First Inning For Cannabis

SPEAKER_00 0:00

I think like maybe we're in the bottom of the first inning at this point. Once we get through adult use rescheduling, which I do think is gonna happen, um, I think that you could say that maybe we've entered the top of the second. But this industry's got a long, long way to go. I mean, there's no interstate commerce.

Welcome And Life Updates

Ben Larson 0:34

Hey everybody, welcome to episode 150 of High Spirits. 150. It's a that's our sesquicentennial episode. Very exciting. Sesqui sesqui centennial. Um we're recording Tuesday, August 25th, 2026. We've got a great conversation for you today. We have Tibby Ertley from Key Investment Partners on the show. We're gonna talk about cannabis investing and yeah, all things finance. Really excited to jump into that. Uh a little bit of my my old life. But before we get there, and Ray, are you enjoying your August recess? I like August. August is like this transitionary time. And I say August recess because I've been taking a bunch of congressional meetings this past week. But there's a lot of things in flux. There's Burning Man, which is a week where people just decide they get to disappear uh and stop operating their companies.

AnnaRae Grabstein 1:30

Yeah, I definitely I received an email this week of like, can we talk about this after Burning Man? I haven't received multiple yet, but I am anticipating more. I personally personally am not headed to the playa. I am heads down focused on other things like work and um has school started up again?

Ben Larson 1:49

Like that's a major transition.

AnnaRae Grabstein 1:52

I'm so relieved. Last week my kid went back to school, so I am now um feeling a little bit more regulated. I have my my mornings back, which is kind of my sacred time before you know, between like 7:30 and 8:30 in the morning, where I can exercise, listen to the news, drink my coffee, and nobody is messing with me. Um so I'm very yeah, totally. It's happening.

Ben Larson 2:22

Oh man. I speaking of regulated, I was remarking last night how dysregulated I was amongst my dysregulated kids. Um yeah, it's it's chaos. I I'm just like the kids have to go back to school. Like that that just needs to happen for me to start getting my life back, and this whole baby thing is just next level.

AnnaRae Grabstein 2:44

You you were the one that decided to have a third kid, you crazy person.

Ben Larson 2:48

So I I saw this, I saw this hilarious uh clip on Instagram, and it was talking about like having kids is like edibles. So you have your first edible and you're thinking, like, I got this, I'm fine, I'm definitely gonna do another. And then you have your next edible, and you're like, how do I get out of this? And then you're high for like 18 years.

AnnaRae Grabstein 3:14

Well, so then what makes you go back for the third edible?

Ben Larson 3:17

Well, it was that same uh yeah, it's that same decision making of like, I got this. There's that uh exuberance and overt confidence that is so endemic in entrepreneurs.

AnnaRae Grabstein 3:29

Well, there you go. Uh well, we don't want to make our listeners hear too much more about our lives. So let's jump into our quick uh news update.

FDA Misses Hemp Rules Deadline

AnnaRae Grabstein 3:37

We've got two stories today. Um, the first is that the FDA is now six months overdue on a legal deadline to publish two things the hemp industry has been desperately waiting for. Um, one, a definitive list of cannabinoids covered by the upcoming THC ban, and clear guidance on what actually counts as a container for serving size limits. Congress ordered the FDA to do this back when they signed the hemp redefinition into law, giving the FDA 90 days. That deadline was February 10th. Still nothing. Congressional Research Research Service flagged it again just this week. Meanwhile, the clock the industry actually cares about, the November 12th ban um taking full effect is still ticking through the Senate while the Senate is pushing through to delay most of it to December 11th with White House support. Um, bottom line for operators, uh, you're being asked to comply with a law that nobody's defined the terms of yet. So we're in a very interesting moment uh with what's happening with Hemp, the FDA not not pulling through with what it was legally required to do, and seemingly no accountability for that.

Ben Larson 4:59

Also, no one's surprised. Uh, so you know, the FDA is the FDA. I kind of wonder if they're just waiting to see what happens November, December before they decide to actually put some work towards this. Um, but it is interesting because, you know, being involved in a lot of these conversations, we also know that the FDA will likely have an important role in whatever happens uh with hemp or cannabis, right? And so it's like, you know, maybe they could show some level of interest, knowing that this is a conversation that's bubbling up week after week, that new bills are being brought to the table week after week. And at some point they're gonna have to get off their uh proverbial you know rear ends and and and do something. And so, yeah, I don't know, not surprising. The FDA hasn't done anything for cannabinoids since, I don't know, 2014 when they should have started.

AnnaRae Grabstein 5:53

What they're being asked to do is so simple. If the FDA needs help, they should just call me. Uh, or so many of us in cannabis could answer these questions very simply that they are being tasked with, and they know the answers themselves. So their choice to not formally release this list or define a container says more than them actually just doing the work.

Ben Larson 6:18

Yeah, I I do feel inclined to state that there are probably so many incredible layers of bureaucracy here that to encapsulate the entire organization as them and they and the FDA. It's like very challenging. And I say this all because we have all had interactions with you know very decent people representing the FDA. And so it's you know, we know that work wants to be done, but maybe this is just the federal government.

AnnaRae Grabstein 6:46

I hear you. You're being very nice to your to the friends that you've made at the FDA, and and Ben Ben does not want to burn it.

Ben Larson 6:53

I just don't want to get angry text messages.

