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A one-stop solution for cannabis entrepreneurs to get their business online and to create a following on social media, and to have a website and email marketing; pretty much everything that they would need for their business to attract attention on the Internet. Narrator: The Periodic effects Cannabis Business and Science podcast is brought to you by Periodic Edibles, the Cannabis caramel company available in Oregon. Podcast begins at 00:30 Wayne: Hello and welcome back to the Periodic effects Cannabis Business and Science podcast. My name is Wayne and I'll be your host. We upload new episodes every Monday night bringing you an insider look at cannabis business operators and the latest updates and studies on cannabis science research. If you're operating in the Cannabis industry, or a budtender looking to learn more, or consumer wondering how cannabis can help you and this is the podcast for you. All right. This is a business-focused episode. We recorded this on March 6th, 2019 and our guest today is Patrick Rea, co-founder and CEO of CanopyBoulder. CanopyBoulder is investing. They have an incubator and they invest at the seed stage of businesses focused on the Cannabis industry; seed stage meaning kind of pre-revenue businesses really at the idea stage right as they begin execution. Remember that stage before you have kind of already a customer base that might be paying, so little more risky at that stage early on and really enjoyed having Patrick on. Brought a really great perspective to this conversation I think, and I learned a lot from this one. I find the investor area and venture capital and these different ways of raising money really fascinating and how they kind of look at the Cannabis industry, and what they're looking for in companies if they decide they want to invest and take a risk on a company, bring them into their incubator to connect them to mentors, and help expand and grow their company. What do they see when they think a company might be successful? What makes them pick a certain company over another so we dive into a bunch of questions like that and also talked to Patrick for a little bit around kind of the smaller craft business being able to compete with much larger scale or bigger money, how he views that, what you have to do as a small craft business if you do want to compete and as things continue to evolve and change in the industry, where he thinks those players will be successful, and what you have to do, so really enjoyed Patrick coming on. I learned a lot like I said, and I think this one will be helpful for a lot of people especially if you're operating in the industry. So if you're curious about what the future of the Cannabis industry might look like, and what investors are looking for in cannabis companies of who they think will do well, I think you'll find this podcast very useful. All right before we jump into it with Patrick, I did want to mention and ask for a favor from you. The Willamette Week's Best of Portland annual competition is now open for nominations. So they run this competition every year and it’s one of my favorite kinds of competitions because it's completely ran and voted on by you, the listeners or the customers. The company whoever gets the most votes from their community wins this competition, so I put a lot of weight behind this one. I think it carries a lot of value and I guess it's Best of Portland, so it's Portland-area focused. I think if you're inside of Oregon, you can still vote. Maybe if you're even outside of Oregon, I think you can vote and they may count that but there's a category for best local podcast. So if you been listening to this podcast for a while, have gotten value out of it, we'd greatly appreciate you taking a little bit of time and nominating us. Right now the nominations are open. That’ll close shortly and then the vote happens a couple months from now. They basically pick - anybody can be nominated; they pick the top five that were voted for, and then there's a voting period a couple months from now. So right now the nominations are open. It's fairly simple to go and nominate somebody. Doesn’t take that much time. This is the fastest way I've found to do it. So if you were to go to Google and search , just three letters as in Best of Portland BoP 2019, it'll show up in the second result, may be the third. For some reason, Kidz Bop also shows up when you search for that. But that's kind of the quickest way I've found to find it inside of Google. If you click on that, there's a couple different categories you can select. There’s one called media and entertainment. If you click on that, then the next one is best local podcast, and there's a little space right there next to best local podcast. You could type in Periodic effects, hit enter and that's it. Then you would have nominated us. So if you have a little bit of time, even pause this episode right now and switch over to Google and do that or Google while you're listening, we would really appreciate a nomination and appreciate your time. So that's that and we will jump right into this episode now. Here's Patrick Rea, CEO co-founder of CanopyBoulder. Wayne: So joining us today, we have Patrick Rea, CEO and co-founder of CanopyBoulder. Patrick, thanks for coming on. really excited for our conversation. I think you're going to have a really interesting perspective working with multiple different businesses around the Cannabis industry. So thanks for joining us. Really appreciate you giving up some of your time. Patrick: I'm excited to be here and thanks for having me on. Wayne: So I like to always start with guests to ask and give some context for listeners. when you meet somebody new in the streets and they ask what do you do, what do you normally tell them? Patrick: I tell them I run an early stage investment fund and business accelerator, and if they ask even more, I say well it's actually in the Cannabis industry. We're investing in all the infrastructure, the ancillary products and services as well as now CBD and hemp brands. Wayne: Okay. Yeah, I was gonna and I got a couple of quick short questions here and one of them was being an incubator for start-ups, what was your target or focused companies? And so it sounds like I saw on your website to mostly ancillary, but you also just said you're getting into the hemp CBD Market as well then. Patrick: Yeah. Until this year, we had only invested in ancillary products and services so data, software, tech, media, hardware, IOT, all the products that surround the Cannabis industry. Some of our most successful companies are work - they do payroll processing, BDS analytics. They collect check out data from dispensaries and make that