Over the course of The Future of Cannabis program, we've discussed the major opportunities this market presents to both businesses and investors that are able to establish their positions early. While the growing wave of legalization is the most significant catalyst of this generational opportunity, the market driver really stems from rapid organic expansion from passionate entrepreneurs. In fact, that's a distinct trait that the cannabis market shares with many of the disruptive industries we seen historically. Business titan Mitch Lowe knows this better than anyone. Lowe is a co-founder of Netflix, Inc. (NFLX), which revolutionized the way everyone around the world consumes content in their homes. He was also formerly the President of Redbox (OUTR), which was a pioneer in automated retail kiosks. Among his many endeavors now, which includes helping and mentoring entrepreneurs, he is on the Board of Medbox, Inc. (MDBX), certainly one of the most well-recognized names in the industry.
So why are established business leaders like Mitch Lowe so interested in the cannabis market's future? We had the opportunity to find out in this exclusive interview in which he discusses the hard lessons he's learned early on in this industry, the most important things investors need to consider when considering cannabis companies, and the societal benefits of taking cannabis out of the black market to become a legitimate business industry. Above all, integrity is a key theme that Lowe emphasizes throughout our conversation.
EQ: What is the opportunity that excites you most when you look at the cannabis industry and the opportunities there?
Lowe: Cannabis is an industry that has dealt with all kinds of complications. I’m especially interested and, in fact, a little embarrassed for the history of our country with regards to how we have incarcerated so many victims who were just using cannabis in the same way most people use alcohol. So one of the things that attracts me to this space is how it moves from being an illegal market into a legitimate business industry with the utmost integrity. Just how do you do that? Of course, there are other instances when we’ve seen that, historically. A good example is when alcohol became legal again after Prohibition. Initially, it was filled with a lot of people formerly in the industry during Prohibition who were not great actors.
What I’d love to see in this industry is a very fast evolution to a legitimate, trustworthy business because, again, it really bothers me that so many people have been incarcerated as a result of their use of cannabis. It bothers me that we’re not taking advantage of the medicinal benefits, and it also bothers me that it’s not currently a legal business that is operated just like any other business. So those big changes are what has really brought me to the industry itself.
EQ: We’ve seen a significant amount of momentum in the biotech space already being viewed as a legitimate industry. The really big game-changer that we’re seeing now, however, is recreational use. That aspect is starting to see wider adoption and legalization. What are the opportunities there that you see for some of the early companies?
Lowe: There’s a number of really interesting opportunities in areas like support services, equipment for cultivators, point-of-sale software systems for dispensaries, etc. It’s tracking the product for both federal and state and local monitoring. There are business services that are standard for any business, like HR services and payroll. So, there’s a whole bunch of opportunities, but specific to the industry itself, there are strains. What I mean by that is bringing in the science, which has been prohibited in the United States. There are several countries that have been doing research for years on the strains of cannabis. Israel is one of the leading examples.
So I think there’s going to be a whole science of the business. We’ll see that on the pharmaceutical side, as well as on the recreational usage side. In some ways, it will parallel the alcohol industry where brewing and mixes and things like that have really emerged. There’s going to be hundreds of ways to get involved in this business. Meanwhile, because of this transition, there are going to be thousands of people who will transition from living in the gray economy–not being able to get health insurance in normal businesses, not being able to pay taxes–who are now going to be able to move into the regular world to make their living. I think that’s going to do fantastic and positive things for families. Their kids won’t have to live under the fear that their parents are going to be put in jail for having a couple ounces of pot.
So there are all kinds of services that will start to provide the support that you would normally have for any legitimate business, and then others that are specific to the cannabis industry itself.
EQ: You’ve had first-hand experience revolutionizing a lot of industries and changing the everyday lives of consumers. We can look at Netflix, Inc. (NFLX) and how that changed the way content is delivered to consumers. Redbox is another example of automated retail. So when you look at the cannabis space, obviously there are a lot of differences there between these industries, but at the core, it’s about disrupting a long-established industry, which creates a lot of opportunities. What are some similarities that you’ve noticed?
Lowe: If you go back to the early days of the video rental industry, back in the early ‘80s, we were all considered pornographers. Essentially, most people outside of the business and the government thought that all our money came from renting porn. For some companies, that was true. But by and large, what we were trying to do was give people greater choice than what, at the time, was just maybe a dozen channels on their television sets. They were constrained to watch things dictated by the movie companies or the television stations. So the people who got into that business in the very beginning, and this is a parallel to the cannabis industry, were people who loved movies. They essentially wanted to run a business with a product that they loved and deliver a service they, as movie lovers, would enjoy.