AnnaRae Grabstein 6:55

Yeah, yeah. No angry text messages, blame

Curaleaf Versus Aurora Takeover Fight

AnnaRae Grabstein 6:58

me. Uh all right, let's talk about the Kirileaf hostile takeover bid for Aurora. Um, it's getting ugly. Aurora told shareholders this week that Kira Leaf's offer is contains inaccurate statements and significantly undervalues the business, telling shareholders that they should take no action while a special committee of the board reviews it. Kiraleaf fired right back the same day, accusing Aurora of deflecting from real issues, including hundreds of millions of dollars of uh inventory impairments under the current leadership. KiraLeaf's uh offer stays open for 105 days from its early August launch. And Aurora's board hasn't made a formal recommendation or a counter. So there's definitely going to be more back and forth before this one's resolved. My take is that this mudslinging just says right now to everyone that nobody really knows what Aurora's actual worth is, and everyone is sort of hoping that shareholders won't notice. And uh Aurora's hoping that the shareholders will listen to them and do nothing, and Kira Leaf is hoping that the shareholders will take a bet on a new management team and a new strategic path forward. It's it's like an episode of succession, um, possibly.

Ben Larson 8:23

I was just gonna say, has anyone checked on Boris lately? Like, is he okay? Like, he seems to be picking fights with everyone. I don't know. It's like he called like mission accomplished against intoxicating hemp after a couple years ago saying that in infused beverages would be 50% of the cannabis market, but I'm not gonna talk about how that is uh contradicting their. But he also declared that it's like there's too many cannabis businesses and we need consolidation. So like he's kind of you know attacking the fact that it's like there's a lot of small businesses that make up make up this industry, and then attacking the Canadians. So it's like I don't know. Like, is he okay? Does he need a hug?

AnnaRae Grabstein 9:04

I think that he instead would like a EU GMP cultivation facility, not a hug, and that that is why he is trying to execute a hostile uh takeover of Aurora.

Ben Larson 9:16

Very hostile.

AnnaRae Grabstein 9:17

A hug might might be a good concept.

Ben Larson 9:19

Maybe some weed surprise. Maybe some weed.

AnnaRae Grabstein 9:21

Yeah. Well, maybe

Meet Tibby Erdly And Key

AnnaRae Grabstein 9:23

our guest has has an opinion on this. Um, our guest today is Tibby Erdly. He's the founding partner or a founding partner at Key Investment Partners, a Denver-based private equity firm that he co-founded in 2018 alongside two partners, Pete Carabas and Jordan Ukli. Over the past eight years, Key has deployed somewhere between 80 and 100 million into the cannabis industry, backing more than a dozen companies across the spectrum, um, including recently a full control buyout of MM brands. At Key, Tibby leads the firm strategy, investments, and capital formation, and um brings an institutional pedigree from Time at Goldman Sachs and Partners Group that still isn't super common in cannabis. Uh Tibby lives in Park City. He's active outside of cannabis, recently launching um a new strategy in frontier technology, um, investing in quantum energy and aerospace. He loves skiing and hiking and lots of home construction projects and new builds. Um today, for today, Tibby offered to let us run a bit of an ask me anything for from an investor's perspective. So we're gonna do just that and hear what he has to say. Uh, welcome to the show, Tibby.

SPEAKER_00 10:40

Thank you so much, Anna Ray and Ben. Thank you so much. So, Ben, take me back. So, this is episode 150. Um, I'm the lucky guest here. That's awesome. Sesquicentennial guest. I've never heard that, and I'm not gonna try to say that back to you right now. Yeah, but that's fantastic. I love it.

AnnaRae Grabstein 10:59

Yeah, we've been doing this for for about three years, which is pretty crazy. Uh, yeah, had to have had lots of great shows, and I think we're gonna make some great content with you today. Yeah. Yeah. Talk to us about Key and what you guys do, what you've deployed in cannabis, the origin story, how it all got started.