useful for brands and investors and managers, and then Front Range Biosciences - they do tissue culture propagation. So all around the industry and then with the passing of the Farm Bill, we've been eyeing the CBD and hemp space and Boulder’s a great place. Boulder, Colorado is a great place and a hub for the natural products industry - organic foods, dietary supplements, natural wellness products -that we looked at CBD and Hemp and saw that it was the next hot functional ingredient that actually may have some credible efficacy around it, compared to some of the other things you might buy at a natural food store. So we wanted to take that experience and local knowledge, and apply that in our accelerator and incubator. Wayne: Yeah, makes a lot of sense. I think that CBD industry is so interesting with the Farm Bill passing and I want to dive deep into that. I think around the regulations and there's still a lot of unknowns there, but before we do, what year did you start CanopyBoulder and how many businesses have gone through the incubator? Patrick: We started the accelerator and incubator. We start work on it in 2013. We raised our first Fund in 2014 and then we made our first investments in 2015. So it was a very sort of disciplined approach. We wanted to find a way to impact the industry in a really positive way and we felt that an accelerator and incubator was the best way to do that because we could help the most companies and have the greatest impact over the long term through that model. Now since we launched, we've invested in 90 companies and we've done over 110 investments. So we've been pretty busy. Wayne: Yeah. Sounds like it. Did you move to Boulder, finding that that was a good epicentre to go to, or did you already live there? Patrick: I already lived here in Boulder, Colorado. I moved here from California in 2005 to work more deeply in the natural products industry and operated a business. enjoyed that but wanted to get back on the investing side, which I had started my career in at a boutique Investment Bank and Venture Capital firm focused on that natural products industry, natural organic dietary supplements. So it was a kind of coming back to what I really enjoyed, which was analyzing, studying companies, making investments, nurturing those investments and helping them be successful. Wayne: Got it! So it sounds like past experience really accelerators or incubators outside of cannabis or some of that experience, bringing it into cannabis. Sounds like you're definitely early too. I mean the industry moves so fast. I know even 2014, 13 or 15 was almost the early days, at least around Colorado too. I would love to know when you started, what was the decision making process of putting this together and kind of the thought to dive into cannabis? Did you have a lot of confidence at the beginning, or was it still very unknown and maybe if you want to talk about why you decided to go with only ancillary companies at the start and not you know plant touching companies with THC products? Patrick: Sure. So back in 2013, at one point there were 100 dispensaries in Boulder County and there's only about a hundred thousand people in Boulder County. There was 1 dispensary per 1000 people at the time. That’s ridiculous, but that is what it was. So it was happening and the sky was not falling. The zombie apocalypse was not upon us, so it seemed like this was a lot to do for nothing, and that if any indication of what was happening in Colorado was indicative of what could happen in the United States and around the world, then I think we're going to be just fine. I looked at it as a bit of a plant medicine much like Echinacea or St. John's Wort and it was a functional ingredient with very high efficacy. I mean it really did work for a lot of people, so it seemed very familiar to what I had experience with in the natural and organic and dietary supplement industry, preferable alternative to the market standard, depending on who you talk to, is under-regulated or over-regulated strong consumer driven market and people lived the life. They didn't leave the culture and the work at home at the office. They took it home and lived it, so very, very familiar. It was still on that cutting edge and maybe the bleeding edge of the time, but since then we've seen a very healthy, well-functioning, legal cannabis industry grow in Colorado, and it continues to grow so it just made sense to get involved and really the decision about how we would invest in services, because to start with because I spend about a year talking to people in the Cannabis industry trying to understand the economics of the businesses, the different business segments and we found that the tax and compliance costs for businesses that touch the plant were really high. we found that wholesale cannabis prices that cultivators were selling at were declining rapidly. That was a key metric in that business that made it kind of scary. Wayne: Yeah Patrick: Brands; it was hard to market and advertise. you were sort of limited. So that wasn't something and there was all the lack of interstate commerce. You couldn't make it in Colorado and sell it in Southern California, so that's going to be hard to get a 10x return and then retail, retail’s tough and we're in a moment in our world economy where retail is really suffering, and that method seemed like a good one. So we thought with some capital, we could really help ancillary products businesses scale and expand outside of Colorado and in other states, and there weren't any limits and there wasn't an IRS code 280e issue with ancillary companies and it just seemed like there are a lot of things pointing to the decision to go into ancillary and the decision to launch an accelerator. Wayne: Yeah, yeah, it makes sense, and I think that it sounds like the Hemp, the CBD Market kind of ties back to that model because you do have all those options - crossing state lines and the scalability - that you don't have in the much more regulated THC product. So those probably go more hand-in-hand with the model you already currently have Patrick: that's right. That's right. Wayne: How is the landscape in Colorado? You know, we're in Oregon - hyper-competitive, lower barrier to entry. With your companies being able to move into different states in that way, is the Colorado landscape for growers or processors that are making the THC products, are a lot of them really struggling right now? Are there a few winners that have really excelled? Is it oversaturated? What's the feeling in Colorado, being the oldest, most mature rec market we have in the country? Patrick: I think you hear this from a lot of people in the industry that they say if you can make it here, you can make it