Dispatch From a Happy Warrior: Mitch Baruchowitz from Merida Capital Holdings

Merida Capital Holdings Managing Partner Mitch Baruchowitz launched the New York-based private equity firm in 2016 after several years investing in and learning about the cannabis industry. His very first effort, in Connecticut, resulted in a cultivation license, after which he never looked back. Baruchowitz brought 20 years of experience in the legal and finance arenas to the cannabis industry. According to his Crunchbase profile, “He is the former Associate General Counsel and Chief Compliance Officer of publicly traded MarketAxess. He was also the General Counsel of investment banking boutique Pali Capital, which had revenues of nearly $200 million and 200 employees when he was appointed in late 2009 by the Board to lead the restructuring and wind-down of the company. Since 2010, he has led numerous public and private offerings, assisted in the formation and funding of several credit funds and a $60 million REIT while the Head of Investment Banking of ACGM, Inc. and at Cavu Securities.”

Merida itself has completed three fund raises thus far and is in its fourth. Fund 1, established in September 2016, had capital commitments of $14.7 million, assets under management (AUM) of $79.1 million, an internal rate of return (IRR) of 67.9 percent, and a multiple on invested capital (MOIC) of 6.49x, per Merida. Fund II, established in February 2018, has capital commitments of $53.3 million, AUM of $148.5 million, IRR of 54.6 percent, and a MOIC of 3.23x. Fund III, established in March 20189, had capital commitments of $118.3 million, with AUM of $218.9, IRR of 99.9 percent, and a MOIC of 1.93x. The fourth tranche, Fund IV, was underway as of June 2021.

Its portfolio of companies reveals a comprehensive interest in just about every area of the business. Things are always changing, of course, and deals are always in play, but as of March 31, 2022, Merida says it is invested in over 75 companies and manages over $400 million across the four funds and co-investments. In early July, Baruchowitz sat down with CBE to discuss the state of his business as well as the industry overall during a challenging time for the economy as well as the cannabis industry. Baruchowitz was running a little late because he got caught up in a meeting with a Massachusetts cannabis company that he started raving about as soon as he got on the call. “It’s a brand,” he said. “They’re a manufacturer who makes this packaging and these – they look like cigarettes – and they had to create a special machine for it, so I’m digging on the machine because we own a huge operational arm.

“Merida is a firm,” he added, “but we also have like 10 companies that we own the majority of that operate in various states. And I just love what they’re doing, and I would love to bring them to a few other states. I’m always thinking around interesting concepts that I think are sort of idiosyncratic and differentiated. At the end of the day, I’m a passionate innovator-entrepreneur myself, so I just get lost in these things, so I totally lost track.”

That was his apology for being late and the interview had not even really begun. But it did tell me that I was in the presence of a man whose passion precedes and informs him, and whose intellectual curiosity is clearly a mark of his leadership and investment style and strategy.

I replied to him that his interaction with the Massachusetts company was an interesting aspect of this industry, which has many creative people in it and all sorts of verticals that lend themselves to innovation. I noted that the Merida ecosystem in particular almost has every single industry segment covered.

“We’re trying,” said Baruchowitz. “I can tell you what’s not covered. Let’s just say that if you were to say, ‘Where does Mitch think the money is not going to be made, just look at what’s not in the ecosystem.’”

I drew a blank. “Seed-to-sale are not areas that we believe in deeply,” he said. Indeed, there was no track-and-trace company on the list.

“We’re in compliance,” he explained, “but when it comes to point-of-sale, or seed-to-sale or track-and-trace, while we may invest in elements of it, those are platforms, and if we own a point-of-sale, that might limit New Frontier’s opportunities with other point-of-sale. So, we stay away from areas where we think at some point it’s invisible to people and it’s just a platform. We would rather invest in the pieces that fit into those platforms, and also, no one’s really ever made money in a seed-to-sale business.”

So much for seed-to-sale. But before we moved forward in time, I wanted to know about the original Connecticut grow, and how Baruchowitz got interested in the cannabis industry.

“I had a very good friend, a best friend and business partner, who was injured and paralyzed in 2000, and he moved out to Colorado in the early days – ’07, ’08 – when Colorado was still kind of figuring out its medical rules,” he said. “He wanted to establish residency so that he could do his own production because he really wanted to explore the medical side and could see that it was exploding. But in 2011, he got one of those letters from the government saying he was however many feet to close to a school and had to move. At that time, Connecticut announced it was going to give out more licenses, and I said to him, ‘If you can find the team that would move east, with my public company, legal background, and the fact that I’ve been helping you for the last two or three years, we really know a lot about the space, and I think I could create an effort that would lead to getting a license.’ And so, I did start it, and as a founder, I built it, raised all the money, built the operating plan, and wrote the application, which was roughly 2000 pages and a seven-month effort.

“Then, right after we won that license, we started getting emails from virtually everywhere where the laws might have been changing,” he added. “In Minnesota, which announced they were going to give out two licenses, so we applied there with a local family. We understood what regulators and what a state wanted to see, and the reason we liked limited-licensing a little more was because we had an institutional background, and we really thought that the patients deserved capital spending and clean, safe, powerful medicine, and you can only get to that through spending money. You can’t fake your way to building that medicine, especially back then when you really needed money because everything was a search. We had to look online for everything we were trying to do, for vape carts that didn’t have leached metals in them. But I started on [the cultivation] side because that was the only thing available. Around that time, I also won a license in Nevada, so by early-2015, I was like, ‘Okay, I have three licenses, there’s three applications pending, and there’s a lot of infrastructure that needs to get built. We’re spending a lot of money on the ground, and there’s no infrastructure in this space, and that’s when I started to really explore what it would be like to create a vehicle that could invest in those huge gaps in the space, and that’s how Merida was born.”