Building An Institutional Cannabis Fund

SPEAKER_00 11:20

Yeah, happy to give you a little bit of uh the history here. Um, so I'm Tibby Urdely. I'm one of the founding partners here at Key. Um, as Anna Ray said, I founded the firm with my two co-founders, Pete Carabas and Jordan Euklis. Um it doesn't take folks a long time to figure this one out, but Key is really just an acronym for our last names, Carabas Ertley Euclidis. I sit right in the middle there. Um it's it's been a really figure that out. Yeah. Yeah. So we were uh, you know, we were deciding what to name the firm, and that just hit us in like five minutes. We're like, that's it. We're gonna unlock cannabis for everyone. Key investment partners, there we go. Um funny enough, I'll save you a story for another time, but uh uh a certain large bank with a similar name as ours um tried getting us to change our name. And uh, anyways, eight years later, we haven't done that. So we're still here. Um so yeah, my background, I'm born and raised in Texas. Um, went to school in Texas, studied finance. Um I was uh lucky to get a job at Goldman Sachs right out of college. I was working um on emerging markets, a part of the fundamental equity team, doing bottom-up stock picking. So um basically building out institutional, publicly traded portfolios that were then sold to um the various types of institutional clients that Goldman works with across the globe. Um during my tenure there, I switched from emerging markets to U.S. blue chips, so on the U.S. core equity team. Um, I was spending time over at the mothership at 200 West in New York City when I was approached by a large Swiss private equity firm partners group to come join their team. And I joined on like a quasi-rotational program where I had the um uh luxury of being able to spend time with all of the different investment teams over about an 18-month period. So, first with private equity, then infrastructure, real estate, and debt, uh, and then ultimately spent time with the institutional fundraising team out there. Um, I spent time with partners in New York, I spent time with them in Switzerland, and ultimately in Denver, Colorado. So in 2016, I moved out to Denver. Um, I was one of the first employees at Partners in Denver as they were expanding their global presence. Um, Pete and Jordan similarly met them at the same time. And after about three years in the heart and soul of the canvas industry or universe, um, you know, we just saw a huge opportunity that traditional institutions were passing by. And not because I think they didn't see the opportunity, because most of them were basically just hamstrung from being able to deploy capital into the space. So we spent some time getting smart on the industry, starting to look at deals. We quickly learned that our former employer partners was, you know, akin to most other traditional VCs or PE firms, unable to deploy into the space. And we saw that as an opportunity for us to be one of the first, I think, real institutional financiers to come in. Um, and we took an approach from, I think, a different lens than were most of our peers at the time were investing, which was uh more of a picks and shovels play on the industry. You know, I think early on we identified that this is a consumer packaged goods industry that's going to be largely driven by brands in the future, but we simply weren't there at that time. And frankly, I'm not sure that we're quite there yet, although there are some more obvious plays starting to emerge in the space. And so we took the approach that, you know, in an industry where more and more folks are joining as consumers, as form factors are changing, um, and you see more people trying cannabis for the first time, rather than throw dart at a board and trying to figure out like who the best brand's gonna be, um, let's support companies that are supporting the entire infrastructure around the industry. And so we launched Key Fund One in 2019. Um, we deployed that vehicle into about 14 different companies. Um, we were deploying from 2019 to basically 2023 or so out of that fund. Um, most of what we did would fall in that ancillary picks and shovels play. Um, although as um valuations came crashing back down to earth in a very meaningful way over those years that we were deploying. And as we started to get more comfortable on the plant itself with our access to asymmetrical information, et cetera, um, we did also start to lean into the plant more heavily. And fast forward to today, we've now um closed our second fund. Um we've done, I want to say eight or nine deals out of that portfolio. Most recently, just completed our first public um equity investment. Um, so everything we've done historically has been private. Um, but we've found a compelling opportunity in Canada that we couldn't say no to. And we're in the process of setting up that trade right now. Um I won't speak the name just yet because we haven't initiated the trade, but once we do, um, we'll be able to publicly disclose what that name is. Um to be clear, we don't have any MMPI on that deal. Um, we're going purely into common stock. It was quite the um conversation with our limited partners to basically give us the uh green light to make that decision. Typically we have full discretion over all investments that we make. Um, but if we are to make a public investment in a publicly in a in common stock in a publicly traded company, then um we do need to get LPAC approval. But they saw the same um kind of diamond-the-ruff valuation and opportunity that we did on that one. Um I I I hear Aurora is looking for investors. It's definitely not Aurora. We're looking for we're looking for high-quality names. Um, folks that are very, very talented at manufacturing at scale, um, not so much interested in buying shelf space, you know, really taking market share organically through great products and great cannabis. Um we think we found that in one very excellent management team, although I do think that there's probably two or three really star LPs in Canada that are not the typical names that people talk about a lot, but these are companies that I think have been through very difficult market cycles um with very limited access to capital. And they have really proven themselves to be exceptional um entrepreneurs and we're excited to back those names as well. Um speak ill of no man, I don't have a huge opinion on Aurora or or on Kira Leaf's hostile bid. I will say that I actually hope it's successful. I think that if a hostile takeover like that is um met and executed properly, which I'm uh, you know, I'll give not a huge opinion on how I think it's going right now. So I think there's a lot of showmanship, showmanship happening, but I do think it shows that the industry would be entering a new stage of maturity if this is actually successful. Um, you know, I think it's pretty obvious Boris wants to take over the world, and that's okay. Um, you know, if I were CEO of Cure Leaf, I probably would be doing similar things. Um, would I go about it differently? Uh it's hard to say. I'm not sitting in Boris's shoes, but I've sat down with Boris um pretty recently, uh man to man, and and you know, I think I think that Boris is also a very intelligent person, um, but he also has uh a big um a big backing behind him. I'll I'll put it that way, just to just to be uh polite here. But uh um I'd rather be on his side in most cases than than not on his. Um yeah.

Why Cannabis Capital Froze In 2023

Ben Larson 19:22

I wanna I want to go back to 2023, uh, because you you mentioned it in kind of the run-up, and uh it's a it's a time that really stands out to me as well. And I want to kind of unpack it a little bit uh just to see if there's anything that we can learn about it for the future for our listeners. And 2023 stands out to me because people were feeling really good in 2022, and there was venture capital was flowing. I know we were working on uh in equity round, and getting into December, or maybe even a little bit before that, you start hearing these whispers of like, oh, the barn doors are closing, you know, something another. But like conversations are still hot and heavy, and all of a sudden the room gets really chilly. And then you know, fast forward the next thing we hear is 2023, 97% of the venture capital leaves leaves uh cannabis. And we went to raise a fund that year, so and you went to raise a fund. Yeah, so yeah, I mean, from where you sit, like you're really plugged in, you're part of that investment community. What was happening in 2022 that was giving people the signal that this was coming? And what should people have been like listening for? Because like I felt like so much of the industry just ran off a cliff, but there were the people that knew. And where does that disconnect come from from your perspective?

