretty much any circumstance. There are absolutely risks with THC never going to play that down but the magnitude of those risks have been wildly overblown and we are learning more and more about that. especially different dose levels thc kind of three different drugs want a sub five milligram dose for most people it's like a light and. The Olympic perfectly fine people can function operate no problem whatsoever five to ten or five to fifteen. You're starting to get real stones. You're getting high for most people although changes again, like different people have different tunnels at least with thc once you start getting above fifty, it's a psychedelic experience. Almost it's not one that most people care repeats but the for you can really start discussing what's the effect of marijuana? The question has as many multitudes. What's the effect of computers? There's a lot of nuances be baked into their before you can start answering that question with any sort of specificity that's. What's the most interesting difference between the CBD Industry in the industry? What are the relative sizes I could even wager close guests as to how revenue basis or something what the difference between the two US I've seen good numbers the legal thc industry I think sitting like ten to twenty billion range today. The illegal industry is sitting in the sixty to seventy billion dollar range for THC. In MRS IN AMERICA CD I've seen estimates that this year you're talking like two to four billion I. Think are probably a little bit high it's really hard to tell CBD has just unregulated THC is actually more regulated in CBD right now thc like, yeah, the FDA won't. Touch it. But at least the states are paying attention to it before products on the shelves in well-regulated states like Colorado it has to go through cannabinoid testing, which is imperfect science that is developing but at least it's something. So you at least know what you are taking to a greater degree than you used to. CBD. Now there's none of that companies are self-regulating but self-regulation isn't a thing self-regulation is just asking for trouble. There's no incentive to actually abide by the rules when I lobby on this issue I, keep saying the returns I'm lying or far greater right now than the returns on doing the right thing and that's a regulatory fault that is. Something that regulators can change the answers by putting in place regulation. How much do you think is left to be unlocked in on what timeline? So it sounds. So it's still early days when I asked, what are the top three variables that matter for the future here you said regulation regulation regulation. So what does that mean and look like almost all of it is left to be locked when you think about like I said, the THC market right now it's fifty individual states that operate all lines soups and not supply chains more or less the national industrial food supplement and beverage supply. Shane is in the US is probably the most robust in the world. The. Marijuana supply chain looks nothing like that and could benefit holy from that. This is to scale structure that has been put in place yet there's a breadth of use that has been put in place yet. There's no reason why a lot of products can have one to two milligrams of THC as not a intoxicating dotes there's no reason to treat. That's the way that we do the ten milligrams stuff. Yeah. That should be treated like alcohol. That's great. It should be I, think the CBI we got we know so little we know that it has bioactive fact we know that I mean it was proved as prescription drug it clearly as bioactive effects got good. Properties, it's God's good anti anxiety properties, good anti inflammation properties, but we don't know at what levels it has those in four which people in for what conditions this sort of thing that only really comes through research and experience and just putting the markets and structuring the market so that you can continue to collect good data especially as regulator, and so you can make good decisions and how to build for this forty. CD. The tinctures that are the most popular part of the CB world-renowned. CAD Onepointoh. Was All these pictures that would go everywhere well. The best research we have suggest those things are six percent bioavailable, ninety, four percent of what you consume is getting excreted out without entering your bloodstream. It's one of the people don't have a good experience that product it's also basically intermediate good nobody runs out and says, you know my favorite thing in the world is to do is to drop raw crude oil on my tongue with an eyedropper that's not a consumer product. There's also sets of claims that have to be developed around but that takes time in research once you get past the teach the canals in general this is a category of ingredients think people make. Claims when they say one hundred and thirteen identified cannabinoid all have bioactive the fact yet maybe to some degree, but the real question is going to be which ones of those can be produced in an economically efficient way and brought to market with a safety profile that matches what we as a society are comfortable with and sold for profit. The answer to all of that is probably going to be not I think I'd be happy with three to five additional. Follow on can happen in the next decade that would come up. There is a set of materials that are the most fascinating bioactive that anybody on my team has come across I've got people who spent the last twenty five years at eminent Mars, working their functional ingredients, divisions, and wave and horizon organic. These are food scientists who have been paying attention to neutral to bioactive ingredient functional ingredients. This is the most exciting space of new science, any of them ever seen. Can you talk a bit about the kind of business and