TRANSFORMING CANNABIS COMPANIES INTO INDUSTRY LEADERS | THE HIGH GROUND FT. CODIE SANCHEZ FROM EEC

For trichomes.com, I'm Jesse Battende, and this is The High Ground. On this show, we feature leaders of the cannabis industry. We talk to everyone from farmers to CEOs and public officials, anyone making an impact on the cannabis community and beyond. The current moment that we're living through, while undeniably difficult, presents an opportunity for the cannabis industry. Millions are out of work, but cannabis is hiring. States need tax dollars. Cannabis is open for business. It doesn't take an expert to see the chance that presents the industry, but we got one anyway. Today I'm joined by Codie Sanchez, managing director of Entourage Effect Capital. Entourage was one of the first private equity firms to get behind cannabis, and Codie's equally sought out for her insight into the cannabis industry, but also also the wealth of personal and professional career advice that she puts out on her personal blog and on social media. She also produces The Contrarian's Guide to Getting into Cannabis, and not so long ago, or very far away, she was an award-winning journalist covering human trafficking along the Mexico border. We'll get into what this moment means for the relationship between cannabis and the private sector, advice for everything from taking your first steps in the industry to what you can do to convince someone like Codie that your business is the real deal, and why federal legalization may be closer than some previously thought. Codie, thank you so much for joining me.

Pleasure to be here. Thanks for having me.

Of course. So we've heard— I've heard a lot from leaders in cannabis companies that they're going the extra mile. And I think this is true of most businesses going the extra mile, communicating with their employees, communicating with their customers about safety procedures, about what they're doing, where they're at as a company, and trying to be really transparent. I'm just curious, on your level, when you're involved with so many companies, what are those conversations looking like? Like, how involved are you? What does your day-to-day look like right now?

Sure. Um, so, you know, we have 65 portfolio companies at Entourage Effect Capital, and of those 65, let's say about 20 are still active, meaning we haven't actually sold our positions in them. And of those 20, we are hands-on engaging with, let's call it, 10 to 15 on pretty much a monthly, weekly, and sometimes daily basis. So there's— we have, uh, 4 other partners. There's 5 main partners at the fund, and then obviously another great team surrounding us. But, um, we are pretty involved on a day-to-day basis. I think, you know, normally we do something like, um You know, for instance, we have a company right now that we just acquired called Sublime Canna, and they have, they're the number one selling pre-roll company in California, and they have incredible marketing on their products, but their social media is something that we need to ramp up. So, you know, I'm sort of the go-to for growth and marketing at the firm. And so, you know, we have a pretty consistently outstanding call right now on how we're going to take over the social media aspect for them. Build a business around it in order to actually create a brand and a human and a personality feel online, similar to what they have in person. And so we sort of do it on this project basis sporadically for a lot of the companies that we either take over and run or that come to us for help. So maybe about, you know, 20 or 30% of my day is spent engaging with our direct portfolio companies. Probably another 20 to 30% of my day is spent engaging with our investors. And then the other 40% is looking for new deals. And thinking about the market and writing about it to put out content like this to the world.

Do cannabis companies have sort of a step up in terms of their presence on social media? I mean, I think most companies are prepared to think about that as something that they need to do, but you know, that it— this is a new challenge. Have people been able to kind of rise to the moment?

Well, you know, um, yeah, I think cannabis, to be frank, is not great as an, at an industry at marketing and social media. Case in point is the fact that we've been outlawed and illegal for the better part of, you know, 100 years. Um, so, so we haven't told the best narrative ourselves and we've really let other people tell the narrative about the industry and, um, and what we're doing. I think that's changing because to your point, for instance, right now we're listed as an essential service, right? And that came because many of us in the industry were lobbying on that behalf to start seeing the lens of cannabis as medicine as a real thing. For those of us who are in the industry, we sort of shoo that away because we, we already know that we've seen it every day in our engagement. But for those outside of the industry, they do not see it as a medicine. They do not see it as wellness. You know, they still, still have a stigma largely about some sort of vice, even if they are pro-legalization. So we have a lot of work to do, but I see a great trend with essential services happening. And I see a trend with, you know, how people are continuing to look at this industry today and allowing the company to stay— companies to stay open and realizing how many jobs we provide in the cannabis industry and the tax benefits of it. That is going to become critical as we come out of this crisis. I think regulators and everyday humans everywhere will see the cannabis industry as an opportunity to get back to the normal that we had pre-COVID-19.