SPEAKER_00 20:50

But Ben, I think that we could probably spend over an hour trying to unpack this question. And um the beauty and the curse of uh an open mic session here is that I'll be thinking out loud to respond to this, but let me try to put some puzzle pieces together here for you. So um let's think about the capital markets, you know, from 2018 to let's call it 21, where I say they were really hot. 22 things were definitely starting to slow down. Um the exuberance and the valuations that were the checks that were being written, the valuations that were being given out were super unjustified. Um, and I think that they were purely speculative on promises that the prior administration was going to make good on their cannabis legalization efforts. And simultaneously, you were getting data coming out of COVID that people were consuming more cannabis than they ever have before. And that is, I think, justifying some of the types of deals and structures and checks that were being written. And so you fast forward into 22 and you know you. Take those two dynamics that were at play and they both really come to a halt. Um, one, um, you know, cannabis sales spikes tremendously during COVID, and as things normalize, they came back down. But frankly, if you look at a chart, they really just reverted back to the mean. Like you still have a pretty healthy industry, you just don't have that spike that you saw. So everybody started saying, oh my gosh, cannabis sales are down tremendously from you know the prior year. People are consuming less. And it's like, well, not really. You just had this black swan event that was causing people to consume more than they ever had before. But as far as adoption's going, people are consuming cannabis more than they ever had before. New form factors are leading to new consumers that had never entered the industry before. New states were kind of continuing to come online, and we saw that in the background happening, thinking this isn't a downturn. This is just a reversion to the mean. But from I think a retail or a less um intertwined position, it was easy to say that see that and see the declining year and say, oh my gosh, this industry is actually in a decline. So I think that that started to spook a lot of people. And then frankly, I think the inaction by the prior administration to actually make good on many of their cannabis promises also led people to believe that we had overvalued the market in 2020 when people thought that reform was coming more quickly. Um, I would go as far as to say that we never got caught in that valuation trap. That was actually another reason why we chose the picks and shovels early on, because we did not see the same types of multiples being thrown around. I mean, when you're looking at a plant-touching business that had at that point in time like no guarantee that 280E might be going away or that you know, regulatory barriers are going to be coming down, and you're throwing out multiples that are two times what some of the best SaaS companies were doing, like insane multiples. Um, we were just like, this is a bubble that's ready to pop. So we really avoided a lot of that exuberance on the plant touching side, um, which I think then led to us getting much more comfortable with the plant later on. But to get back to your question here, um, yeah, I think that the party stopped. I think that people said, okay, like the rug's been pulled so many times on cannabis-related reform. We haven't seen it happen. Um, valuations were crazy, and people are consuming less cannabis now. And the party definitely stopped. You know, I think that when we started investing, there was probably like three dozen funds out there that we would consider peers or competitors. And, you know, you fast forward to 23 and then to today. I mean, I think that there's less than a dozen and probably only a handful of us that are actually raising and deploying. And everybody said that we were bonkers for trying to go out there and raise a fund in 2023. Um, I think that there was two things going for us. Um, number one, you know, a lot of the funds that we were competing against were like, you know, frankly, just older folks that had much further along in their career and could probably afford to pause on any fundraising efforts. Whereas my partners and I, you know, we were in our late 20s, early 30s when we started this, and we don't have those types of nest eggs. And we thought, you know, we had to keep the business going. Um and also we saw valuations crashing back down to earth. And we said, this is when you should go out there and deploy and make a name for yourself. So I will say fundraising in that 23, 24 vintage, even last year. Um, I don't think I'm exaggerating when I say it's probably like four or five times more difficult. Um, but our capital, our capital went four or five times further at the same time. And we were able to cement, you know, a stronger foothold in the industry. We had more um ability to structure deals properly, lead more deals at that time. So um I view it as a silver lining. Like we went through a full market cycle. I think that we've definitely bought them now based off what I'm seeing happening on the ground. Um, but that's not to say that it has not been an extremely difficult environment that's weeded out a lot of folks. And I still think that's I think that there needs to be tremendous amounts of consolidation. I think that there needs to be a tremendous amount of weeding out of terrible operators that do exist out there. Um, though the one thing I wanted to say about what happened too is um to my terrible operator statement is when this exuberant capital spending was happening in 2020, 21 and crazy valuations, man, people were getting pitch decks and cutting checks. They weren't doing any due diligence. Um, they weren't spending a lot of time with these management teams. And I think a lot of these management teams completely mismanage their funds. Um, they had some exuberant spending, trying to go for the land grab play. And that's led to the environment that we're in right now, which I think is very interesting if you know how to tackle it, which is that there are um really great assets out there with very impaired balance sheets. And if you know where to look, you can scoop up some really interesting opportunities. So when I see what Boris is doing in Canada, I think it's logical. I mean, valuations are low. They've got a great hold on um Europe. This would really enable Cure Leaf to, I think, really cement themselves and what better environment to do it in than when valuations are where they are. Is it a good deal for Aurora or not? I haven't spent enough time underwriting that to tell you whether it's a good deal or not or if they should accept or not. I'm not putting my hat in the ring. I do think it's a logical thing. I'm not surprised to see that happening, and I wouldn't be surprised to see it happen more. If it's successful in getting done, I think it shows that the industry's really ready to enter a new level of consolidation and of institutional ownership. And I think that you will see that more legitimate capital providers will see that maturation and it'll actually ultimately be a good thing for the industry. If this falls apart and it becomes a mudslinging competition the way it looks like it is right now, um, I think that's gonna scare off more institutional capital from getting involved in the space. They're not gonna take it very seriously yet. So let's however you feel about it. I think it's a good thing for the industry.

AnnaRae Grabstein 28:14

I I I agree. I think that I definitely think it represents a maturation to see this happening. So I'm aligned with you there. I love how you uh talked about you and your partners having something to prove. It makes me think about what you have in common with the entrepreneurs that you're investing in who also have something big to prove. And um, and I think that that kind of shared approach um and looking at yourself as investors who really are entrepreneurs as well in their own right, um, is is really interesting. And I want to be able to spend some time talking about what that process looks like of actually making investments, um, meeting meeting businesses and leaders, what you're looking for there. So I'd I'd love for you to give us some insight into how you have assembled the portfolio and the investments that you're looking at. How are how are you meeting these companies and these entrepreneurs? Is it cold investment? Uh, is it cold outreach from people on LinkedIn? Is it warm intros from the network? Are you going out and finding people and pitching them and coming into their companies? Um and then what what gets a second look and and what gets killed on the spot? So give us a site

How Key Sources And Screens Deals

AnnaRae Grabstein 29:33

there.