For myself, I loved watching movies. I grew up watching TV and movies. So I started opening video stores as a way that allowed me to watch lots of movies and not have to pay for them. I think people in the cannabis business, in the same way, are opening dispensaries and building cultivation centers, and are getting into it for the same reasons. They actually love pot, and they love it in all the different ways, and they love all the creativity. There are companies and entrepreneurs out there that have personally been affected by the medicinal benefits of it, whether it’s a child or a family friend, and they’ve gotten into it because they see that it can do good. The very same thing happened in the video industry where we were all trying to build something out of nothing. There was no model to follow. But we loved the product.
We were making it so that families could gather around the television and watch a movie after dinner for an affordable price. So I think there are similarities in that category of why people get into the business and the character of the people.
There are no big corporations. It’s just a lot of individuals. And then over time, like the video industry, where then you started getting Blockbuster and Hollywood Video and major companies getting involved, it transitions from kind of an independent owner/operator industry into a more corporate type of environment. In some cases, as long as it’s done right, is necessary for the public to make sure that the products have integrity, proper labeling, and things like that. So I think there are parallels along those lines.
EQ: It’s a very organic beginning for this industry, created by passionate entrepreneurs. You’re very active in helping entrepreneurs as a mentor, educator, leader and adviser. When you look at the cannabis space, a lot of the people that came into this business were enthusiasts. As you said, they are people who really enjoy the product, but at the same time may not be as familiar with basic business fundamentals and practices. We saw what can happen during the industry’s recent correction last year. What are some of the most significant challenges for companies trying to succeed in this young, booming market, especially with the very unique characteristics of the cannabis space?
Lowe: There are a couple of things. You have to have a lot patience right now, because there’s this real challenge that it is still federally illegal, and in some states it’s either legal for medicinal or legal for recreational. Because of all that, things like banking and paying bills, and dealing with taxes are much more complicated than in almost any other business. So one of the things I advise people, myself included, is that we need lots of patience, and we need to move forward, very, very slowly. That’s the first thing.
The second is if you’ve been in the pot business, whether you’ve been a grower or a dealer in the past, you have got to change. These people are used to living in the gray market where they hide everything. They don’t report everything they do. They keep everything hidden, whether it’s from their own partners or the people they sell to, and that has to change. You have to start to run a very high integrity business. You will not survive if you operate the way you did when it was illegal to do. So I advise people to start to run their business in a high-integrity way. Don’t go for the short-term profits. Go for the long-term building of the business, which, as I said in the very beginning, requires patience to do so.
EQ: There is a noticeable absence of big business in this industry right now. That creates an advantage for small companies to grow quickly with little competition, but at the same time they don’t have the same support system as more established industries. Are you starting to see that shift of big businesses looking to dip their toe into this industry or to provide in other areas of support in this market?
Lowe: Just a little bit of dipping their feet in the water. I think the federal law change is the one milestone that will create a sea change in the willingness from larger companies to get involved. So people who are in the business today, if they want to survive and be leaders in the future, they have to prepare for a very quick change. In the video industry, there was maybe just a couple dozen people who were in the business from the beginning. They evolved and survived.
An example is Mark Wattles, who founded Hollywood Video and built it to be as big as Blockbuster. He started out with a couple of single stores, but was always innovative and stayed ahead of the curve. But the sad part is a lot of great entrepreneurs got completely shut out of the future as the big chains came in, and you’d hate to see that in this industry. But in my view, these people will have a window of opportunity of four to maybe eight years to become good business leaders and build good, innovative companies before they’ll be challenged directly by large corporations.
EQ: When you look at the industry itself, for as young as it is, it’s actually incredibly diverse and has a very rich ecosystem of different businesses. With that said, the breadth and innovation we’re seeing in the cannabis market is really something that most investors are not aware of. How can the industry communicate that better to the broader public?
Lowe: It’s not easy because there has not been very much continued press around the positives of industry as a whole. What I mean by that is, in the states where it’s become legal for recreational, the people in those states worked really hard to demonstrate why it was going to be a positive all around for the state up until it actually became legal. Once that happened, they kind of stopped the PR machine. So now all that information is not getting to the public.
A couple of weeks ago, I was at an event called Summit at Sea and the head of regulation for the state of Colorado was on board. He gave a presentation about the pros and cons of recreational legalization, but no one hears about that stuff. Essentially, what he was saying is everything has gone great. They’ve brought in money and they’ve seen these great businesses open up, employing people and paying taxes.