anywhere. Wayne: Yeah Patrick: And that's great. The companies that are succeeding and thriving in the Cannabis industry in Colorado are some of the most experienced operators in the world. They have been through the things that others in other states will go through in due time. So the knowledge base, sort of seasoning that the folks have here is really, really impressive. In addition, the problems that they encounter running their edible company, or their dispensary or their cultivation of crops, their extraction company, the problems they face are real and they're great problems for ancillary products and services entrepreneurs to solve. Again, because the market here is a little bit ahead of development in other States, those business problems and frustrations they have, we can generally estimate that they'll be the same problems people encounter elsewhere whenever they get to the point where it's a problem. Wayne: Yeah. Yeah. No, that's great insight to have there; an advantage. It definitely sounds like to be able to predict what will happen in these other states and be able to solve those problems having already seen them in Colorado. That makes a lot of sense. When you are looking for a start-up or someone applies to the incubator/ accelerator, what do you look for in a company? I think I saw on your website your mostly seed stage so not later rounds, or a company that already has revenue, and correct me if I'm wrong on that, but what do you look for in the company or the founder that makes you feel like this could be a successful company and let's work with them or invite them into the incubator? Patrick: Well, we feel very strongly that success and failure in any business is dependent upon people and the quality of the people, the quality of their approach to work, and so we always say we make our decisions based on Founder-Founder-Founder. So what do we look for? We look for high intelligence. We look for curiosity. We look for people who are open to feedback and coaching. Folks that are in love with their problems, not their solution. Wayne: Yeah. Patrick: We look for people who have some right to win in what they're doing, and that can be demonstrated through past experience that they're porting over to the Cannabis industry and the company that they're starting, or existing traction that proves they are in touch with that problem and are providing a good solution. So it's a lot to look for in a founder and I guess most importantly low ego, people that are willing to take guidance from others and advice and really think about it and make a good decision. So decisiveness, you're not always going to be right but you need to make decisions. So there's a lot there. We spend a lot of time - the company's last cohort - eight of the ten companies in our cohort were revenue-generating when they came in the program. So like most accelerators a lot of people on the outside of them who haven't been through them think oh that's only for concept stage entrepreneurs who haven’t really written up a business plan or pitch deck, and that's not the case. Accelerators are for people who realize that entrepreneurship is a lonely journey and it's best taken with a family of people around you supporting you and what you're doing. Wayne: Yeah. Do you find a lot of first-time entrepreneurs applying or do you find people that have built already a couple companies potentially and even if they had failed or maybe found some success also applying? Patrick: Absolutely. Both. We get all types. We have got an applicant in the hopper right now - three times, three exits - and he realizes he needs help and there's a lot of things he doesn't know and he can do a lot more with us and CanopyBoulder than he could do on his own with his own team, so they want to tap into our network of mentors, industry connections, investors because they see it as a real value-add to the launch of their business. Wayne: Yeah. Yeah. I mean the networking piece and the mentors is I mean, it's everything, especially for someone with less experience. It’s hard to put a dollar value on that so important. if you have a company and let's say they have the right people in place. They're humble, low ego and they're curious, they want to learn and they're not tied to their own ideas, they want to be open like that. If they have all that in place, they come, they start, what kind of problems do you see they've most struggled with as they're launching their business? Is there a lot of pivoting because the Cannabis Industry is so new and these problems are just being discovered and they're constantly changing and evolving? Patrick: Absolutely. I mean the different problems they encounter, it's all over the map. It can be they have a great idea, great concept, but they just can't get sales to go or they can't wrap their brains around what it means to raise capital and what all the jargon means, so they need to get educated there. It might be that they need to do a rebrand because they've realized, oh this is not representative of my vision, or they just need connections. They just can't get people to call them back. There are so many stories of entrepreneurs coming in there. Like I tried to get that woman to call me back for six months and we just picked up the phone and called her we're talking to her. It's really is so much easier to get things done when you have people that are there. They’re invested, they are on your side and they want to help you be successful and they have contacts that you don't. Wayne: Yeah Patrick: Again, Techstars. Their Mantra is do more faster and we believe in that mantra as well. Wayne: Are there other models similar to Canopy that are doing well? I think I saw you guys were one of the first fully cannabis focused incubators. Is that still the case, or are there some other ones out there in other States now? Patrick: Yeah, there are some folks that are working on incubators or accelerator models and have launched, or are talking about launching, or have kind of launched or have launched and failed. We welcome it... [AUDIO HAS TRUNCATED SECTION: # MINUTES UNCLEAR] Wayne: The program structured it and then after that, they go, they're out there. I'm sure they've still got resources to connect with, or reach out back to, but what does that 4 months look like? How is that structured and what are the key pieces that you've seen as trends that really take businesses so they can find that success and get past those bottlenecks? Patrick: So the process - we have an open application. Folks are applying with their ideas. They are reaching out to us through mentors and advisors and contacts that we have in common, and if we like the team and like the concept, timing feels good, there's a big target