SPEAKER_00 29:33

Yeah, great. And you know, there's several questions in there to unpack. And uh I know I'm a talker. So like interrupt me and get me back on topic if I keep going off. But um, you know, first and foremost, I, you know, to your entrepreneur comment, um, you know, look, we started key investment partners because we came from a private equity background, and that's what we know really how to do. Um, I'll be honest with you, and I'm probably speaking for my partners too. I have no desire to be the CEO of one of our portfolio companies. I don't want to run day-to-day operations. We like the ability to come in and help and analyze several businesses and help guide entrepreneurs to the best outcomes possible. But um, you know, this started, you know, earlier for us, way beyond just like, let's go start a business to try to make some money. Um, Pete Jordan and I all really believe in the cannabis industry, first and foremost. I think that we do view cannabis as a legitimate alternative therapeutic that can really help people help out society when being used properly and and not abused. So one of the first reasons we got involved in the industry was um uh a gentleman that we met early on named Josh Hott. Does that name ring a bell to you guys?

AnnaRae Grabstein 30:57

No.

SPEAKER_00 30:58

They they called him like the Steve Jobs of cannabis in 2016. So Josh had a similar story to kind of the Charlotte's Webb folks. Um Josh suffered from uh severe epilepsy, and he basically created uh a therapy for himself and he like essentially cured himself. He's a Denver guy, super smart. Um and like hearing those types of stories on how cannabis could really benefit people's lives, and we were we lived in Denver, we were consuming also, but maybe not for the all the same purposes, um, really, really kind of gave us that belief that this was an industry that needed to come out of the dark ages and into mainstream. And so our belief all along has been that we are investing in this space in order to legitimize and legalize this industry so that people can go out there and find self-therapeutics. And hopefully eventually it evolves into something more pharmaceutical. And we can get into the FDA and all that stuff that you guys were talking about at the beginning. But that was really kind of the genesis for us getting involved. And as far as like looking for entrepreneurs and whatnot, um, it's not easy to find, always find like-minded individuals that are actually trying to solve similar problems for the for the same reasons. Um, and so it takes a lot, a lot of screening. I mean, so much so that we've invested in like, I think, less than half a percent of the deals that have come across our desk. We've done, I want to say 22 individual companies in eight years, and we've screened probably like 3,000 to 4,000 total in that amount of time.

AnnaRae Grabstein 32:42

Um how many of those have you actually gotten into a data room on diligence for one once you got rid of all the bad ideas that came your way?

SPEAKER_00 32:51

Yeah, you know, 90% of what comes through is typically like a 10 to 30 minute desk kill. Um, and there's all sorts of reasons that something doesn't make it through that initial screen. Um, but I would say a solid 10% of what we look at actually gets a deep look. Um, out of that 10%, probably half of that comes from trusted sources and relationships or from proactive outreach because we know the businesses themselves. Um, and the other 50% comes from all sorts of different angles, people that, you know, cold call us, um, send us a cold email, reach out to us on LinkedIn, um, reach out to our form on our website with uh with a deck. Um and you'd be surprised every once in a while, you know, something does catch our eye via that angle. Um I will say that as the firm's grown, um, probably less cold deal flow gets through than it used to. And that's just a matter of how far along we are. Um, I don't think any other fund would say anything different. There's no issue with deal flow in the cannabis industry. We see a lot of opportunity come across the desk. The issue is with the quality of the deal flow that we see come across. Um, and you know, we have a pretty strict screen process. Like it's very rare in a ray that we will do anything pre-revenue. Um, and in fact, as the industry has taken longer to um find regulatory uh ease, if you will, um, our focus on cash flow positive businesses is only stronger and stronger as time's gone on. So it's very easy, as you can imagine, to say no to a lot of things or now's not the right time, but reach out to me once you get to a certain inflection point. Um but with that being said, as far as like deal flow, like I think that out of those avenues that I I mentioned here, you know, one of the best ways we get deal flow is by doing things like what we're doing today, being on podcasts, you know, having thought leadership. Um I'd highly encourage you guys to go to our website, keyinvestmentpartners.com, go to our insights tab. We are writing blogs, newsletters, publishing white papers all the time. Um and a lot of that thought leadership, I think, has not only led to more deal flow for us, but it's also frankly led to a lot of investors um to our doorstep as well. So it's kind of two birds with one stone. Um I don't think I answered all your questions there. What else did you have?

Cannabis Lessons Applied To Frontier Tech

AnnaRae Grabstein 35:24

Okay, you're good.

Ben Larson 35:24

Yeah, Ben, you well, you you you did mention the website, and so and you also mentioned how you started your career evaluating kind of emerging markets, and so you you kind of looking at it from the outside and then jumping headlong into it kind of as a founder yourself of you know, of key partners. And now you're applying kind of what you learned there to energy, aerospace, defense, quantum. So I I guess my question is what did you learn operating in the cannabis space in the emerging market, you know, of all like it's the Goliath of emerging markets as far as complexity goes. Um, what was surprising to you and and and what do you think gave you a unique insight to apply to these other markets now?