investing angles here? So one interesting question is does some of the opportunity exists because it's so fragmented and the big brands big CPG brands can't deploy their scale and their marketing advantage to just go win the space right now, talk about that transition period and sort of where you think the pockets of potential value are for entrepreneurs and investors. So there's two things that I think are holding back. The big brands one is you're right federally illegality is holding the back anybody who has existing. Business Line to protect can't afford to take the risk of operating this. We've said from the beginning that one of our big benefits is that coke isn't sold on the same shelves as we are or not solving some shells as they are sucks that we can't sell on their shelves, but it's great that they can't sell ours dispensaries are unique environment aubrey much more like jewelry stores than CVs bud tenders drive seventy percent of the sales of new product sales because people come in and they know they want experience, they don't know which product to get. So, this is all opportunity that is available because the big players aren't coming able to spend time on so that you can succeed at a small scale and really make it work. The other thing is the lack of federal legality just cuts all the advantages out from those big players. Those guys have all built up infrastructures that are designed to serve massive markets. If you told, Coke, I need you to produce enough soda to serve one person a day. They're like, great. We do that five times a day. No problem. If I might great I need you to produce enough coke to serve hundred thousand people there like Shit. I don't know that I've equipment I can turn on and turn off without losing all my money. That's too large scale they also don't Know like that thing that I want produce what's the right formula for it? How do you get to the right formula? You have to start small and work your way up companies not that I think that has been a real advantage to the marketplace just all of the things that make it hard are the things that keep coke and Pepsi out in things that keep innovation and small operators and opportunity in at some point they're going to come in and that'll be a different. World but in the meantime is long as you have the right understanding of what the opportunity said is, which has to take into account with the demand side looks like where you can ship to truly what the market is and you build your production platform to match that. Then you've gotta opportunity if you over build relative the opportunity, you could get into trouble real real quick. What do you think is the competitive frontier for your businesses consumer brands versus others? Is it equality is? The brand itself is it relationships with bud tenders never heard that term that's hilarious. What is the competitive frontier? Where will this battle be won or lost again it depends on timing. It's very easy for a lot of investors who've gotten used just investing DDC brands on Instagram is friend of my calls at like Qvc for millennials where they just have platforms they spin up a brand, slap it onto a commodity product and make some money off facebook ads. No other profitable vomited lives. We're not there yet a brand without consistency is just a logo. You actually have to produce a consistent product and that is actually really hard specialize in term can avenue it's water soluble. The reason why we do that so that they'd be placed into water based food systems and as well. So low fat food systems and we've also discovered that there is a much better absorption profile. So people actually get what they have bought into their. Bloodstream to do that, consistently, it's taken years of our investment and I think when people go to fast with too much money they go in the wrong direction I. Think you saw this with constellation had this whole thing when canvas two point Oh came down where they're like, oh, like can liners the aluminum can liners were t h c? So we have to delay launch well yeah. That's because you treated a two million dollar problem like two. Billion dollar problem that was a solved problem. Already, the CAN liners and it's solvable if you have a small line and good food scientists who can operate flexibly. But again, there's new science here. What is the shelf stability working in acid versus base will abass breakdown CD? The answer is, yes. Do you need a high s environment for it to actually live in? How long does that see stick around does degrade below the label claim these Are All like the structured parts of the food supplement supply chain. It has to be verified before they can be scaled and I think a lot of people were just especially if you're trying to do brands, you want to go straight to scale because you want the cheapest way to get their word and infrastructure phase in this industry you've got to be in it for that. You've got understand what you're getting into some day will brands went. In when you've commodity infrastructure that everybody has access to that's the only way to differentiate. But today quality and capabilities are how I think you differentiate yourselves. You actually have to build the platforms on which you operate. You don't get to go out to just rent somebody else's. What are your thoughts on sort of where this all goes from here? So if the first part of this was the handcuff risk, the second part is sort of the state by state period of time, and maybe the third piece is some sort of federal unifying. What is it time for something like that and when will we look back on this and just think was a crazy period of transition. So on Thc I think you could see a lot of movements next year depending on the outcome the election obviously marijuana reform in social justice reform and criminal justice reform all