Sumit Mehta, Founder and CEO at MAZAKALI
In addition to his role as Founder and CEO at MAZAKALI, Sumit is a consultant to The Arcview Group and the Managing Partner of Emerald Ventures. A frequent speaker at investment seminars, Sumit acts as a mentor to Arcview and Canopy companies and serves on the Canopy Investment committee as well as the NCIA Finance & Insurance committee. Sumit and MAZAKALI support NCIA, the Marijuana Policy Project and Students for Sensible Drug Policy.
Sumit’s past experience includes: Financial Advisor, J.P. Morgan Securities, Director of Business Development, DiMeo Schneider and Associates; Head of Midwest Sales and Trading, Susquehanna Financial Group, Director of Institutional Equity Sales, UBS Investment Bank; Equity Research Analyst, Raymond James Financial; Associate Analyst, Merrill Lynch.
Sumit has earned an MBA from the University of Michigan, a BA in Economics with Honors from the University of Texas and currently holds Series 7, 63, 65 and 79 licenses. He resides in San Francisco where he enjoys riding his motorcycle, yoga and craft beer.
[00:00:01] You're listening to Thinking Outside the Bud where we speak with entrepreneurs investors thought leaders researchers advocates and policymakers who are finding new and exciting ways for cannabis to positively impact business society and culture. And now here is your host Business Coach Bruce Eckfeldt.
[00:00:30] Welcome everyone. This is thinking outside the box. I'm Bruce Eckfeldt. I'm your host and our guest today as Sumit Mehta and he is founder of MAZAKALI and we're going to talk a little bit about his background in finance and his entrance into the cannabis world order and talk a lot about what he sees in cannabis and a cannabis investment and where the industry is going. Welcome to the program. Thanks for coming out.
[00:00:51] Thanks Bruce. Thanks for having me. So I always like to start with a little bit of kind of personal professional background. So tell us before you got on the cannabis face. What were you doing and then we can talk a little bit about your entrance to the cannabis. Sure thing.
[00:01:02] I spent 20 years on Wall Street. I started at Merrill Lynch in 96 and I left J.P. Morgan in 2016. And through those years I focused my efforts on investments and investment opportunities around the world.
[00:01:14] Any any particular types of investments or sectors industries geographies that you had people experience and we were looking at the tech space in the 90s.
[00:01:25] I was a technology analyst for a mutual fund and that was a big part of our focus from 96 through the first dot com crash and we then shifted our our focus to international the international space I spent some time in Singapore and Malaysia in the early early part of the century. And then then moved out onto real estate certainly looked at the whole mortgage boom before the bust got into craft beer spent a few years in the craft beer space with from an investment standpoint and also from an entrepreneurial standpoint. And then finally shifted focus again in 2013 to cannabis.
[00:02:02] Yeah yeah. A crack craft beer with you know another one that kind of grew dramatically particularly in the US that and that time period that I guess.
[00:02:11] So do you see. I mean I was cannabis for you.
[00:02:14] You're yet just another market that was on the on the edge of growth on the edge of kind of this rapid expansion. How did you choose cannabis or how to cannabis choose you. Tell us a little bit about the story.
[00:02:27] Well one of the investors and my site launched a brewery in Chicago and one of the investors of my brewery came back to me and told me that he was looking at cannabis and that I should take it take a look at it as well. So I started taking a look at the space and certainly when I first started taking a look it was all about growth and all about investment not about a lie. I found that that changed pretty rapidly and it was less than two years later that I left a 20 year career to join the cannabis industry full time. But yes when I first started looking at it it was it was definitely from an investment of pure investment.
[00:03:00] Yeah and I'm always kind of curious where people's kind of I guess kind of personal take on cannabis was you know went when they started kind of getting involved.
[00:03:08] You know I think there is obviously kind of a mixed history of cannabis in kind of U.S. culture U.S. politics where were you or where where was cannabis in your kind of personal sphere your understanding of it you know before you got too involved on the investment side.