At the same time, people are concerned about the infused products area of this market. Too many of them look like candy, and as a result might appeal to young kids. While there hasn’t been a lot of problems due to that, it could be very bad for the industry if it’s not addressed early. So I think people in the industry, especially in those states where it’s gone recreational, have to continue to make public all the positives, not just the money that’s gone to schools, but the people who have gone from not earning a paycheck and not paying taxes and not getting healthcare to now working for dispensaries where they are gainfully employed and able to contribute back to their community. So there needs to be a lot more positive press out there, especially in those states where it’s become legal recreational.
EQ: You’re on the Board of Medbox. That’s a company that has, as much as any, been through the ups and downs of this industry. Thus far, it’s shown a lot of versatility and resilience to be able to shift strategies as this industry moves forward. What are some lessons specifically there that you’ve learned and that has helped to make the company stronger going forward?
Lowe: It’s really about investing in and taking part, especially on the service side and on the consulting side, of people who you vet both personally and business-wise. The most important thing we’ve learned is that you’ve got to put high thresholds against the people you work with. You can’t just take their word for it that they operate in a certain fashion. You have to investigate it and do things like credit checks and background checks. So the most important thing we’ve learned in these ups and downs is you have got to do it the same way that McDonald’s (MCD) vets their franchisees and enforces rules as far as who they’re going to do business with. In this business, I think, to succeed you need to do the same thing.
You need to only work with people that you are absolutely confident are going to represent the highest level of integrity and the highest level of hard work, and living up to what they promised. And I think that’s the most important thing because you may end up working with people who historically don’t have that, even if they claim that they’ve changed their ways. You could end up in the same place. I think that’s the number one lesson.
EQ: When you look at the capital landscape of the broader markets, we’re seeing that startups are choosing to stay private longer because there’s less scrutiny and other things associated with being a public company. For a space as delicate as cannabis, what are your thoughts on whether these companies should consider staying private longer or to access the public market sooner to fund their growth?
Lowe: I think stay private longer. It really comes down to capital means. If you have the ability to raise money to fund your growth privately, you should definitely stay private. You should stay there for as long as you can. One of the ugly lessons I’ve learned over time about being a public company is that it’s very, very hard to always serve the consumers or who you do business for as opposed to your shareholders. There is this expectation as a public company to report growing earnings and to live within a certain plus-or-minus percentage of forecasted profits and revenue.
And many times, that becomes the sacrifice of being innovative and investing in the future. If you’re going to slightly miss forecasted earnings, the easiest way to make that up is to cut your innovation budget, because that’s only going to pay off five to 10 years from now. You can put it back into the profits for the short term, but that’s not good long term for consumers or your business. So I’d say stay private as long as you possibly can.
EQ: For investors in the cannabis market, they may be very interested in getting in on these types of early opportunities. There’s a huge risk-reward level here, obviously. What advice do you have for them?
Lowe: Yeah, I do have a couple of messages. First, as I said before, find the good people. Find people who not only know the product and industry–and this is why it’s hard–but that also have the highest levels of integrity, work ethic, history and ability to build large businesses. Second, you have to have patience, especially until it becomes federally legal. And third, as an investor, this is different than other investments where your model of payback is pretty standardized. In this business, it’s unlikely for quite some time, that there’s going to be large public offerings or large acquisitions.
So you have to think of your investment horizon as more in the five-to-10 year term. If you need payback quicker, then you need to find innovative and creative ways that don’t include the big IPO or the big acquisition. This is going to be a huge, huge business and it’s going to eventually be really well-run, but it’s not going to happen tomorrow.
In my view, it’s easily $60 billion to $100 billion in the US alone. Today, it’s a fraction of that. So it’s a huge opportunity to be in that growth curve of a new industry that really isn’t new. In fact, the fascinating thing I find is that the people who estimate what the current spending is on marijuana believe that, as it becomes legal, it actually isn’t going up. More people are not necessarily buying cannabis products. It’s just a result of people spending the same amount as before, but now ideally getting safer products, and that money is going back into the economy rather than going into the gray side of the black market.
EQ: The cannabis space is unique in that it’s an already established market. You’re not building a new market. It’s just moving over.
Lowe: Yeah, and if anything maybe we might be moving people from alcohol. If it’s doing anything, maybe that’s the positive, is moving people from over-drinking to smoking.
EQ: Right, and tobacco as well, in many of the same ways. So there’s a lot of market opportunity here. Mitch, I do appreciate the time. Do you have any final takeaways or anything you want to share with our readers?
Lowe: Sure. If you’re interested in this business, it’s a fascinating place to be. It takes a lot of research and learning and talking to people, but I think anybody who are interested in this business will find it fascinating.
You can read more from our special program The Future of Cannabis here. To find out why Equities.com and Viridian Capital Advisors launched this program, be sure to read What is The Future of Cannabis? This program was made possible by the support of our sponsors.Click here for a full list of our sponsors.
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