That is, um, a really good point and, and an excellent sort of transition into one of the things we wanted to talk about today, which is how, how important do you think, or potentially impactful could it be, if cannabis becomes this place where more and more Americans are, are working or finding new jobs, those who have been displaced or put out of work because of the pandemic? Like, How critical could that be to changing perceptions about cannabis?

Well, I think the more you touch this industry firsthand and touch the plant and interact with it in its more mature stage, let's call it moving out of its teen years and kind of getting into its early 20s, maybe the more you realize that this is an industry just like any other that we've really put a negative spin on for not a lot of practical reasons whatsoever, facts completely excluded from, from the story. So, um, what I've been amazed by is when I first came out that I was going to invest in cannabis publicly and take on this private equity venture capital role as a partner in the firm, you know, my background is Goldman Sachs and State Street and Vanguard and these huge multinational companies that are very traditional. And so you better believe that my mom and dad had a few questions for me. When I said that I was going to go into, you know, drug financing, for lack of a better term. And, um, and, and now, you know, let's flash forward a few years later. What's fascinating is, you know, my grandmother suffers from rheumatoid arthritis and also has degenerative disc issues. And, you know, she uses cannabis tea and honey to help her, and she got off opioids completely because of it. You know, my dad uses some of the salves for his lower back. These are all normal stories in the industry. Um, but they would have never done that if I had not been in the industry, they would not have been going into a dispensary. So to your point, the more people who are working at it, the more people who are using it, the more people are going to normalize this asset class. And they're going to see that it is an asset class like any other, too much of it, not great moderation.

Good.

Same as is true for coffee, water, anything else you do in life. Hmm.

What were some of the reactions you got from some of your sort of, uh, peers or, uh, you know, other people that you were working with in the industry when you started to make that transition beyond your family?

Well, first they wanted to make sure that, um, you know, they were concerned about it being dangerous, right? I mean, the objections up front are very straightforward. One is, you know, is this a vice or a drug that we're peddling to a nation that is already under an an epidemic from opioids and antidepressants. And so, they were very clear about like, "Let's dig in here and look at the data." And, I'm a former journalist, so I don't do things very lightly when it comes to research. So, the very first thing I did upfront is look at, "Okay, are there downsides to this that I don't understand?" And, I went really deep into the world of can cannabis kill you? The answer is no. Nobody's ever died from cannabis ever compared that to alcohol. Then, number two, I went, "Okay, maybe it can't kill you, but can Can it make you an addict like opioids and antidepressants? And the data also seems to say no, it doesn't. It's not addictive in the same way. Then 3, we went down the rabbit hole of, yeah, but what about for the youth? It can't be good for developing brains. Are there issues for children? Are we going to have children who are a generation of stoners in their basements locked up, not working? Just smoking weed all day and playing video games. And that's this mentality we've had. And so then again, we went back to the data and what we see in the data is that as you legalize, it becomes harder for the youth to access, which is absolutely something that we are a proponent of. Opioid deaths decline in states that legalize. Now, we don't know if this is correlation, causation, or what, but these are the numbers. We also know that, um, from an addictive standpoint, cannabis seems to be an off-ramp drug as opposed to a gateway drug. The gateway drug is a complete fallacy. There is no data that I have seen that supports that this is true. What actually seems to be the case is that the data shows that people drink and consume other drugs at a lessened state once they have access to legal cannabis. So this is why the big alcohol companies are getting in. As big alcohol seems sees that their, their sales, particularly beer sales, beer sales drop off heavily as cannabis legalizes. And so, um, that's why they're starting to come and invest in the industry. And I think it'll be the same thing with, with tobacco. And so those were the objections people had up front that were all very rational and important questions to ask. And what we needed to do was dive into the data and see what was true and see what was false.

You've talked before about this idea that whoever is going to sort of figure out how to socialize cannabis is, is going to set themselves up to be in a really great position, as in finding a way to, to make cannabis use as, as comfortable and not out of the ordinary as consuming alcohol, or similar to how people consume alcohol. What do you think that looks like, and do you think that perhaps staying at home, the moment that we're all in, is there an opportunity here?

