EDITION:

SMEs are driving the cannabis sector, but funding their growth isn’t easy

Home » SMEs are driving the cannabis sector, but funding their growth isn’t easy

Cannabis Wealth spoke with Kevin Bush of Sweet Leaf Madison Capital – a major lender in the US cannabis sector – about his passion for supporting the little guys.  

According to Kevin Bush – CFO of Sweet Leaf Madison Capital – the cannabis space is like pizza.

On one side of the spectrum, there are Domino’s and Pizza Hut; huge brands turning over millions or more each year. They’ve created a winning formula that works. Their products aren’t exceptional, but they’re consistent, cheap and powered by technology. On the opposing side is the local family-owned pizza place around the corner. Somewhere in the middle is the small to medium-sized independent businesses producing authentic pizzas in wood-fired ovens. They’ve made it their mission in life to make the best pizza in the area and they’ve put their life savings on the line to make it happen. 

A similar structure can be seen in the cannabis industry with individual, self-funded dispensaries at the bottom of the rung and huge multi-state operators (MSOs) at the top. It’s often the companies in the middle who are driving real innovation and producing consistently high-quality products. But in spite of the importance of lower middle-market companies, they are often overlooked when it comes to financing. 

“If you’re awarded a licence for a dispensary, it is going to [cost] anywhere between $800,000 and $1.2m,” Bush explained. “People can finance those dispensaries. They put together friends’ and family’s money to come up with it.

“Then, once a company is doing $50m in sales, lenders will step up. These are large, proven organisations, institutional investors, hedge funds [and] private equity. They will show up and back them.

“But what happens is somewhere between the individual ‘Mom and Pop’ shops that raise a million dollars from friends and family, and the MSOs that are doing 50 million-plus in sales is this huge market that is massively underserved.”

Sweet Leaf Madison Capital was born from the marrying of two firms; major equipment lender for the cannabis sector, Sweet Leaf Capital and private equity firm Madison Ventures which has raised in the realm of $1.6bn since its formation in 1996. The firms joined forces to fund and consult companies that fall in the middle, with top-line sales in the region of $2m to $5m. 

These companies are generally too small for major institutional lenders and too large to raise enough investment to expand. Sweet Leaf Madison Capital aims to fill this gap, financing primarily craft producers with an ambition to scale. For most companies Bush and his team work with, it’s the first institutional raise their clients have gone through as they transition from a micro-business to a middle-market company. 

An institution like Sweet Leaf Madison Capital requires significant due diligence, books and records need to be in order and policies and procedures in place. But thanks to the sector’s infancy and a lack of regulation, it remains a wild west, Bush said. “We’ll look at an operator making $7m a year and then you look at their books, and you think ‘who the heck put this together?’”

Clearly, there are challenges in funding new businesses in a young and emerging sector, but these barriers are outweighed by the excitement and financial reward of backing an emerging company. 

“Not only are you working with really enthusiastic and exciting entrepreneurs […], but you’re working in a situation where the sky’s the limit and you have a large amount of influence in terms of how you can help them,” Bush said.

“These entrepreneurs are all so passionate about what they do. They’re doing everything they can to get to the next level and that’s the fun part; they’re big enough to finance innovation […] and they’re able to be more responsive than a larger organisation.

“It’s tough to replicate that once you become a certain scale.”

As the influence of these craft producers continues to grow, Bush believes that cannabis could be headed in a similar direction to the beer industry which has undergone a revolution in recent years thanks to the emergence of a flourishing global craft beer scene. 

“One of our founders worked for Molson Coors and saw what happened to big beer when the craft movement came in,” Bush continued. “The craft providers maintained pricing power, whereas the generic stuff was a race to the bottom. There are lots of reasons to think that this will happen to cannabis at some point.

“The [businesses] that we think will have pricing power longer term are the ones that we favour.”

A potential danger to the burgeoning ‘craft cannabis’ sector is federal legalisation. Although US-wide legalisation would help operators and producers by bringing the cost of capital down, the introduction of cross-state transportation and distribution could lead to medium-sized companies being swallowed up. 

Growing operations are likely to move to states where crops are easier and cheaper to grow, like California and Colorado while established growers in states with less favourable climates are at risk of being stubbed out. 

But it’s Bush’s view that members of Congress will push to keep their state’s cannabis micro-industry autonomous, allowing them to keep cannabis professionals in work and continue to collect taxes from an increasingly lucrative sector. 

As federal legislation creeps closer, it may feel that the gobbling up of small and medium canna-businesses is inevitable. However – as with the craft beer scene – there is a fierce independence amongst the SME of the cannabis space. 

For those that want to scale their company, Bush said “don’t be arrogant, it’s a tough business. 

“Don’t be afraid to work with outsiders that have experienced it. Don’t hand them the keys, but don’t hesitate to bring in money or advisors who have been there and done it. There’s not a lot of it because it’s such a new industry, but don’t be a hero and [think] you have to figure this out on your own.”

[activecampaign form=31]

Related Posts

Related Posts

CONNECT

Related Posts

Related Posts

Recent Posts

Related Posts

Subscribe to our mailing list to receives daily updates!

We won’t spam you

Categories

Browse by Tags

CATEGORIES

EDITION

BUSINESS OF CANNABIS

© 2023 Prohibition Holdings Ltd. All Rights Reserved.

EDITION

Are you sure want to unlock this post?
Unlock left : 0
Are you sure want to cancel subscription?