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This week, Matt Hawkins, founder of Entourage Effect Capital, joins the podcast to discuss the surprising lack of capital in the cannabis industry and what he looks for in a potential partner.
Matt Hawkins is the founder of Entourage Effect Capital. He has spent his entire career in private equity, raising numerous funds in various industries. In 2014, Hawkins was looking for something new.
He noticed that warehouse centers in Denver were looking to refinance their mortgages out of commercial debt and into private debt so they could lease their facilities to legal cannabis growers. The businesses were paying a premium, and Hawkins closed on a couple loans.
Hawkins had a premonition. He thought the yields would soon dry up on the real estate side as the landscape became more competitive, so he turned to underwriting the cannabis assets themselves – which he had done much of his career in other industries. He'd have a "first mover advantage" as capital was hard to come by for startups. He raised his first cannabis fund and made more than 20 investments. It was a great success in a mostly angel investment capacity.
Fund two was a different story. Hawkins raised $75 million, but cannabis companies were maturing. It was more Series A funding and he found EEC maturing alongside the industry.
Now raising money for his third fund, he finds his company providing growth equity for later stage companies. He’s writing much bigger checks for companies looking to scale in advance of federal legalization, which he believes will happen in the next five to seven years. He’s targeted $150 million for the third fund and he's about half of the way home.
Things have changed for Hawkins over the years. In the first couple of years, he was flying under the radar, still fearful of going to jail. From a regulatory standpoint, he knew it would be a big stretch to prosecute him, but it did keep him up at night. The fear has subsided over the years and though he has hit many speed bumps along the way, he says the industry is still evolving rapidly on many levels.
What’s odd is the surprising lack of capital in the industry and what he describes as a lack of real organized capital providers. Cannabis operators are having a hard time raising money and the lack of capital dramatically impacts the industry, stunting growth. While the industry is a different animal, Hawkins says cannabis investing is not for the weak, but remains an incredible opportunity.
When looking for potential partners, ethics, morals and track records matter. Hawkins stresses a need to be above board. Among other red flags, he typically won’t work with companies led by people who have been operating illicitly to try and enter the legal side. What he looks for is previous experience and success inside and outside of cannabis. He adds that a lot of talent is entering the space right now with executives coming over from many other industries.
Hawkins is always looking for new opportunities, and not just plant-touching companies. He’s currently searching for potential partners that are more mature, looking for a later stage investment.
Please make sure to like, subscribe and share the podcast. You could also help us out by giving the podcast a positive review. Finally, to email the podcast or suggest a potential guest, you can reach David Mantey at David @cannabisequipmentnews.com.