tied very closely and for many obvious and deserve reasons CBD, you had Senate Majority Leader McConnell legalizing the production Of Hemp at the end of the twentieth Farmville by it's FDA has been slow to actually accept responsibility for the derivatives of Hemp that legalize namely CB FDA's claim to three to five year time line I. Think it's wild for a food public health regulator to just ignore a market where twenty to forty million people a day are consuming a product totally unregulated because they don't have enough information now you regulate the market. Can you improve regulations over time? You don't look for perfect in the meantime consumers to twist in the wind. So that goes back to my point of like you need regulators who want to regulate and I don't think we have that right now. I, think hopefully, we will have that by this time next year and if you have regulators who are dedicated to. The concept of public health who are dedicated to imposing the will of Congress and enshrining that's in administrative policy. You could have CB regulation. Next year, you could clear up the banking issues around THC next year you can get thc probably starting decriminalization, but heading towards legalization with next twenty, four months. These are all things that could have been set any time in. The last four years. But one thing that I do believe is if thc and CD of manage to make this much progress throughout the administration's attorney general sessions and bill bar the two most anti marijuana people I could imagine God. I can only imagine what happens when there's somebody who's making the life's work to destroy it so we could be looking back on. This three years from now I think with wonder I kind of hope that the next president who every might be would embrace marijuana in a similar way to how President Obama embraced gay marriage maybe was circumspect that the election but then he got it across the finish line once he was in office and I think that's totally implausible analogy that can happen here. Can. You walk us through the business itself in sort of what it looks like in terms of almost like an income statement walk through what kind gross margins are we talking in a business like this? How to sales and marketing figure in what are other notable key aspects of business that determine its long-term kind of margin potential again, it's different each stage, the supply chain. So I can really only speak to my point as a products manufacturer. The margins are quite good. You're talking thirty to forty percent even a-, and the key thing is we don't have a huge salesforce only got three, hundred thirty stores to sell to. We got a salesforce three. This is on our THC business side. So that's still water brands are THC business, it operates. Serve three hundred sixty dispensaries covering a population of around eight million total population state population around million we self distribute to them through a mix of couriers and our sales people directly dropping off. There's not a lot of advertising to be done. So I don't think people fully appreciate the Google and facebook won't take money from CD or THC companies. If you've seen those ads than they were placed their against public policy and usually through some sort of work around that was probably enabled by the sales team at those. Companies, but it's frowned upon by the legal team. So it's not like you can spend your burn a hole north performance marketing. Even if you wanted to, I mean the way you do it is you have to, if you want put an ad on Instagram I, you have to go out and buy like an affiliate's placements and get an article written on some third party sites, and then you have to have them by an ad against that article that links to your website. The transaction costs neoclassical economic sensor just massive. In the space and yet still thirty five percents been. So wanting a lot, we really pay a lot of attention to operational control. We pay a lot of attention to emergency pay a lot of attention to good process because we believe that if we can learn to function in an environment as fucked up as this, the headwinds are only receding. So it's just removing from advanced level as we get towards clear federally galaxy, you're retreating towards and more of an easy mode men no play just more and more opportunities. Open up for us. But for now, you're just facing problems everywhere you look everything takes five times longer if not ten times longer, it takes three vendors to find one who can do the job. Each one of those vendors takes two months to figure out what they know anything. It is a blanket rule in myspace space for my staff. Don't believe people when they tell you things it was a blanket rule for me as an investor, but it's especially a blanket rule for me here and it's not because people are. Dying I think people are just they're optimism they can't distinguish between optimism sales and lying. So as seen like rafter after people come through with just huge plans that never made any sense never materialized. Thank you back to that founding story I'll of the POT Brownie story as to the origin insider something what after that would you classify sort of the first big break for the business? So if you've had any step change improvement since the prospects of the business, what was the first big break that stands out in your memory? After we decided to become a food company, we wanted to produce a product of my grandmother ninety year old seniors and the product came up with is called stillwater. T was tune half milligrams of THC, and it was explicitly designed not to get you stone. It was supposed to replicate the feeling you'd. Get from taking three deep breaths and have of that last for a couple of hours and we went out to sell US dispensaries and were met with a collective T.F. We had one by