addressable market, and they have some traction or showing forward progress on the idea, we will start due diligence with them. We will ask questions, have them fill out some surveys and get feedback on their ideas. We ask a ton of questions and then as we get closer, we start negotiating the investment and trying to understand if we have goals in alignment. if somebody comes in and says hey I really want to become the world's best skywriting company, I don't know if I can help you out there. I don't know if we're gonna be able to help, so we want to make sure that their plan for the business is something that we can engage with and help with and we agree with. So then we make the investment and there's some negotiation, but it's pretty standard. We’re going to do 30k for 6 - 9½% common stock Founders Equity, and then we have $100,000 convertible note. So companies coming in are going to have $130,000 to get going and/or grow, and you know again, like I said, they are not conceptual, all of them. They're not all generating revenue. They're all over the map and frankly our most successful companies that have come in and out of CanopyBoulder have been conceptual. Concepts when they came in. no website, just an idea and a great team of founders. So when the cohort begins, these teams because we've been working with them and having regular communication and the education's already began, they come in kind of hot. They’re ready to go and the first couple weeks are super intense. The whole program is intense, but what we do is we make sure every week has a different theme that builds the strongest foundation under that company as possible. So we'll do a week on venture capital. We’ll will do a week on sales. We’ll do a week on marketing. We do a week on legal, Ops, team, leadership, all the elements that you need to be thinking about as an entrepreneur if you want to be successful, you want to find your business growing, or you want to raise capital. So by the end of the program, these teams are hard as nails, then pressure-tested. We've done 13, 14 pitch practice events, and then we go out and they are put in front of investors. So we do demo days and investor preview. It's like a road show. So we want to make sure that they are getting in front of the industry VIPs and investors. So the people that should know what is going on with this company know and the entrepreneurs have the opportunity to find more traction, raise capital and increase their probability of success. Wayne: Yes. I was going to say that 130K, is that lower to start a business and launch it? Is that initially the seed and then investors later or another series raised, is that normally the approach that every business takes assuming they find that success with that initial investment? Patrick: Yeah. Yeah. I mean it's $130,000 should give you between 6 and 12 months runway as an entrepreneur, depending on how you're spending it. So there's gas in the tank right? We're building the car and they have to drive it. Wayne: I always hear a company raises money and then they raise the next round and the next round, how much do you think about driving a company to become profitable as soon as possible or to get revenue while thinking about the cost, versus let's just drive top-line revenue as hard and as fast as we can and we worry about becoming profitable much later down the road? How do you kind of balance that or think about that? Patrick: You know, it really depends. It really, really does depend on every company, but as an investment fund and if these entrepreneurs are going to come in and take capital from investors, they've got to be thinking about their return. So growing faster, more aggressively pushing that expansion, the revenue growth that is going to signal product/market fit to the industry and to other investors and potentially give them more capital, more gas in the tank to grow bigger and faster. A lot of entrepreneurs - the good ones - they stay very in tune with what the margins are for their business, how much they're paying for leads, lifetime customer value and then path to profitability, and in the event that they need to, they could flip a couple of switches and be profitable. So in our Venture Capital week or weeks - we need two weeks of that - we talked about the fundraising road map. You have your business, it's generating revenues and maybe some profits or not. You have the capital that you raised and you're burning that every month. How much time do you have? What milestones can you reach with the capital, the gas in your tank that will impress investors and people who are going to support you on the next journey to the next milestone? So your next round of funding. So we're obviously always working on very acute specific problems in the business, but we're trying to help the entrepreneurs think you need to keep your head up and say have some attention paid to what's going to be needed to be done in the next 6 to 18 months. Wayne: Yeah. Yeah, I think it's been one of our real struggles, how much to raise if we should and kind of that speed of growth and I think in the THC Market where it's highly regulated, there's this huge black box or concern with what's going to be the future ,or interstate commerce or federal legalization, and how fast should you go and get maybe stuck in a position where potentially your business can't operate in that way, and it's nice to be pivotable but it sounds like these businesses... you're not dealing with that as much so there's probably more room to go faster because the odds of running into something that just completely shuts your business down are much lower. Is that accurate? Patrick: I think for any business, an entrepreneur you're going into a minefield. You got to build the business. It’s not like you're just taking over one that already exists. So again having an ecosystem like a village around you helping you see those mines or those potholes coming up and say hey, watch out for this. Watch out for that. A big part of I think what we're doing here is trying to help entrepreneurs avoid catastrophic failure…. Wayne: Yeah Patrick: … because it can happen any day. So that's a big part and we help with investment documents. I mean the program ends after 16 weeks, but our relationship does not end. I’m helping a company work through relocation of their business to another geography, which is a different tax structure, looking at investment documents for other companies and making sure that there's nothing in there that would again cause catastrophic failure for their business because it's a control term that they didn't understand at the time. So, it's again, it's a big family. We're all working together and I think that in the long run for