Sure. So I think there's an unequivocal opportunity for our industry in that we have seen cannabis sales increase by 78% year over year since the crisis. I've anecdotally, so we don't have good data on this, been speaking to many people who have lessened their alcohol consumption and also lost weight. You're eating, you know, less calorie, drinking less calories and less sugar, typically when you use cannabis. And so I think, you know, we've seen also about a 200% increase in net new consumers to cannabis. So these are, you know, Codie Sanchez never used legal cannabis, never has been tracked at a dispensary before. And for the first time ever, she's trying it by a delivery mechanism or going into the dispensary. So we're increasing the amount of people, of product people are consuming. We're increasing our group of consumers substantially to new consumers who are novel entrance into the space, or maybe coming back to it after trying it in the '60s or '70s or whatever the case may be. And then the third leg, I think, that's more aspirational, and I don't know if it will be, you know, true and continual, is that, you know, I think cannabis really can be a help for those who have addictions with things like opioids. We don't have any data on this whatsoever. In COVID-19. But, you know, in periods of high stress and high anxiety, typically, quote unquote, vices do better. So alcohol, tobacco, for instance, and then things like healthcare and consumer staples. Those are your recession-resistant industries. And cannabis falls sort of squarely over all of those industries. And what I would be really interested to see is, do we have less people turning towards destructive behavior like high alcohol consumption or, you know, turning to things like antidepressants, sleep— sleeping pills and, and opioids during a crisis like that. And I think that would be a huge turning point for the industry from a positive standpoint.

That's interesting because I do— I wonder in, in some ways when it comes to sort of more recreational cannabis use, do you think that there's something to be learned from other perhaps taboo products that found their way into the marketplace, or is it still about showing the differentiation between alcohol and other recreational substances?

So I, you know, I think it's interesting. I— the real key, in my opinion, that we have to hit upon in order for cannabis to be normalized is, of course, first federal legalization would be very But simultaneous, I think we also have to think about how we humans are structured to consume. And the way that we consume is typically, you know, eating and drinking. Yes, we smoke, you know, tobacco through cigarettes and cigars, but that's really become taboo, right? But so when we do things recreationally, typically our recreation is going out, eating and drinking, socializing with a heavy emphasis on beverage. And so we're particularly interested in the beverage category because I think in order for us to socialize cannabis in a way that is similar to, let's say, alcohol, which would be the recreational component, um, we need to be able to, to lend ourselves to this millennia, uh, habit we have of picking up a drink and a glass of wine at the end of the night or with a group of friends. And so I'm interested to see what happens to beverages and if we can make those, you know, really taste good and have the same doseable dosable effects as alcohol, meaning you don't have to wait an hour for it to onset and you don't have that scary feeling where you feel a little bit out of control because you're drinking too much. And in this case, that means too much THC and too many milligrams. And so, you know, we invested in one microbeverage called Cann. I think that's a really interesting market. I'm interested to see how do consumption lounges change. And when we eventually get back, which I do believe we will, to restaurants, Can we integrate cannabis into them in a way? And when we start doing that, then I see cannabis mainstreaming. But we certainly have a ways to go.

That's, that's interesting because on the other side, um, you're, you're very out there, uh, in a way that I think other investors often choose not to be. Um, is that an intentional choice? And, and I mean, I would say you're, you're bordering on prolific in terms of LinkedIn and Instagram and blog posts and the advice that you're giving out unsolicited. Um, why make that choice?

Yeah, it's a good question. So, um, you know, typically, um, I think one, uh, investors in general have to be very careful because we have regulations on us that are there to protect the consumer, which are, are very, um, smart, such as making sure that nobody's making false claims. And making sure that you're not offering quote unquote unsolicited investment advice or investment advice. So I'm very thoughtful about that. And so investors tend to stay in the shadows, I think, a little bit more, and especially because today we have this belief that I think is really toxic that those who accumulate wealth and that speaking about wealth is somehow dirty, right? And that it somehow means you've done something wrong. And I think that is a huge fallacy for the average person because if we speak about investing or wealth accumulation in negative terms, how are we going to accumulate it? You know, you don't really attract another person by not wanting them in your life and thinking that they're bad. You know, it just doesn't make sense. And so, in the investing world, I think it's actually really important that we get out and we educate the populace and we bring everybody along with us to wealth creation. And that's, you know, that's a lot of what we try to do at EEC is we're normalizing normalizing cannabis, which means we have to be out there more publicly. And two, you know, we, we started investing in this space because we saw an opportunity for all of us little guys to invest in cannabis before the huge sovereign wealth funds, pensions, endowments came in because they can't right now. And there's not very many times when you have a generational wealth creation industry event happen when the little guys are the only ones that have access to it. And of course you have to be an accredited or qualified investor. Um, you know, but in the past, KKR and Carlyle and Blackstone would get access to all of these investments before any of us would. And so I think that's the, that's the choice.

Was it a, a difficult or a scary choice to, to go down this road?