[00:03:23] So Bruce I don't know if you're aware but I spent a significant number of years in India. And when I grew up in India that was not the stigma that there is here. Cannabis is very much a part of Indian culture. Part of Indian history a part of Indian religion and a part of Indian medical practice as it has been mentioned in the entire of babies since the since twenty two hundred B.C. and has since been used in the IRA Vedic medicinal practice and in fact modern IAB that doctors will share that there north of three hundred and eighty five formulations that include cannabis that were created thousands of years ago. So I didn't have the stigma. I did not have any of the propaganda shoved shoved into my face. And as a result it was another IRB and a useful plant and they are a very attractive vegetable for the human race from multiple perspectives.
[00:04:17] Do you think that gave you a bit of advantage of being able to see kind of the business and the opportunity and where where this industry could go over you know other investors or people who may be coming out traditional businesses and had a more conservative or had that propaganda you know in their kind of upbringing and things you know that allowed you to kind of see it better for what it really was. I mean there was this Do you see this as an advantage or was it kind of the way it was for you.
[00:04:43] I think it may have been. Certainly I believe that when your roots run deep your tree can grow tall. And when I think about the 5000 year history of this plant I also think about how moving forward we will come to a point where we look back at the same two year period of prohibition as a complete suspension of rational thought. And so when I think about cannabis when I thought about all of the good it has done for thousands of years it did not make sense that we would put each other in cages for having a relationship with a plant. And I saw that the beginning of the end was near the end of prohibition and that was an exciting exciting place to be.
[00:05:19] And I think that a lot of what's happening in the industry is that kind of awakening or that that kind of rethinking for a lot of folks. But both individually and as a sort of cultural society around the plant and it's how it's framed how it's used how it's managed. Where do you think we are on this kind of process or the spectrum is this. We're still kind of very early are you seeing this is really been kind of the beginning of the trend. Are we in the middle of it. I mean where do you think the possibilities are with with the industry and the plant.
[00:05:46] I don't think it's a trend. So I don't think we're at the beginning of any kind of trend. I think it's a return to normalization and I think that again the last 80 year period has been an aberration. So I think in terms of where we are. I'll answer your question from a couple of different perspectives. From a political standpoint we are very much towards the end of prohibition. I in fact I suspect we will see effective federal legalization as early as next year with full federal legalization possible by 2021 from a societal perspective. I think that a lot of the stigma around the plant has begun to wear off. In fact it's been dropped in the least of 32 states that have allowed for medical use and the dozen or so states that have allowed for adult use. That changing of the stigma and propaganda continues to proliferate across the country in a very positive manner from a religious use standpoint. I don't really know that I have a lot to say about it except for the fact that there are many religions that use cannabis and use it in a very spiritual way. And from a medical U.S. perspective I think there is a long a long ways to go but we are seeing the early and very powerful images and reports of children and the elderly that have and everyone in between frankly that have benefited from this plan when traditional medicine or allopathic medicine was not able to help them. I can go on with industrial uses that environmental uses and social justice uses and Cognitive Liberty uses but those are those are several of the areas in which cannabis is able to impact our society.
[00:07:14] We can do it we can probably have a series of podcast episodes on some of these before we get into the investments I guess. I'm very curious what you've been doing there practically.
[00:07:22] I do notice just in your background in your profile here that you've done a lot of work with marijuana marijuana policy project with students for Sensible Drug Policy CIA. I mean I ask you Do you see for your kind of involvement in this is this more than just kind of the business person seeing business opportunity and really seeing this as having a responsibility I want to make an impact on kind of the whole kind of adoption by culture and society and make us how do you how do you see your purpose in the in the business right now or in the industry of cannabis.
[00:07:53] So when I started looking at the space in 2013 I was looking at it from a pure business lens and a pure investment lens and I started making investments as a result of that view. In 2014 in Oregon and in Colorado and in 2015 I came into California from again from an investment standpoint. But by 2016 I realized a couple things. One I'd only been making cannabis investments and two that this was not just an industry it was a movement and it was not just enough for me to look at this from an ROV perspective it was imperative that I looked at it for all of the wonderful things that it does to various parts not just of our lives but also the lives of our our animals our plans and our planet. And when I had that holistic realization I also realized wasn't just enough for me to put my money in this industry. It was also imperative that I had my time and effort. So with that epiphany I left JP Morgan and a 20 year career to join the industry full time. I have been working with many groups and I have worked with groups including canopy and Arc View as well and I believe that as we are all coming together and utilizing all of the lessons we learned from the plant for business decisions we can make much better business decisions and we can do well and do good at the same time. And that's very important yeah.