tender is like did I take three hundred milligrams for breakfast? Why are you pitching me a two and a half milligram product to which the responses I man you've gotta problem but second this product isn't for you. This product is for other people some would get it. We would get people would give it to their mom but tenders and her mom or the grandmother would love it, and then they would become real advocates for it it. Never, really took off and it turned out because you have to account for what your retail channel is and the people walking into dispensaries just weren't that interested in the low dose products we couldn't market to try and bring in more people and the dispensers themselves and really have much interest in going outside that core customer base and they were making money and they didn't do any work. Everybody loves making money off studio work. So we couldn't get the target customer that we built this product around to even get in front of us to even try to make the sale and that was a big learning for us. It's sort. Of like you can't fight the Fed you can come in with the mark in, want to say have all these big ideas for how things should work? Why aren't these products merchandised? Why are they all behind glass? Why am I listening to a bud tender as if he's a pharmacist, why can't we advertise talk about the things that we're doing but then there's like the market as it is and you've got to figure out a way to sell into that. Fortunately, we had on the back end. Nice little innovation story where to produce the water soluble component of the teas. We were basically creating these crepes of slurry like an. New Type feeling texture, and then breaking them up by hand, and we were dumping the granules into t sticks. T stick was our form factor. It looks like a stick pack with of perforations functions a teabag, but is part of that we had to have granules of a certain size. So all the grain was smaller, the fines we're basically throwing out. Well, our yield was turning out to be like fifty percent of our THC which are core input there and That was fine with a a half milligram product. But when we realized we had introduced a product that would get bud tenders excited. So we made a ten milligram t we realized that man you can't get by with fifty percent yield on the ten milligram product just getting destroyed on margin. So we looked at a couple different things we could do whether we could try and find a different way to gripe ultimately decided was, hey, this powder parts the water soluble. Piece was really the most interesting piece when we package that up into packets and sell it as done product that became ripple ripple is like a little stick pack odorless liable flavourless clean label, soluble thc. CD mixes drop straight into a beverage and dissolves instantly, and that was the product that came out of those two things to go. The need for product would get excited the need for a process or a use of the waste so that it didn't destroy margins. And suddenly that what was before waste became our growth engine that was the product that took off everyone got really excited about eighty that you can make anything an edible and then they got really sight even further because we started discovering that people are giving these anecdotal reports that they were getting high faster with ripple than they would when they were taking other edibles and we believe them but we couldn't prove it until we went out and actually did the studies. What a fascinating turn of events really cool story to look back on the book and our conversation with another couple of questions just bigger picture kind of harkening. Back to your background as an investor first and then wrap up. So my first question is you mentioned studying under Tim Wu what specifically you learned from Tim. What made him special what you take away from your time learning from him I don't want to oversell my relationship with him. I don't think he would know me from Adam at this point, but he did have the best class I took and he was my major writing professor. But the big thing from him was just that market structures matter. That was what he was really talking about back. Then I think it's still what he's talking about today. These things don't just exist vacuum markets don't come out of a vacuum they're not naturally occurring. There's nothing natural about them. They are created by man therefore, they need to be created with intention if you hope to get out of them what you expect. You also mentioned that you're intrigued by Jim China's idea that this is sort of a golden era for fraud I'd love to hear why that idea is interesting to you and kind of what it means to you. That just feels like sort of violently true. At this point, there is absolutely no penalty for lying bullshitting. At this point, we are rewarding the bullshitters from top to bottom and. That's fine I guess I think there is a belief that you need founders who almost bullshit themselves to create companies out of nothing. But I think that that's a form of idolatry that I think is just straight up wrong. There's absolutely no reason founders of not different from other people may be more tolerant of uncertainty. Some of them are good businessmen. Some of them are bad business people. They are also humans. They are leaders of humans and I think actually putting together an organization where everybody is treated as a human where everybody is not asked to participate in a cult where they're not asked to put the company over themselves where they just like this a job I need you to be good. At it and then I need you to go home and enjoy your family. That's a much healthier way of doing business and I don't think you would see any reduction in good in innovation that actually has societal benefits off of that if anything you'd see the exact