most entrepreneurs, they really appreciate that. Again it can be a very, very lonely journey as an entrepreneur. Wayne: Yeah. I'd like to go a little deeper on companies that maybe struggle or do fail. I think if you have the capital to burn and you go for super-fast scale or growth, it could potentially be harder to downscale or make that pivot if you become over-invested in certain things. You made that comment of TechStars - do more faster. Have you seen where too fast growth becomes a detriment, or maybe when do companies fail or struggle when they're trying to move too fast, and actually a slower approach may be a better option. Do you see that or do you kind of always feel that faster always equals better? Patrick: That's a great question. As an investor, my bias is towards faster and anyone who understands Venture Capital will understand why that's the answer for Venture capitalists. as an entrepreneur, you want to build something that will eventually have a lot of value and that can take time, and there may be periods where you need to move slower and there's periods where you need to move a lot faster. So everybody has different answers based on what their incentives are, but I think the answer at the end of the day is sometimes you need to move faster. You need to really kick it into gear and sometimes you need to take a pause and slow down a little bit. So, we're understanding of that, and I think if you spoke to our entrepreneurs, the alumni in CanopyBoulder, you'd hear the advice that we give them is if you have the option to move fast, move fast, but if you have to slow down, absolutely do it. Wayne: Yeah. Yeah. Now it makes sense. It's definitely a case by case scenario and it's always a big unknown because you never know the alternative, what would have happened if you did a different way. What kind of CBD companies are you investing in or joining the incubator? Patrick: Yeah. No, we really like CBD brands. We feel there's a lot of opportunity at this point to develop the next Cliff bar, the next Horizon Organic Dairy, the next Lacroix beverage. So we're investing in brands. There's plenty of opportunity. There's not a lot of competition but there's a lot of competition. You know what I mean? We're still in the very early innings. At the same time, there's a lot of inefficiencies in the supply chain for hemp and CBD, and there are brokers running around cutting deals left and right, and it hasn't sort of settled down. So there are opportunities in the supply chain as well to sort of add structure and consistency and reliability, which is another thing we're interested in. Wayne: How important is it for a CBD brand and I kind of always reference back to our business because we're in Oregon right now and we're very focused to inside of the state due to the regulations, but as a brand is growing and scaling, how much do you think about keeping of maybe a more geographical, localized consumer base and really build the brand so it has so much sticking and staying power in that smaller area for long-term sustainability, versus spreading may be too thin and not creating the brand solidification that you need to have those repeat customers where this is a part of their lifestyle and a daily user. I guess we're on scaling a CBD brand. Do you try to find a narrow niche and go heavy, or are you going more for early mover and just speed and spreading it out? Patrick: Well, I think you need to prove your concept, and the best place to do that is where you are, but at the same time at some point, you need to test your brand and your concept and see if it's scales beyond your locality, because there could be a lot of local love. You can have a lot of buzz, but if you can't go into another store elsewhere and see the same turns and velocity, you're not going to scale. you're really not going to scale. So I mean it's important again to establish that brand equity and understand how it impacts your customers, your stakeholders, but you got to test it. You gotta push it. Wayne: Yeah. with raising money, if there's a listener that has a start-up or maybe they've been in business for a little while, we talked about Venture Capital money in it and I haven't raised money in my past experience so I'm really fascinated to learn more about this and we want to kind of understand venture capital is looking for a lot more scale and faster growth, and I know there's other forms of raising money. How do you view the different forms, or what would you recommend for a business or different types of businesses and the different ways that there are to raise money? Patrick: There's so many ways you can bring on capital to help your company grow. You can do priced equity rounds. You can do royalty agreements, debt, convertible debt, saves. The options are almost limitless. Whatever you agree to in a contract is what it is. There are the standard forms though. So what I would encourage entrepreneurs to do is if they don't feel like they are an equal at the table when they're talking to investors, get help. Surround yourself with people that have done it before. A good entrepreneur knows how to ask for help and how to get it in a way that pleases everybody. So don't be afraid to ask for help. Dig in - there's tons of incredible resources online. Actually one of the favorite books around the office here is Venture Deals. It was written by the founders of TechStars. It talks about all the players, what the roles are, how decisions are made and it just sort of guides you through the process of raising capital. At the same time, I was with an entrepreneur and she was trying to understand how an employee stock option pool would impact the equity in your company as she raised capital in multiple rounds. I was just like struggling to find a really simple resource for her. So I hit the Google and looked it up and found a great YouTube video. It was a screen capture narrated video. It was so simple and intuitive. I sent it to her and she was like, I've learned more in the last 10 minutes and 58 seconds watching this video than I've ever been able to absorb in a book. So there's a lot of resources out there online but it's always good to have people to help you navigate those acute questions and issues. Wayne: Yeah. And one thing I hear too is multiple raises, raising the right amount of money. Raising the most possible I don't think is the right approach all the time. There's a fine point there to hit. if we used let's say the Lacroix so maybe it’s a CBD-infused beverage as an example. How would you recommend or think about raising your initial round of capital and then each step forward? Like what questions do you ask or what do you look at to know we should raise this amount of money and