[00:09:05] And I think that's one of the fascinating and sort of interesting and meaningful parts of this whole industry is that it is it is more than just investment. I mean most people getting involved here have kind of a bigger picture or a bigger vision for kind of the benefit and the impact that you can have as participant here more than just you know being a good kind of entrepreneur or a CEO a leader from a business point of view.
[00:09:27] So walk us there so you say you love JP you're kind of looking at the investment side. How did you kind of navigate through the process of getting involved with different organizations. How did you pick the organizations. How have you kind of laid the path Worry for yourself in terms of getting involved and where have you seen it worked well and maybe where have you sort of seen things not worked so well.
[00:09:46] Sure. The process of transition was fairly straightforward. I'd been working with within the Arc View group for many years. That's how I got into the industry and that's how I started making my first investments and when I mentioned to Troy Dayton the founder of Arc View that I was thinking about leaving Wall Street.
[00:10:01] He was very supportive and encouraging and in fact asked if I would come on as director of finance lesson or I'm CFO for the first foot for a few months until we hired a replacement. So that allowed me to leave. JP stepping to ark views I ended up spending about six months working on finance for our view while also launching musicology and then as we hired a replacement for me I could do it full time.
[00:10:26] I was able to transition into my work at musicology and any particular area of the cannabis industry that the sort of area of the industry that you've been focused on in terms of types of companies you know stage of company. Give us a little bit of a sense of where you've where you focus your efforts.
[00:10:42] Focus my efforts in the private space. That focus has evolved over time as the industry has changed as we are looking now at the industry I can share that in the supply chain of the plant touching part of the industry. The areas of the biggest area of focus for us as brands. We're not a we're not under any illusion that cannabis is an emerging market and as such it exhibits a lot of the characteristics that are common amongst emerging markets. Those characteristics include fragmentation and as emerging markets mature they tend to move towards a legalistic structure. So we expect that there is a lot of consolidation coming and there's also a lot of commoditization of various parts the supply chain. So as I think about where one can generate value over time it is in mindshare that ends up being able to help capture wallet share and that Mindshare is from a branding perspective. So that's a lot of our focus on the plane touching side on the ancillary side of the business. We look for scalable opportunities ones that are not trying to compete with the big boys in a way that people eventually get wiped out for when the multinationals are allowed to play so big data. Genomics robotics machine learning machine vision all of that is sort of a collection of spaces that are ripe for a lot of innovation and innovation that's driven by the margins that this plan affords us. We're not as interested in mobile payments or any of anything banking related that will eventually get wiped out likely the day that guys like J.P. Morgan decide to come into the space.
[00:12:16] Yeah. I think you're bringing up kind of a situation you know because of the federal illegality that creates this kind of open playing field for a period of time and a lot of these spaces where you know the big players don't want to come in because they don't want to taint their their businesses dealing with cannabis that it's really legal. But I think everyone is pretty much anticipating that soon as it does and I think you mentioned earlier that you're projecting the end of the end of next year or the beginning of next year you know having some kind of movement on the federal side at the moment that does it's going to change many of these businesses at either you know coming in and wiping them out you know bringing whether there are services and products into the space or kind of a mass acquisition mode. I mean I guess do you see I guess how do you see that playing out. I mean there's various parts of this kind of a space that you know some can be solved by existing companies and they're just not doing it because they don't want to. They don't want to touch it right now. Other places maybe not so much that there really is some unique areas of cannabis that you know a pharmaceutical company hasn't been able to come in and replace it completely. Do you see companies kind of positioning themselves for acquisition and when that happens or I guess how do you advise companies in terms of dealing with this pending federal legalization and how that's going to impact them.
[00:13:29] You know we've seen a similar movie before. This is just playing in a different theater at this time. I do expect that as we approach federal legalization we will see a massive wave of consolidation one that will only be eclipsed by a bigger wave of consolidation after legalization. So as we are looking from an entrepreneurial lens in this industry out towards legalization we only see one of three options for every company in the in the industry. You're either strong enough to get purchased. It's all right. You're either strong enough to stand on your own in a fully federal federally legal environment OK or you're attractive enough to get purchased or you get wiped out. And as we saw a 90 percent decline in the tech space coast the first crash and a similar decline in the homebuilders post the mortgage crash I expect to see a very similar number four for the cannabis space as well. It's a large number of companies will not survive full federal legalization and they understand that if they're they're not attractive enough they have to be strong enough and in order to be strong enough it is helpful to band with others that can that can boost your strength. That is what's driving what I'm going to say is the very beginning of an eminent cycle in our industry and we're starting to see I mean it pick up in certain sectors. I suspect it will pick up more and as we go into legalization we will see a seismic change in the complexity and fragmentation that is so that is so prevalent today in our industry.