SPEAKER_00 36:12

No, it's a great question. Um first and foremost, uh cannabis, you know, calling it an emerging market is almost like giving it I think it's more than an emerging market. It's like very nascent still. Like everyone who says that we're like in the third or fourth inning here, like I don't think they really understand where this industry is. I think we're in the first. I think like maybe we're in the bottom of the first inning at this point. Once we get through adult use rescheduling, which I do think is gonna happen. Um I think that you could say that maybe we've entered the top of the second. But this industry's got a long, long way to go. I mean, there's no interstate commerce, there's still no banking. Ben, I I went to go open a trading account for this public position we're gonna take, and we were denied like three weeks ago because we're a cannabis firm and it's a US brokerage. I mean, it's insane. So now we're going to Canada to a Canadian brokerage to execute this trade. I mean, it's it's wild. Uh so, anyways, it's an industry that is largely unknown, heavily regulated, and not going anywhere. And I think all three of those things have translated very well into the frontier technology super cycle that that we are simultaneously um gonna be chasing here at Key. Um, just to be clear, we are not cannabis is not going anywhere for Key. We are evolving into a multi-strategy platform. Um we actually brought on a new partner, a gentleman named Jake Picoli, who also worked with us at Partners Group. Um Jake actually left Partners Group around the same time that we did in 2018. He founded a company called Clean Republic. Um he sold that it was excellent timing, as you can imagine, with COVID. He ended up selling that company took the subsidiary of Clorox in I think 21, um, joined a uh as a founder, a digital um crypto platform um called Traditional Digital as a founder. Um and he's also part of some some other uh small investments that that he he acts as as an entrepreneur in as well. Anyways, Jake joined us to help us lead this new strategy. And I think that those three dynamics that I just mentioned, heavily regulated, largely misunderstood, and not going anywhere, translates very well into the frontier technology super cycle. This is a this is a super cycle that we're either going to destroy ourselves as a civilization, or my grandkids' grandkids will be a part of building this out. Like, you know, we kind of say in the background that our our tagline is that we are investing towards becoming a type one civilization on the Kardashev scale. I don't know if you guys are familiar with that or not, but basically it's a planetary civilization that harnesses all of the resources and energy from their home planet. Type two is solar system, and type three would be galactical. Um, we're very far from that. But we're about 70% of the way towards becoming a type one civilization on this cartilage of scale. And we want to invest towards achieving that planetary status. And we believe that one of the biggest problems, and similar to cannabis because there's so much noise to work through, is that access is quite difficult. And sifting through those different opportunities is very difficult. And that's where we come into play. We are very process-oriented at key. Everything that we do follows a very strict um four-phase investment committee process. Um, all of us as investors really have somewhat of a generalist background. I don't think any of us have any difficulty understanding business models, total adjustable markets, valuations, um, you know, sales pipelines, et cetera. And so, unlike the Frontier side, we say that we're solving access for our investors similar to what we do on the cannabis side, which is that we are acting as a funnel for our investors to guide them towards the best opportunities, also pick some shovels. And what's different about Frontier versus cannabis is we are certainly the subject matter experts in cannabis, but I'm not a 20-year PhD in quantum physics or aerospace or whatever. And so we're actually partnering with general partners or PhDs, if you will, um, that are subject matter experts in those spaces, investing in earlier seed stage type technologies, where we then get a look at their portfolios. And then our job will be to cherry pick, call it their top one, two, three deals as we then build out our direct investment platform. And we will do that at an inflection point where, again, companies are showing um real commercial traction or cash flow positivity, et cetera. So um, you know, similar to cannabis, we don't think there's any reason or rationale to get into early. Um, we have no motivation to get into any business that we don't fully understand well. Um, and we want to basically create a layman's understanding opportunity set for Frontier or cannabis. And um I think our investors have been really happy with everything that we've done on the cannabis side. And so far, the feedback that we've got on expanding out of cannabis has been we've been waiting for you guys to do this because we want you guys to put these processes in place. Um, so I would say that like the processes that we've developed at Key, it's you know, Frontier is not gonna be the last um expansion of key investment partners. I imagine if we're talking again 10 years from now, we'll have an infrastructure arm, we'll have a real estate arm, we're gonna build this out into a traditional private equity platform. We were born out of the cannabis industry because the cannabis industry created a very uh unique opportunity for us at a young age to come in and do something special. I think we've proven that, and and we're gonna take that beyond cannabis now.

AnnaRae Grabstein 42:23

Well, so your galactic um aspirations make me uh realize that you are really thinking about the future in in all kinds of ways. And um I'm curious, kind of grounding us back in the US and Canada and in the cannabis market,

Where Cannabis Investing Goes Next

AnnaRae Grabstein 42:43

where you think the cannabis industry is going. You talked about how early we are. Um, but I'm I'm wondering when you think about putting capital into businesses today, what are the what are the areas that you're focusing on that you think are going to be the leaders of the next couple innings?