not 2x, so that the timing is right and we're not giving up too much of the capital with our equity rather with our current valuation? Patrick: It's a great question and it is one that we work with our entrepreneurs all the time. What's the right amount of money you need to raise? a lot of investors, they're going to want to see you raising enough money to sustain your business for 12 to 18 months, and on average you're going to give up 20% of your company every time. So the existing shareholders - you and your founder and your team - will be diluted by 20% because you're adding shares to the pool. You're not subtracting shares from what you have. You’re adding shares to the total which is going to dilute you down about 20%. So that is the kind of the range that you're going to be expected. It's pretty standard. When you deviate from that, it encourages them, the investors to ask more questions, and some businesses need a lot more capital than others. If you're going to build a brand and you need to do heavy advertising and marketing, you're going to have to raise a lot of money. You want to build a 100 million dollar brand, you're probably going to have to raise 40 million dollars. So now there's companies that have not done that and they have built billion dollar brands, but typically you see those metrics around capital. Wayne: I see. Yeah, those are really good rules of thumb to know and staying on the Lacroix brand as an example, would you, as someone is scaling or going for growth, do you look at co-packing and hiring a distributor as the right route, or do you think of companies building their own infrastructure as a better approach? It's more costly. You have more control. How do you think about that fork in the road? Patrick: You know, I think your newly minted MBAs would scoff at the idea of growing, processing, packaging, marketing, selling and distributing, and there's a lot of good reason to avoid that. I mean it is really hard to do those things really well, all of them. There's only so much time in the day and you've got to be focusing your energy as an entrepreneur where you’re going to have the highest margin revenue coming in. So if there are service providers that will do the distribution for you, you can buy wholesale flower. You can have it co packed or manufacturing. You can just focus on marketing and sales. There’s a lot of research out there; a lot of case studies that indicate that is the best way to grow a brand. Wayne: Okay. Around the CBD market and the Farm Bill coming out legalizing hemp growing and not really having regulations around the CBD-infused products, do you kind of have a pulse on where that might go? I've heard some talk that it may be handed to the FDA and become more of a pharmaceutical model with a really high barrier to entry, or do you think it'll be more of a nutraceutical supplement where you can have these smaller, medium-sized businesses that can still operate inside of the CBD Market? Patrick: Well, that's a great question and it’s history unfolding before us. So the Farm Bill has passed and the Department of Ag has an interest here. It's the Farm Bill. Wayne: Yeah Patrick: But the FDA, remember it's the Food and Drug Administration? So they actually have oversight over drugs, foods, dietary supplements, and a lot of products in between, so it would be natural and it is natural and it is happening right now, that the FDA is collecting comments and trying to have an understanding around hemp and CBD, and develop regulations on the federal level for hemp and CBD. Now, there's going to be a bit of a need for harmonization between the FDA and the USDA’s prerogative’s on CDB and hemp. Right now, the FDA see CBD as a drug and has said you cannot legally add CBD to foods. I think that's going to change. I think that it will eventually look like dietary supplements or organic foods, or as you said, nutraceuticals, so if we're trying to understand what that future looks like, we can look at the regulations that the FDA has implemented around foods, organic foods, dietary supplements and nutraceuticals. So there's a bit of a road map right out in front of us if we just open our eyes, and the rules around dietary supplements have been in place since 1994 so there's not been much change. Now Scott Gottlieb who just recently resigned as FDA commissioner, he was, along with the agency, driving forward a review of those regulations and so there's a lot of good material out there for people to read and understand if they're trying to sort of predict the future. Wayne: Yeah. Yeah. It's a big mystery and I think we'll continue to learn more. It seems to me like there's so much behind…it didn't just roll out. CBD companies are starting up and have been for a while, and to kind of strip that market away and move towards a pharmaceutical model seems like it'd be so difficult to do to kill that momentum, but it's a big unknown right now. Patrick: Well, let's also not get too scared too quick about big drug companies, because if you look at dietary supplements, there's a couple of dietary supplements that exist in the market, and then there are also drugs. So you have fish oils - you can buy fish oil at a grocery store, online, a natural food store, and then there is a fish oil that is a drug called…I think it is called Lovaza and then Lipitor has a natural version called Red Yeast Rice and they coexist. So there's ways for an ingredient or functional ingredients to be a drug and a nutraceutical or dietary supplement. Again, there's a map for us if we just open our eyes and study what's already transpired and the government isn't here to stop foods and drugs from getting on the market. They're there to help foods and drugs get on the market in a safe, compliant way that doesn't harm consumers. So FDA is not the big enemy. The FDA is a partner and I think we should view them as such. Wayne: Yeah. Yeah, I think companies most of the time it seems it’s unknown or there's no communication there and that's just the assumption that's made, versus reaching out, working with them and I think you've seen a lot of that from maybe the black or grey market growers becoming legalized and there's this kind of bottleneck of communication. both sides shut down or stop talking to each other and the assumption is each side of the bad guy and then no progress is made or negative progress. But yeah, I think that's a good point and important to keep in mind. As companies come in, how do you think about building…are companies building with the idea to sell in mind or do you see the other option where companies want to hold on to this business long term? Is there a better approach of one or over the other, because I think for us and as I think about big