[00:14:55] Yeah you mentioned this focus on brands you know brand recognizable known brands trusted brands you know are going to be important in surviving this kind of consolidate earliest surviving or defining that those brands that make it on their own versus those brands that have to kind of go through an acquisition. I got a strong viable business but if I don't have a good brand recognizable brand to be able to stand on my own I'm kind of forced into an acquisition but I'm not going to be able to survive competing against other known brands coming into the space.
[00:15:23] Is that how you're kind of seeing the bifurcation of this process looking absolutely extremely difficult if not nearly impossible for most to compete with the likes of Betsey Johnson or Procter Gamble. It's also extremely difficult to compete with JP Morgan or ADP or State Farm. So if you have businesses that are in that space they are either they can either be helped by regulations i.e. if you have a certain license that is difficult to get then it is more likely that it will be bought and you will be back with it. But if you don't have a business that is helped by regulation and you're just competing in a free flowing economy then you are currently enjoying a very nice current in the moat around the cannabis castle that's been caused by this federal state conflict. But as soon as that moat. As soon as the floodgates open and the fence blow the whistle then yes the athletes are ready and the field is open for play.
[00:16:14] Yeah and that's just gonna be open season open season on cannabis companies in that respect.
[00:16:19] So in terms of building brands I mean I guess what do you see in terms of I guess brands that are out there that are potentially you know able survive that or taking an approach to build themselves to be able to survive. Without are these brands that we're seeing right now. Or do you think this is new brands that are gonna be forming at establishing themselves for this purpose.
[00:16:37] I think a few brands might survive. I think a lot more brands will be formed. Let's not forget that Google as a search engine was launched in the fifth year of search engines and for the first five we had to live with the likes of like those and also beast.
[00:16:50] I remember remember on well ask Jeeves.
[00:16:54] So we are in 2019 in roughly the fifth year of legalization in even the most mature states in the country. So we have barely begun to scratch the surface of what true branding is like and if you ask most cannabis consumers their relationship to the plant is through a stream not through brand. And that's not true for any other product we consume. So that mindset will change and as it changes those companies that can continue to provide high quality at a reasonable price and not have the issues we've seen throughout the industry with their products and with testing etc. have the best chance of survival. And one other thing I'll add is that if we are looking at how this industry is being built it's being built on a state and county level. There are very few multi-state operators but they are increasing and therefore you don't have as much of a as much of an easy pants to national branding as you might in in an industry that is not handcuffed by state and county lines.
[00:17:53] I guess you see these multi-state operators that are do you see people that are that are starting to be able to build a brand across state lines across these different markets.
[00:18:01] There are certainly some brands that have national recognition. Those are primarily brands that are being touted by major media and by Wall Street because of because of lots of opportunity that the public sphere they provide. But let's also not forget that while there are 32000 businesses in cannabis the vast majority are private. And if we have less than 300 companies that are public then the opportunities the growth and the fuel for the industry is all being provided primarily in the private space.
[00:18:33] Yeah yeah it's an interesting kind of character for the industry or for the for the market has figured out how do I get you know how do I get capital. How do I get the investment on the stuff. I mean I guess you see do you see the capitalization side as being still kind of a challenge. I mean everyone talks about how much money there is on the cannabis and the kind of cannabis industry. Like you you've got a cannabis business. You just kind of walk around and you know you'll be able to find money and left and right. Is that really true or is that you finding that companies still are struggling with getting the right capital and the right kind of structure to help them be successful.
[00:19:01] Well we started this talk business with you. You're coming up with extra topics where future for future talks. And one of those one of those might be the top myths in the industry and I would add to the top five myths that the that the myth or the police a statement that the streets of cannabis are paper gold. So no the capital is not plentiful. In fact the opposite is true. And there is a very large shortage of capital in this space. We forecast or we we understand that shortage to be in the range of 80 percent while we believe that industry has an 80 percent unfunded capital need. And if we were able to bring more capital into the industry the growth of the industry would only be helped in a very tremendous way.