You know, I think getting into cannabis itself was scary and I certainly had to think about that a lot. I'm not a huge user of cannabis. And so this wasn't something where it was a natural passion of mine that I wanted to get into the industry for that way. I actually started off in business, in my business, as a human trafficking and drug trafficking correspondent. So I did— was kind of a conflict correspondent along the US-Mexico border. And so I saw the impact that the war on drugs was having on people on both sides of our borders. Um, and I saw it in a very visceral way that one will never forget. And, um, and so that part was tough for me to start out with. Um, but then becoming more public in the space, um, it really just seems like we need to have individuals who are willing to, to speak out. And thankfully, I think some of the other investors today have really done this in a way that paved it for us. I think of Howard Marks from Oaktree, who is very public in writing his investment briefs and speaking on podcasts now. I mean, and he's in his 70s with a huge multi-billion-dollar empire. He doesn't need to go sharing wisdom, but he's doing it. Ray Dalio, same thing, writing Principles and being out there publicly while being a multi-multi-billionaire. He doesn't need to go share those secrets with others, but he's doing it. Um, you know, and, and you saw, you know, I really like, um, Mohammed El-Eranian from, uh, previously from PIMCO, blanking on where he's at now. Um, but he is very public in his sentiments. And so, um, you know, if, if those of us who speak about wealth creation and building businesses and getting Americans back to work and growing nascent industries that can actually do things for us, if we don't speak out, then the world is, you know, filled with a vacuum of noise from the Kardashians and the next reality TV show. And that's certainly not what we need.

Going back to, uh, your point about federal legalization being a key going forward here, you know, both potential, uh, presidential nominees have signaled that they're, uh, at least against full-on federal legalization. Um, And, you know, unfortunately politics affects business. So do you think that there's a chance— there is a lot of time between now and November— do you think there's a chance that federal legalization ends up on the ballot this election? Or do you— are you kind of preparing for the potential of 4 more years of, of, uh, this strange limbo we're in?

Yeah, well, if you would have talked to me pre-COVID-19, I would have said, um, we probably won't legalize in the next 4 years fully. We will not have federal legalization. And, you know, the timeline is more like 5 to 10 years. Maybe I'm— I was trending towards 6, 7 years. And that's hard for me to say because I have a natural bias where I would like the industry to legalize sooner rather than later. Right.

But sure.

The reason that I say that is because pre-COVID-19, you know, there were so many other issues from, you know, impeachment and, you know, Russia hearings and really cantankerous political storm that we're in. Now, uh, there is one singular focus and that is how do we right the ship, um, from the single largest, uh, unemployment, uh, numbers we've ever had in our history and a potential impending depression or recession. Um, you know, the likes of which we haven't seen in decades. And so the solution has been a lot of monetary policy, um, and, and fiscal stimulus, But I think that we have a much faster likelihood to legalize now. I would not be surprised if in the next 12 to 24 months we don't— I don't imagine it goes on the ballot. I think likely the states legalize more quickly than previously. The president, you know, if President Trump stays in power, which is my base case, that I think that he continues to take office, not a bias because I want it to happen, one way or the other. I think that is just the most likely scenario, pure speculation. Then I imagine he allows the states to legalize, but they do so quickly because they need the jobs and the tax revenue.

No matter what happens with second wave, third wave, you know, a couple years till we have a full vaccine, cannabis will be working, like the lights will be on, you know, for that period. And, and therein is this opportunity. Um, I, I only have a few more minutes with you, so I'm going to kind of try and squeeze, I think, 2 questions into 1 here, which is always a bad idea, but I'm going to try it. Um, you, you give so much advice, uh, and especially geared towards other women who are in the professional world that you're in. And, um, for anybody who is either starting out or like has been there for a long time, it's worth a read. And One of the things that kind of struck me is you, you recommend to people like read The Art of War, not because you want to be Genghis Khan, but because it like allows you to recognize the Genghis Khans in the modern era, which I think is just fascinating and such good advice for, for a newbie cannabis investor, someone who wants to get into this world. They want to find a career in this space. Where can we get advice? Do you have a recommendation for a book to read, either obvious or, you know, sort of unexpected?