companies that can really scale and have that distribution infrastructure in place, sometimes it makes sense for a smaller craft company to build something up to a few million dollars in revenue and then maybe hand it off to somebody. Do you think that's normally a good approach, or is there one over the other that the way you think about it? Patrick: Well, there's really two types of businesses. There’s lifestyle businesses and then there's growth businesses. So a lifestyle business is maybe you start your own consulting practice and you grow it, you’re doing really good and you bring on some other folks who are doing the same thing and you make a really great living. it supports three, four people, maybe five, ten people but there's no exit in the future because as a consultant, if you're removed from the business, where's the expertise? Where's the value, right? And then there's businesses that are growth businesses or can be sometimes called venture back businesses, and those are designed to grow in scale and have value outside of the founding team, and those are perfect businesses for acquisition naturally. So your example where you build a business and it’s really solid and it's 3, 4 million dollars. Let's say it's a food business and you're doing really great in small retail shops. You’re selling in food stores, natural food stores and then a big company comes along who has distribution into almost every retail location in the United States. These are the big CPGs, your Kraft, your Heinz, your Diageo. They come along, they look at it, they like you're doing a great job in your little world in your little retail distribution world. The velocity is good. The turns are good. You have good margins or pretty good margins. We're going to take you and put you in 30,000 retail locations in six months and we're going to pay you. we're going to acquire this business and get that done. That's why acquisitions happen in a lot of consumer products Industries because the opportunity to take a successful small business and scale it can be done quicker through an existing distribution network in a marketing engine and advertising engine that it can be done if the entrepreneur continues to have to self-fund or raise capital and do it piece by piece. It's like flipping the switch. Wayne: Right! I like that comparison - the lifestyle expertise, consulting business or having this food product business. Do you think that's almost a necessity or what happens if that food product businesses says, I'm not going to sell right now. I'm only doing 4 million a year in revenue. If they don't sell, is there a really big risk that that big player will go find the next one, mimic it or do something of similar quality and that person that's doing 4 million in revenue now is going to slowly lose market share over time and potentially go out of business because they didn't make that acquisition happen? Patrick: For anybody who's interested in this topic, I'd highly recommend the story of Clif Bar and Gary Erickson. It's called Raising the Bar: Integrity and Passion in Life and Business: The Story of Clif Bar because that's what happened. They were early players in the nutrition bar space. They had a 120 million dollar offer to buy the company and they had two founders and Cliff or Gary Erickson - his father is Cliff- Gary at the closing got cold feet and said he couldn't do it. Yeah, it did make things easier. I mean but they survived because they had a great product. They were already at a level where it was going to be… they had a better product, and there's always room for better and they had a better product in the market. Yeah, he had to take on debt and buy out of his partner because they had a 120 million dollar offer on the table, and that's not a peanuts, and he had to go through some financial engineering to get the company back on firm footing and could have gone away at any point and they were probably days where they thought it would, because everybody realized that somebody was going to offer 120 million dollars to that business not because they like the products, because they knew they are great products and they knew this is a huge market opportunity. It is a business deal. So when they turn down that money, anybody could have come in with a boatload of cash and try to compete with them, and they did and they were some lean years, but they made it through. Wayne: Yeah. Yeah, it sounds like there there's both options on the table. It seems like you hear less examples of that Clif Bar example. It happens, but it sounds more rare. You think that's accurate? Patrick: Yes. Wayne: Yeah. Okay. Well as we kind of wrap up here, I'd love to just ask an open-ended question around the industry, maybe just cannabis in general. What's your biggest concern right now or what keeps you up at night as you think about the Cannabis industry or your businesses through the incubator?

Patrick: What keeps me up at night? What keeps me up at night is making sure that the people coming into the good people coming to the Cannabis industry get the support they need and not the folks who are trying to make a quick buck. And there's plenty of them in there, in the industry right now. I mean, what we're seeing going on in Canada, they're good people but it's financial engineering being done before the businesses are built, and I think there's a lot of… it's hard to pass big money that comes with a lot of hair on it. But I think we all here in the CanopyBoulder community sleep better at night knowing that we're doing things right. We're building solid, strong businesses solving real problems built to last, built to scale and we're not chasing some IPO on the Canadian Stock Exchange just to get liquidity for ourselves and our investors. So I want the industry and I want investors to support real businesses, so that's one thing I'm thinking about all the time. Wayne: Yeah. Yeah, I'd never even heard of the reverse takeover or reverse IPO until all these companies started doing it, and I found that interesting as an approach. Patrick: Well the reason that it's not the typical way to go public is because there can be a lot of problems with it. You're merging with an existing public company shell, and there's owners of that shell and they have different rights. They may have warrants, sometimes you don't know how much. It definitely can be a treacherous thing to do. Wayne: Yeah, let's see if we kind of played off that a little longer. Let's say this is a diabolical shell company and they're buying up 3, 4, 5, 6 cannabis companies that are doing well, have built a good brand and they're paying high value for them. What is the motive or the prerogative, or what could a company look for I guess to see that this