[00:19:46] Yeah that's big. But I think that you know for folks listening there are a lot of folks listening I know that are seasoned business folks entrepreneurs outside of the kind of space that are looking to kind of get involved and one of the reasons that there's a lot of kind of interest is because there's a lot of hype around the capital side of it.
[00:20:03] And so I think getting clear or getting you know understanding that as an entrepreneur as a businessperson looking to be at a high growth situation that the capital is not just kind of falling from the skies that this does take work and finding the right people and the right partners for that capital can be a big challenge. I guess where to where do people find capital right now. What are the sources if you're an early stage company looking to grow and looking to fund it.
[00:20:24] Patrick Yeah that's a that's a great that's a great question and a great top so let's let's think about how capitals come into this space and what capital is not in the space that could be will be over time. When we think about or when we look at statistics from March of 2014 Ninety two percent of companies were self-funded that number in March of 2016 dropped to 72 percent with a lot more companies opening up in 2016 than did in 2014. So that wasn't the first indication we saw of a healthy amount of outside capital coming in where that capitals come from has changed tremendously over the years as well. The initial capital in this industry was largely provided by friends and family and by angel investors. In fact we both meant we discussed the RPA group earlier and that's a group that's been around for eight years is comprised of angel investors and has put over 200 million dollars into the industry. If I look at the largest cannabis dedicated fund in the country today it is not north of 200 million dollars. Yeah that's not. So it's not very big in fact it's a drop in the bucket for an industry that's 12 billion dollars today and growing at 27 percent. As that angel group investment continued to grow we also started seeing the next stage of capital come in and that was from family offices we saw family offices and some dedicated funds come into the industry. What we have not seen is the big banks. We have not seen the big pension funds. We have not seen true institutional capital and as the floodgates open for that capital there's going to be a tsunami of capital coming in that is going to be very healthy for some businesses and potentially very unhealthy for others.
[00:22:08] The other big area of growth from a capital perspective is credit. There simply aren't enough banks lending. And as a business if I have to pull out equity every time I want capital and the cost of equity is much higher than the cost of debt then I'm doing my business a disservice that I would not ordinarily do if I have access to credit. As businesses do and every other in every other sector in this country.
[00:22:30] So yeah I mean let's just recap that because I think that that's an important point so because capital is limited you know that that's stymieing growth but more importantly because it's coming mostly through equity and because it's hard to get debt financing for these companies. And this is mainly because you know most of these groups the traditional kind of debt financing structures can't touch cannabis or is this because they're just like that part of the market's not mature yet.
[00:22:52] What's driving the hinderance or the limitation there the reticence for lenders to get involved in this space is large part of what's driving it. The inability for banks to lend into the space is also a large part of what's driving it. A traditional credit line can be issued on a personal guarantee which is still possible or on real estate collateral which is largely possible. However with accounts receivable financing and with other forms of financing it's extremely difficult to get to get access to those credit lines. So unless one is willing to put up a personal guarantee on or has real estate involved and even with those it can be very difficult. Now access to credit is simply not generally speaking available. And as that credit increases the credit availability increases. We'll see more of a normalization between debt and equity and we'll see balance sheets look very different than they do today.
[00:23:44] Yeah yeah that kind of skews the whole capitalization on the balance sheet for most of these companies. So federalization happens federal legalization happens. Who do you think are gonna be the winners and who do you think are gonna be the losers.
[00:23:55] I mean what are the things that are going to indicate how well someone survives this federal legalization from a kind of access to capital point of view from an access to capital point of view the folks that will survive legalization are the ones that are able to get the right kind of capital to be able to grow their businesses to withstand the onslaught of large corporates as we discussed earlier. All of these businesses are waiting to come in. There's no doubt in my mind that Big Ag Big Food Big liquor Big Pharma Big tobacco big entertainment big hospitality the list goes on are all going to step in. Second they're allowed to. And when that happens the vast majority of small businesses are going to get unfortunately get wiped out. It's just not a way they can compete. So access to capital is extremely important and it's important to have access to capital sooner than later so that we have the opportunity to build our businesses the right way. And so that we have the opportunity to gain and garner enough market share such that in a fully legal environment we're not facing a premature demise.