SPEAKER_00 43:04

Yeah, so it's a great question. Um, you know, and our investment thesis evolves as the industry evolves as well. And it's definitely done that over time. Um looking at the industry today, uh, we've somewhat slowed down our deployment. Um slow for us is we'll do four or five deals this year, which is definitely more than I think any of our competitors. Um, but the the reason I say that is because there is definitely uncertainty right now, and it's hard to invest with uncertainty as to what the regulatory environment's gonna look like. Um, we've been very eager to get involved in the intoxicating hemp industry. We've done a lot of research over the last two years, and we found some some interesting kind of answer ways to get involved without um taking that binary risk that looks like it's gonna be coming to fruition here in a few months, um, which is something. I think that there is a lane where intoxicating hemp can live alongside regulated cannabis. I really don't know what's going to happen. My bet is that you're going to see hemp get gets outlawed in November or December. And then at some point next year, once a lot of businesses have gone out of business, maybe you see some legislation that comes back and allows for low dose. I think the only saving grace out there on the intoxicating hemp side is that the administration is pushing very diligently on letting full spectrum products through so that this whole Medicare program doesn't just get kind of rear-ended right before it even has a chance to start. You guys were talking about the FDA. You know, you guys are talking about six months, but I think it's been like several years that the FDA has been. We've been waiting for the FDA to come out and define cannabinoids and to give guidance on whether cannabinoids can be used in broad nutriceutical products, et cetera. I think that is the future. I think it's unavoidable. And I think it's really sad that it hasn't happened yet. I think that there's some really great companies and operators out there that have spent a lot of time building out expertise and infrastructure that could be used to benefit the lives of people today. And they're getting shut down or potentially shut down before they even have an opportunity to go out there and thrive, which unfortunately I think means that you're going to see big pharma or traditional nutraceutical companies come in in the next 12 to 18 months and acquire um assets very cheaply. Um don't get me started on that. I think it's super unfair. I think that the FDA needs to come in. I think that they need to fix this full spectrum issue. Uh, I don't think that these therapies are going to be efficacious if they're not full spectrum products. Um, so I'm very um, you know, hopeful that that we get some relief there. Um, but also simultaneously, I'm very happy to see gas station weed and that shitty product that's out there on the shelves go away. Um, I'd mentioned I grew up in Texas. It's far easier to go buy weed in Texas at a gas station today than it is to go buy weed at a dispensary in Colorado. Nobody's IDing you. You can use a credit card. I've no idea where the product's coming from, or what, you know, if it's been tested, you know, the labeling, all that stuff. Like that stuff needs to go. And because we let the leash go so far on the intoxicating hemp side before bringing it back in, now we're going to suffer the consequences of this industry getting shut down in a very meaningful way. Um, I do think that there is benefit to that. Um, one, that it uh naturally creates the sense of urgency to start talking about a one-plant policy. Bifurcating this because of a legal definition is dumb in the first place. Cannabis is cannabis, THC is THC. Um, you know, I believe that a one-plant policy would make the most sense. I I don't think that we're anywhere close to that, but I do think the conversation's starting. Um, and with intoxicating hemp going away, my, you know, my bet is that in states like Florida or Texas, it's gonna drive people to the polls to vote for legalized regulated cannabis because all of a sudden, um, you know, the simplicity of going down the street to a gas station to pick up your weed is gonna be gone. And I think that that's gonna drive people to, you know, to ask for regulated cannabis. So um, from an investment standpoint, what does that mean? Um, it makes our job incredibly hard this year to find opportunities that we think are gonna be viable no matter what the outcome is. And that's really the equation that we're trying to solve for, which is hemp goes away, hemp doesn't go away, cannabis is legalized further, rescheduling happens. What does that really mean? So our focus right now is again, really on regulatory environments that we don't think are gonna change, which gets us back to the state-by-state model. Um, states that I think have historically shown that they really lean into their rights as a state. Um, that's to say that if the federal government comes in and makes some changes, that certain states are actually gonna lean into their rights further to not change the existing models that they have. Um, you know, that's yeah, look, just to get like broad, like broadly right, like I think states like Ohio, Pennsylvania are quite interesting. I think Florida is still one of the most interesting states in the country. I think Texas has the potential, but certainly not anywhere close to where Key would want to be. Um I think some of the legacy markets that have been beat up so much are actually starting to show signs of life again. So we are actually looking very actively in states like Michigan and Colorado. We are actively deploying capital into both of those states right now because we think that they've been overlooked. Um I don't think California is quite there yet, um, but we have seen quite a few interesting opportunities come out of Cali. Um, it's really, you know, it comes down to the ability to put deals down on the table side by side, compare them on a relative value basis. That's the most important thing we talk about at Key all the time, is relatively what does this look like compared to the opportunities we're looking at? Um, and being able to have a strong understanding of uh how individual state-regulated markets are expected to um unfold over the next call it 12 to 18 to 24 months. That's where we start to get more comfortable. So um to answer your question a little bit more directly, we are looking more into the plant today than we are looking at ancillary. Um, I think that there's been a tremendous shakeout in a lot of the ancillary companies out there. I think that there's really a few obvious winners that are still kind of leading the pack there. Um I think it's probably too late for any novel um ancillary business that is solving a problem that's already solved outside of the cannabis industry to really have an opportunity at this point to come in. For example, anybody who's coming to me with a payments solution today, you know, that's I that's a desk kill in 10 seconds. Like, I'm sorry, but the idea that Visa and MasterCard are gonna buy you for footprint is insane. They're just gonna eat your lunch, right? Like that's yeah, I see Ben wants to say

Judging Founders And Final Last Call

SPEAKER_00 50:16

something.

Ben Larson 50:16

So well, you you mentioned earlier spending time with management teams and in early stage investing, people talk about it always being about the team and the founders and and like betting on the person. How much does that play into kind of the latter stage investments, you know, from your perspective, you know, when companies are already cash flowing and you get to focus on the on the balance sheet and the the PL and you know, yeah, how how do you weigh like the person versus like what you're able to pick up on a on a desk review? And then just to kind of like compound the question, you know, what do you want to tell founders out there in the space right now, like that are that are coming to you asking for investment?