maybe isn't the best of intentions in this kind of deal? Patrick: Well with any partnership/merger/acquisition investment, as an entrepreneur, as a founder, you need to have your own team. You need to have your own tax accountants. You need to have your own lawyers. You need to have your own financial advisors, and I think we’ve seen entrepreneurs get taken in these situations when they accept the assistance of the acquirer as the lawyer, as the accountant, as the financial advisor, because everything seems great. We're going to merge, it's going to be great. We're going to have this new world, all the shares in the public company and oh, well, it's also got to make sure that you have the good rights for those shares. You're not locked up and you can't sell them for a long time when the acquirers can sell a different class of shares or shares that have different rights, and they don’t have a lock-up and benefit from the perhaps boosted share price from the announcement of that merger. So I mean if you want to learn more about this stuff, hit up Wikipedia and search on pump and dump schemes. I know a guy who was successful doing an RTO with his company, but it took him 7 years - 7 years - to have the RTO or the shell owners sell all their warrants and all their shares that they already had. So essentially what they did was they suppressed the stock price because anytime he did anything well and the share price went up, they dumped and sold shares which sent the share price down, so there was this yo-yo effect - took him 7 years! So be careful. Wayne: Yeah. I like that advice. The due diligence to have your own team, someone that you can really trust looking at it from all the angles. Yeah. That's good one. Well Patrick, thanks so much for coming on. I want to ask where people can find you if they want to reach out, but I always ask if you're hiring, looking for outside help, or even if you want to talk about the incubator, a potential listener that might have a business or an idea anyone that might want to connect with you out there that you guys might be able to have a relationship with Patrick: Sure. For anyone who wants to learn more about CanopyBoulder, I encourage you go to canopyboulder.com. You can follow me on Twitter @PatrickRea last name spelled Rea and you can follow us on all the social media handles just by searching on CanopyBoulder - one word. We've just closed our largest fund ever. We've oversubscribed even the lofty goal that we set so we have more money, more capital, more resources for entrepreneurs than we've ever had, and the amount of money that we're offering to entrepreneurs to come in and join the program, become a portfolio company is greater than we've ever offered before. So the thing that I want to talk about is finding great entrepreneurs. So speaking to great entrepreneurs is what we want to be doing. So if you are out there listening to this and you have a great idea and you've identified a real problem in the industry, or real gap that you feel like you are qualified to fill, and you're open to taking on investment and getting help and being part of a something larger than just you and your company, I would encourage you to apply. Let us know. Reach out - canopyboulder.com On the home page, there's a link to the application. Let us know and if you check the boxes, we could be in business and working together for a long time to take your idea and your business and make it even better. Wayne: Are you thinking about the THC Market in the future, or will you stay away from that, do you think? Patrick: You know, it's hard to predict what is going to happen in the future. I mean anybody that's been in the Cannabis industry would probably agree. There’s never a dull moment and you need to stay on your toes and that's even a better reason to be part of a larger group, because you have a team of people looking over your shoulder, covering your back and looking on the flanks waiting for the things that will naturally come. So the THC business, I think there's some real challenges around it, specifically IRS code 280e limitations on interstate commerce. It just is hard. It's really hard and it's still in the very early innings. I mean wholesale cultivation prices are still coming down. IRS code 280e is still there. It's still hard to have a bank account. Compliance costs are still very high. Taxes are very high. There's a lot of headwinds. Now that being said, industry is growing at nearly 30 percent annually, so we don't discourage anyone from launching any cannabis business at all. Wayne: Yeah. Patrick, thanks again for coming on. I really appreciate your time and your perspective. I think they'll be some very insightful, useful insights in there for listeners. I definitely learned some new things. So thank you again. I really appreciate it. Patrick: Hey, thanks for asking us to be on your podcast. It was really a lot of fun.

Wayne: All right, that was the episode with Patrick. I hope you learned something new about investing, kind of the perspective they have and take when they look at different businesses and who they want to invest some money towards, and what they look at to think if a company if a company is going to do well and grow into the future. We should have a bonus episode this week. I was on the podcast called UpStar which is really cool focused on company's growing or possibly looking for investment, and so they interviewed me for about an hour talking about cannabis again. I was the first cannabis company they've had on their podcast and so it was again unique perspective to see people from outside the industry. It's definitely investor- focused so I think it ties in nicely to this episode that we just did with Patrick, and then at the end they kind of evaluate what they thought, what they saw or heard, and kind of how they would think about investing in a company or just the Cannabis industry in general. So we'll probably upload that one this week got to reach out to them and get that MP3 file from them. We'll put it on our channel. So look for that one coming and like I mentioned in the intro if you have a few seconds, if you haven't yet, please nominate us for the Best of Portland 2019 for best local podcast. Again, if you just go to Google, search BoP 2019, it should show up as a second result, may be the first, maybe the third click on that, go to the media and entertainment category and then inside of that there'll be best local podcast. You can type in periodic effects, hit enter and it's as simple as that, so that's it for this week. Thank you so much for tuning in again. We'll be back next week like always with another episode on Monday. Until then, having an amazing week, everybody. We’ll talk soon. Thank you.