Pot investor sees opportunity in cash crunch, California brands

Where cannabis is headed 

Silver Spike Capital, a cannabis investment firm, is using creative financial structures to help solve a big problem for the industry: a lack of cash.

Due to the federal prohibition on marijuana, cannabis companies can’t just take out bank loans or issue bonds. That’s given rise to creative financing: Many lenders in the cannabis space, for example, specialize in loans secured by real estate. 

But Silver Spike Chief Executive Officer Scott Gordon, with more than 30 years in asset management and investing under his belt, has taken a different approach. Silver Spike has so far spawned three special purpose acquisition companies — one of which took cannabis technology platform Weedmaps public in 2021.

Earlier this month, Silver Spike also announced that its business development company co-led a $170 million loan to Shryne Group Inc., which owns California-based Stiiizy, one of the top U.S. cannabis brands. It’s an interesting move in an industry where the lack of interstate transport makes it hard to gain recognition as a national brand.

Gordon also co-founded Egg Rock Holdings, parent company of the Papa & Barkley brand of cannabis and CBD products. And while concerns are rising about market saturation and competition in California, he sees this as a proving ground for nascent brands. 

Gordon spoke to me about his view of where cannabis markets and brands are headed.

For a while it was getting cheaper for cannabis companies to take out loans. But equity values have declined quite a bit. What’s the environment like right now?

It’s ebbing and flowing. You had a number of deals announced at the end of last year for public multistate operators where the rates were around 8% to 13%. But that was a different environment. Today it’s 200 to 300 basis points wider. It’s hard to say. These aren’t publicly traded bonds, it’s all behind the scenes, it’s all interpretive.

What’s driving this difficult borrowing environment?

If you look at the entirety of the capital markets, conditions have tightened and worsened. For cannabis companies in particular, they have yet to develop a depth of investor base — they’re limited to a relatively small constituent of retail investors, there’s no big institutional sponsorship available, either for public equity or credit. The sources of capital aren’t growing in lockstep with the needs of the companies. So now there’s an even more exacerbated imbalance for demand for the capital.

Also, many companies have had disappointing results relative to expectations. The market really got ahead of itself in the run-up we saw after the blue sweep in the last election. In hindsight, naively, people rushed to the presumption that federal legalization was imminent. Whereas now there’s been a much more sober assessment.

With a lot of companies clamoring for cash and lenders like you in a position of strength, what do you evaluate?

We chose to do a business development corp. as opposed to a REIT, which many competitors chose to pursue as funding vehicles. We felt there was a bigger playing field — real estate is one component of what we lend against; we also look at IP, receivables, inventory. We’re agnostic in terms of where we play geographically and in the value chain. Right now the opportunities closer to home are more dynamic than what we’re finding abroad, but over time I think we’ll do more internationally.

What’s behind your thinking in the deal you just did with Shryne?

We’re not shy about California. The general consensus is that California is a race to the bottom and you should stay away. But it’s the biggest, most competitive market for cannabis in the world. If you’re surviving or thriving there, you’re well positioned. You may see more battle-tested operators exposed to challenges there that the rest of the market has yet to see. Stiiizy isn’t just limited to California, but they’re an example of someone who’s come up in that market.

Will some of the multistate operators have a hard time competing as brands increasingly do licensing deals that let them enter new states? Californian names seem to be much more highly sought after. 

The MSOs were good initially at getting in front of regulatory environments in different states and rolling up smaller players and creating economies of scale. Personally, I don’t think they’ve been great creators of brands. They’re like the P&Gs of the world today that aren’t innovators, their success comes from buying successful startup brands.

There’s nothing wrong with that — building a brand and plugging it into a machine like P&G that can sell it at scale. But I think there’s an interesting analogue in that the brands under these MSOs tend to be their own private-label brands — akin to Kirkland at Costco. If you look at how much those house brands are selling through retailers that aren’t controlled by the MSO, it looks pretty small. But if you look at some of the California brands that aren’t under a massive retailer or distributor, they proliferate in a number of independent outlets. I think you will see more of that. Full disclosure — I’m admittedly talking my book, as a co-founder of Papa & Barkley.