[00:24:53] Yeah yeah. It just seems like sort of building a defensible position you know for this for the cigarettes it's gotta be it's gotta be under Strategic Plan. Like if you don't have some strategy for how you're going to deal with this then it's gonna deal with you and that is most likely gonna be wiping you out you know whether that's immediately or painfully over a couple of years you know I think a lot of these folks are going to be trouble.
[00:25:12] Mean I guess do you see that. Is there room for kind of niche players in some of this.
[00:25:15] I mean even if these big company is gonna come in like if you have a good well kind of articulated brand got a good audience you've got a niche position. Is that defensible is that. Is that an area that at least I mean see rocker chip growth once federalization comes in but at least you could build a successful business around that. I mean are there opportunities there still.
[00:25:35] I think there's a lot of room for a for niche players to play. I think that there's a when you have an industry that is as large as ours and is growing as quickly as ours is and has the potential to grow to a size that ours has there is opportunity for everyone. This opportunity for lots of different types of niche services and there's opportunity for both businesses that cater to the masses as well as those that are highly specialized.
[00:26:02] So yes I see I see that there's plenty of plenty of growth and plenty of opportunity if there was a cautionary tone in my voice in the previous couple of handsets. It's just that we need to be prepared for what is coming and not surprised by it.
[00:26:15] Yeah well I think that the the summary on that is hope for the best prepare for the worst. And I think any any company in this space has to have something something in their plans that deals with that because it's you know it is coming whether it's next year or the year after or the year after that it will happen.
[00:26:30] And it will impact things you know settlement one a question I have is you know we've talked a lot about the big banks about these big players you know how you know those are big professional investors how can we get more kind of the general population involved in this industry. You know we need all this capital. How how can how can people participate.
[00:26:48] And that's a great it's a great area. Bruce and it's one that I've been thinking about and working on for quite some time and the big focus of mine is is to essentially democratize cannabis investment opportunity. Part of that is part of that involves finding the best opportunities and the other part involves bringing those two people to take advantage of. And so one of the projects we've been focused on for the past six months is a project that absolutely allows that to occur and that is a combination of our broker dealer and our legal partner working with us the diligence the best cannabis opportunities and the other part of that is to have or we have a tech team and a development team and we are launching a platform with all these teams in place that allows folks to come onto the platform get educated get advised and get invested into the cannabis space.
[00:27:43] So this is real I guess what level of investor do I need to be it to be able to participate on this platform.
[00:27:47] You will have to be an accredited investor to be able to participate and we are also looking at ways in which we can utilize the freedom that we've gotten from the Jobs Act to bring that to bring the opportunity even further into the into society.
[00:28:03] Yeah for those not familiar the Jobs Act basically loosened up or created an ability for those people who are not necessarily accredited investors and there's a whole definition of that to build or participate on these kind of investments on an equity basis. It's a little different the structure is a little different but it does give you the same kind of ability to participate which I think is great because I think one of the things that facilitates this really kind of bringing more people into the space not only from a volume point of view but people that otherwise would not would never have the ability to participate in this as an investment or as an equity play to get them involved because I think that's going to help not only raise capital but it's gonna help really make this work from a society point of view. I think it will it will create some opportunities.
[00:28:42] I completely agree. Chris this platform is called Global Piper and folks will be able to get on globalpiper.com and learn more about it.
[00:28:50] We're gonna hit time here but I want to make sure if people want more information about you about the work that you're doing have questions. What's the best way to get a hold of you or get more information.
[00:28:59] Website music mazakali.com has has a ton of information and also has our contact info so it's best to get in touch with us.
[00:29:07] Perfect. Thank you so much for taking the time and while I'll plan on scheduling another episode with you in about a year and we'll see if legalization has happened and we'll get to discuss it then.
[00:29:18] But this was a pleasure. I really appreciate your time and the expertise.
[00:29:22] It's great talking to you Bruce. Thanks for having me on your show.
[00:29:25] You've been listening to Thinking Outside the Bud with Business Coach Bruce Eckfeldt to find a full list of podcast episodes. Download the tools and worksheets and access other great content. Visit the Web site at thinkingoutsidethebud.com. And don't forget to sign up for the free newsletter at thinkingoutsidethebud.com/newsletter.