opposite I think most innovation these days is geared towards things that can really raise the value of equity but not necessarily be standard of living of all the employees within the company. Yeah I hate this notion that founders are aliens who are just really good at some sort of thing most of the time they're actually atrocious human beings who are just being carried by competent people within their organization while they're being treated like children internally. If you had to re enter that world and be backing founders actively, how do you avoid that problem? What would your advice be to investors who are primarily making bets on people to avoid that type of person? So you have to structure its Jerry and I talk about this all the time and I am fully on board with him that we're both on board with Connor and Gary King that there's no such thing as intuitive investing when it comes to people, those are complex open systems. If you tell yourself, I just like the cut of his JIB, they turn out to be great. That's look good for you. That was not something that is repeatable. But what you can do is you can create structures decision making structures that try and look for land mines we those out you can try and raise the floor of whoever you hire. Don't think it's possible. To hire perfect person what perfect means different in the context of an organization, a team time. But I do think you can at least construct a hiring process to probe for things like integrity to probe for things like a willingness to play games at the truth to probe for just the difference between somebody who can describe things for somebody who can actually do things I think you focus on those and just mart has this great smart hiring thing yeah. The book is fine. His PhD thesis as much more interesting about how you actually setup decision structures for unstructured decisions. My best resource for this something, I think a lot about two is the CIA. As internal, library on making structure decision making in unstructured situations. As good as it gets the you think about what an investor is doing. They are trying to predict inherently unpredictable complex system, which is itself impossible to predict a point out gum but you can at least start predicting ranges of outcomes if you structure thinking well, and you can avoid falling in love with a specific outcome, given that the same facts might also align with a multitude of other. Outcomes. These are just things that I think are really important. I also think it's super important. Always play the counterfactual 's anytime anybody I'm mateen is like when you guys did this, that was so smart as like, yeah, that was smart but let me tell you about the three other things we wanted to do before we landed on that one that was stupid that could have worked and we could have been going in a totally different direction and tell the. Story about you just heard the story about what happened with ripple that story could have gone in a bunch of different directions. We get a double down on low dose DECI- we spend more money on performance marketing maybe that would have worked I can't say that it would but I think it's really dangerous to get into the mindset. It was always going to be this way and it was always going to be this way because I'm so good bullshit I. Don't care how good you are. The world is complex. Luck is massive massive factor. The best thing that you can do is put yourself in a position to have better larger options than you had before as long as you keep on doing that eventually, you're gonNA, find the option that you can really lean into at say that a lot with this company, this company is large lever that I ever hope to hold and it got that way because we just. Start with very small lever and kept putting ourselves in a position to God and find things to add onto that lever. We couldn't pick exactly which one was going to be the thing but at least we had the opportunity to go after them in the Cannabis Bay specifically what do you not understand well, today that you wish you did cultivation is fascinating to me I. Know I don't understand it. I. Know Enough of it to know that it's complicated I. Think that everywhere you look in the cannabis supply chain it's easy for to look simple especially when you start scaling it up, things get very variant very quickly just because you understand something the way it operates at one scale doesn't imply that you understand how will operated another scale. That's one that is always scary news just trying to understand what's the next model that's going to work for thinking about this industry. I knew a guy wants who got his PhD. In philosophy of friction and he described it to me as the way that friction works at a molecular level is different than the way it works at an inch levels different. The way it works at a mile level. The philosophy is Wendy. You Change Your model for what works something that has describes the molecular level, and now you've got somebody that describes step up if you try and take the molecular model and apply it to the inch model you're not. GonNa get anything predictive and the models I have for marijuana. Are they just Colorado? Specific? We're GONNA find out soon we're going into Michigan next year is this as unique of the market as I believe it to be or are there lessons this market that are transferable to other states each state truly unique from top to bottom and everything has to be relearn. We don't know yet and that's both scary and wildly exciting. That's what keeps a new and fun. Well Justin I've learned a ton today I like I really didn't know anything about the space coming in and now do so I really appreciate your time. My closing question for everybody is to ask for the kindest thing that anyone's ever done for them. I will tell you at least in my professional