Well, I think a couple different items. One, so I have, if you go to codiesanchez.com/gethired, we have a guide that we put together that's getting into the cannabis industry, and then one that is just getting hired in general. Proceeds from this go to military who are transitioning out of the military, especially important today. They've really don't have very good resources at this point. So, I think there's a code now for 50% off. So, it's something like $9. It's so cheap for— if you use the code, The High Ground or High Ground. And so, that's one resource. And that basically has for me everything from how I got into the industry, all of the books that I would recommend on the space, the top sort of influencers to follow, What's happening in the industry overall? Where are the conferences that you should start going to virtually or otherwise? Um, and where should you go to get smart on the industry? And then how do you get noticed once you're in? So if you're trying to get a job or a board seat or build a business or sell into the industry, that would be my consolidated resource that I put together. Um, other than that, I think if you want to invest in the industry, one of the best places to start is ARKQ. The Arcview Group, full disclosure, we have an investment into them, um, and I'm very involved there. But I think they're one of the best at educating investors into the space, especially angel investors. You know, you certainly, you know, we have a firm, Entourage Effect Capital, that puts out information resources. And then of course we're a fund family, um, but we are, you know, more for accredited and qualified investors. These are larger, you know, checkwriters. And then, you know, maybe the only other thing I would say is, you know, if you're going to get into this industry, I would also study, study history, look at what happened with alcohol prohibition, you know, look at what happened as we started to see new industries come online, like, like technology and the internet. And you'll start, you know, as an outsider, you have great ability to come into an industry with fresh eyes be a student of history to see what's happened in the past and make your opportunity inside of a nascent space. So I don't think it's a bad thing to not know a ton about cannabis. Come in with wide eyes, um, and see something that others don't.

And that's, that's fantastic advice. And, uh, if I am a founder of a cannabis company anywhere in the space, how do I make the case to you that I deserve to be sort of floated here, um, through this period of uncertainty? And, you know, like, what do you want them to— or what do you want to hear? And what do you want them to kind of say to make the case that, that, you know, they're, they're worth it?

It's, it's definitely complex. Um, asking for other people's money is never easy. Let me tell you a couple of the mistakes I think people make up front. One is, um, cold outreach is really not very effective for any investor, not just me. Um, and the reason why is the amount of deal flow we see is huge. You know, my LinkedIn, I can't keep up with all the messages because when you put out there that you have money to give, turns out a lot of people are interested in that. Um, so, so try to not do cold outreach. Instead, you know, show investors that you're able to triangulate a way to get introduced to them. Use LinkedIn, use your network, use conferences, get involved in groups like ArcView, and triangulate a warm intro. So I would start with that. Now, as far as what you need to show us, we at Entourage Effect Capital are later-stage investors. So we really invest in businesses that are doing more than $20 million in revenue. These aren't seed-stage brand new companies. And what we really try to do is we're turnaround experts. Distressed specialists. So we try to take these companies that are either not doing so great or doing good but not great, and we supercharge them. We come in and we bring, you know, our growth expertise and our ability to do sort of restructuring of the business to make them more successful. And so you need to also— so why I say that is that as a founder, you need to know who invests in your type of business. Even though I'm in cannabis, it doesn't mean I invest in brand new there's nothing created, but you have an idea of businesses. There are people that do that. And so in order to find those people, you've got to understand what their investment thesis is and respect the thesis because we don't do investment drift. That's, you know, our LPs, which is what we call our investors, require that when we explain to them our strategy, we stick to that strategy. And so it's not because we think an entrepreneur's idea isn't great, it's because it doesn't fit with our investment thesis. And so make sure you know A way to get to the person and then make sure you know how that person invests and you'll already be better than 90%.

Hmm. That's great advice. And it also sounds like you guys are sort of built for this moment in a unique way.

Yeah. I mean, we've really structured ourselves to prepare for today. You know, I can't take credit. The founder, Matt Hawkins, is the one who put this team together. And he, um, you know, I think really saw into the future a little bit. And when we, when we built out our team, we brought on people like Tiffany Liff, who is a distressed expert, um, Joe Blizzetti, who is also focused exclusively on turnarounds and taking companies to profitability. You know, you have me, who's a bit of a growth hacker, um, and knows how to take companies once they've stabilized and accelerate them. Um, and then you have, you know, Andy, who— Sterner, who's incredible at deal structuring and also is a former bankruptcy attorney, which helps these days. Um, and so, and Dov Shapiro, who is an entrepreneur and gets his hands dirty and knows how to operate companies. And so, you know, um, we put together this team with an eye towards the market today and hopefully being able to back some of the industry titans of tomorrow.

Codie Sanchez is the managing director of Entourage Effect Capital. She also created The Contrarian's Guide to Getting into Cannabis, which you can find at codiesanchez.com/gethired. Um, Codie, thank you so much for joining me.

The pleasure was mine. Thank you for having me.

If you are interested in Codie's Contrarian's Guide to Getting into Cannabis, right now she's offering listeners to this podcast a 50% discount. Account. Just use code HIGHGROUND to get 50% off your purchase, which will bring the whole deal to about $9. Just head to codiesanchez.com/gethired and use code HIGHGROUND, all one word, at checkout.