SPEAKER_00 50:57

Yeah. Um, and I'm looking at the clock here, so I'll I'll try to keep this uh short and sweet for you. So um, you know, we rely on a few different methodologies to get comfortable with management teams at the various stages here at Key. We have a very complicated, very comprehensive management questionnaire, like a DDQ that we put together, which is um just as much a questionnaire around, you know, the why and the how they're building their businesses as it is a psychological test to see how they respond to some of the questions that we have. And then we go put that through and we actually score it. Um, this is something that we put together in 2018. This is something that many large traditional private equity firms um uh do themselves. That's usually step one for us. Um, but at the end of the day, we also recognize that just putting a number on somebody is not actually a gauge of um, you know, who they are, what their ethos is, all that stuff. And by design, our investment process takes, you know, on the quick side, it probably takes us three months to get from start to finish. Um on average, it's probably more like four or five months to get a deal done. And we do have quite a um quite a detailed diligence process. And that's one, so that we can answer all the questions that we need to to get comfortable. Um, but two, um, it also gives us an opportunity to see how management responds to the types of questions we're asking them. And typically in that time frame, I don't think there's been a single time we've been in diligence with the company over several months where something bad has not happened to that company, or there's been a moment of adversity, and that always gives us an opportunity to see how management reacts to that moment of adversity. Um, you know, I'll say at key, um, fool me once, shame on you, kind of thing. We have made some uh unfortunate investments behind management teams that we thought were ethical that turned out not to be. And in two cases specifically, um I remember myself or my partner saying, you know, something just feels wrong with these guys. And we wish we would have trusted our intuition a little bit more. And so we do now have like a very strict no-assholes policy. Like you could you could look perfect on paper, but if you if you're giving us just like that bad gut feeling, like we're gonna walk from the deal because it's not about the good times, it's about how you behave together in the trenches. Um, and you know, our due diligence process has kind of shown us, you know, where people's colors are as well. Like, you know, we we may ask a lot through diligence. And if, you know, we're getting kind of half-assed responses, it's like, well, that's not who we want to spend our time with, anyways. Because at the end of the day, us as investors, and I think this is important for any management team to hear, um, we are not making any money like you guys. We're not we're not making a salary when we make an investment in your company. In fact, we're spending a tremendous amount of time sitting on the board, offering guidance, et cetera, answering questions for our investors to help you be successful. Um, and if you like if we're not going to be in the trenches together, we don't really want to spend that time with you because we're in it for you know the exit, right? Um, and working with a management team who is uh who doesn't see that you're trying to add value to their equity, um, it can be quite frustrating for us. So I would definitely say for any management team out there that's trying to get the ear of an investor, remember that your investors are there to be with you, to grow with you. Um and not all investors are equal. There are there are good investors, there's bad investors, there's groups that want to be partners, there's groups that want to be sharks. So do your diligence on the investors as well. Uh try not to partner with a shark. Try to partner with someone who's gonna be there with you in the good times and the bad times, um, and be ready to roll up your sleeves because we we always are, so Tibby, we could keep going.

AnnaRae Grabstein 55:01

This is getting really now. Um, but it is time for our last call. So um we now That was fast. That went by way too quick. It was way too fast. You are a talker, my friend. Um, you get a final message to tell our listeners, advice, call to action, closing thought. What's your last call?

SPEAKER_00 55:21

Look, it's been an incredibly difficult past few years for the industry. And I think the irony of a very difficult environment is that it can breed very resilient operators. And from where we stand, seeing a lot of opportunity, um, it feels like the bottom's in for us. I think that um the exuberant spending that existed before, the valuations that existed before, that's all behind us. I think that folks have realized that they need to put their heads down, block and tackle. And that's the environment we're entering. So again, we probably are in the bottom of the first inning, entering the top of the second. And I really think that these next few years in the cannabis industry are going to be driven by consolidation and traditional capital forces that start to come into the space. Um, we are starting to see uh material moves by strategics who are very quietly um getting involved in the space. We are talking to a lot of these folks that are not cannabis companies, that are really nice analogs or adjacent companies that are starting to get very serious. So um, anyone who's out there who's made it this long, keep your head up. Well, keep your head down, block and tackle, but keep your chin up. As um I do think that there are bright times ahead. I don't think that cannabis is going anywhere. I think it's very clear that there is consumer demand, there's product market fit, there's real therapeutic value to this um to this plant. Um, and I think that with uh rescheduling, that's gonna be the first major crack in the dam that's gonna lead to a lot of easy regulations that are gonna make um cannabis actually have the ability to enter the 21st century finally. Amazing.

Wrap Up And Listener Requests

Ben Larson 57:05

Yeah, hard times create tough people. Yeah, exactly. Yeah. Tibby Earthly, uh key investment partners, thank you for spending the last hour with us. That was uh great great conversation. I we literally could go probably another two or three episodes with you. But uh I think we could. I'm a talker, so I've forewarning anyone who wants to do it.

AnnaRae Grabstein 57:25

Yeah, like an all-in-style three-hour discussion, I think.

Ben Larson 57:28

Yeah, hell yeah. I'm here for it. We'll we'll we'll get it on the calendar. Happy to do it for our bicentennial ready guy. I mean that's right. We'll talk to you soon. Thanks, guys. Thank you. And thank you to all of you for listening. What do you think? Uh, you ready to go out and try to win some investment? Uh, thank you to our teams at Virtosa and Wolfmeyer, and of course our producer Eric Rossetti. And as I recall, I think I'm starting to hear murmurings of our next morning mixer uh at MJ Biz in Vegas. So stay tuned for for more information on that. We have some incredible partners to to announce this year. We're going bigger and better than ever. Um, if you've enjoyed this episode, please share, like, review, do all the things wherever you listen to your podcasts, especially on YouTube. We're gaining traction on YouTube. Uh, thank you for listening. And as always, folks, stay curious, stay informed, and most importantly, uh, keep your spirits high. Until next time, uh, that's the show.