career. kindest thing that anyone has ever done in my professional career was Roger paying me out of his own pockets to be an intern it I A and they were friends and family company which got me out of a job in San Francisco that I hated, which got me back to new. York with my wife or at that point my girlfriend now wife which led to me having a kid a dog in a company and all just because he was willing to expend not much money to get somebody who he thought was smart and could help the fund. Fantastic could easily bands but he did it and man and my grateful it was kind. Fantastic. Well, Justin thanks again for your time today I've learned a ton and I hope to send such. Thank you appreciate it. This episode was brought to you by Microsoft, for startups Microsoft for startups global program dedicated to helping enterprise ready BB startups successfully scaled their companies. In our five part miniseries. We were talking to Evan Riser CEO, of Admiral Security about his experience with Microsoft startups. In this week's episode with Evan. Talk. About. Technology. Shifts and picking a cloud provider. What has changed about companies sort of clouded option I would count us and our business in the same category of like slowly, and then suddenly you know we had to adopt this sort of thing. So maybe just describe what exactly because it sounds like a technology platform shift that often makes new companies possible. What exactly has changed and wise a company like yours position. Well, for that yet I think two things one is just how enterprises work. Then the second is, what are the new platforms that allow small teams do a lot with very little. So they in former category like the the general shift is. Enterprises it stack moving into the cloud and the prevalence of migratory five is just an example of that. So that enables all this it and security deeds be available in the crowd and therefore accessible Api's, and so we wanted to build our product ten years ago would need a fundamentally different architecture that wouldn't allow us to get as much data at the same level of detail in deploys quickly and I think with the with the rise of infrastructure and cloud computing, and even more specifically some of the higher level services like azure cognitive services. Those are tools that allow relatively small engineering science team to go build. These world glass enterprise ready applications you very quickly. So you just started in two, thousand, eighteen. So you're you're young company even though you're moving quickly I'm curious what the experience was like at the beginning as you thought about what tools to deploy this is one of the more interesting things for me. Now, because the toolkit available to founders say eight years ago is very different from what's available today you can do a lot less building of commodities stuff or stop it's not your core competency. So how did you think about that? How did you address the problem of what stack of Third Party partners are we? Going to use to build this company on top of we arguments, mistakes, Some areas were very thoughtful wants for us. Thoughtful when we started right we knew just like the speed to market a was going to be very important for us. So we started off by just using the or familiar with right. We didn't do Lotteries Urs WanNA areas, one example inside cotton infrastructure when it to things like cloud infrastructure, it's not really just a technologist it's really a business decision and the reasons why we decide to invest on Azure I think this to on the technology side we had to have the most secure. Of Privacy Centric Clapham to bill on top. Of. The the second thing is clearly for a business and we the technology platform that will need lots to spend more time focusing on customer problems not on rebuilding commodity technology. So being able to use higher level services like AI and machine learning computer vision getting that out of the box just allows it up to do a lot more faster. Of course, I, realize the irony of me being a enterprise technology CEO saying it wasn't a technologist vision but I really think the reason we ultimately decide. To invest in the azure platform was really around some of the the business benefits glide came down to just what is most valuable to the company for companies like us we currently work with maybe three or four percents abortion five hundred. So the biggest challenge for us as a Harris, the other ninety, five percents, we wanted to reduce the cost required rush to go and market ends acquire customers into their scrape programs like the Azure co-ceo program, which enables Microsoft sellers to go sellers from Russia. and. Help with us to help solve customer problems. I think the other thing that was really important on the business side was we wanted to increase our success with customers by lining their strategy. So a lot of CIO today are interested in consolidating architecture into the Microsoft ecosystem they want fewer and fewer point solutions independent and they want one interconnected ecosystem that that works well. So the ability to enable our customers too busy investment microsystem to buyer solution gets as your consumption credits as part of. That to reward them for their Microsoft ecosystem investment. That was another key piece. Big thing for us is that we realized that conner infrastructure was much more businesses and in the past I would have offloaded that to maybe the engineering team and had them kind of side. But for us, we brought to the board and he said Hey we think that all in this actually more important for the business, we get a lot of benefits for both the company and for our customers by investing Microsoft overall. To find more episodes or sign up for our weekly summary visit investor field guide dot com. Thanks for listening to founders field, Guy.