As he was talking about coming online in Connecticut, Minnesota, and Nevada, I wondered what his preferred route into the industry would be if he were getting in today. ‘That’s an amazing question,” he said after a pause. “I never really thought about it. Well, actually, I’m going to give you a thought that is just air. My thought is every time Merida launches a new fund, in theory I am entering the market for the first time. Now, you would say, Mitch, you can’t turn off your brain; you can’t turn off what you learn. Right, but you are learning enough every year that you do have a reorientation of the strategy. For instance, Fund Two. It just so happened that there weren’t a lot of states going online, so Fund Two is very light on state-based operations, whereas Fund Three is very heavy on state-based operations, because there happened to be a fair number of processes happening at that time. So, vintage does matter.

“One of the things I love most about cannabis as an industry is that I get to use the full monopoly of my entrepreneurial background; my innovation background,” he added. “When I used to write patents for startups, my legal background, my writing background, everything I have been able to do and learn in my life I get to use every day. And for that reason, I am the happiest warrior you will find on the investment side in cannabis.”

He had used that term in an interview, and it stuck with me. I asked if he was encountering a lot of other happy warriors these days, because in California, for instance, there did not seem to be a lot of happy warriors right now. They might be determined, they might just as passionate as ever, but happiness may not be the operative word.

“Again, amazing question,” replied Baruchowitz. “I think it helps that you read some of the stuff because I feel consistent, but every article has a different angle, and when I use that term, happy warrior, it really does describe a personality trait. I mean, obviously everyone in the space is happier when stocks are going up and there’s free capital, and it feels like anything’s possible, but even in those times, there were plenty of unhappy warriors who were unhappy that they weren’t making more than this guy, or whatever. It is a personality trait, and I tend to both hire and invest in companies that have happy warriors at the helm. When you look at the personality of a Graham Farrar (Glass House Farms), who might be struggling to effectuate his best business at Glass House, but he’s a happy warrior. I know him very well. I love Graham, and I tend to invest in companies where that trait is present.

“I just had a conversation with my partner this morning, and it’s like, the Merida team is happy because we’re happy people, and happy people tend to tackle challenges with more vigor, with more collaboration, with more open mindedness,” he added. “They tend to see the opportunities even in struggle. It is a personality trait that I greatly value in a space that has a tremendous amount of friction, and remember, the old days had a lot of internecine warfare. I always thought that people with a better, more joyous perspective on life would be better employees, better partners, and wouldn’t let small things deter them or let them go negative. Because there’s plenty of companies where the minute things go bad, someone goes, ‘This is my little fiefdom and it’s doing good, and it’s too bad that your little fiefdom is doing terrible, but my part of the company is doing great so why am I carrying your load?’ And then there are people who are like, ‘What can I do to help you do better in your job?’ And when you think of it, it’s really a mindset more than the itinerant aren’t happy because things are going well.”

I asked if that mindset is also one that will allow a company to pivot if necessary, but Baruchowitz had more to say on the current subject. “I’m going to just close the loop on the happiness thing, because I really do feel like it’s an important element of Merida, and of our corporate mindset and temperament,” he said. “As I said before, I think happy might be the wrong word. It’s positive, and not dime store positivity, like, ‘Hey, I read something interesting today, and let’s repeat the mantra.’ I’m talking about a deep sense of satisfaction with what you can achieve on a daily basis, and an acceptance of the flaws and failures that are going to naturally occur. Do you know what a prerequisite of success is? Failure.

“So, when you think about pivoting,” he added, segueing into the new subject, “there are two ways to look at it. Pivoting can be, ‘I can succeed in achieving X, and I therefore need this to survive or compete, I have an open-minded approach, and I am reorienting my thinking to create the best company that still achieves my intentions.’ And I do think that mindset allows for what is critical in cannabis, which is being flexible and extremely open-minded in the feedback you’re getting from the market instead of trying to convince the customer that you’re right and they’re wrong, and being open to the opportunities to use your learning, and maybe it’s a different thrust.

“But I don’t know if reinventing is the right word,” he continued. “I think it’s being responsive to the facts. People often say, ‘Why did you change your mind on that company?’ They changed, and why shouldn’t we change our minds when facts change and when reality changes on the ground? There’s a negative word you can use to describe that, which is flip-flopping, but it’s not flip-flopping if your core ethos stays the same. But if the affectation and implementation of that ethos is through a different strategy or a different methodology, how is that flip-flopping? No, you’re changing based on external facts, and I think cannabis companies have to do that on a daily basis to survive.”

Fun with Funds

Moving to Merida’s investment strategy over the years, I asked Baruchowitz about Fund Two (2018), which appears to contain more ancillary companies, and asked if that was because of timing. “Yes,” he said. “Both Fund One and Fund Two had some state-based operations, but not where Merida was necessarily a majority owner of those state-based operations, whereas Merida does have a pretty significant operating arm at this point, from the end of Fund Two into Fund Three. I’m sure you’re aware of the Virginia sale to GTI, the sale of Laurel Harvest to Cresco, the merging of 315cannabis into SKYMINT. Fund One and Fund Two may have exposure to those companies, but those companies were largely driven by a late-Fund Two, early-Fund Three strategy, and that’s just a vintage thing.

“Now you have adult use coming in New York, New Jersey, Connecticut, so there’s a lot more chances for our operating arm to put meat on the bone,” he added. “That’s not pivoting per se. Remember, if you go back far enough, I’m the original operating person. In some ways, me and my confederacy of partners were the first MSO. By the way. I’m not in any way defensive of the pivot term, but some people are often surprised at how big Merida’s operating arm is. They’re like, ‘Is that consistent with what Merida does?’ And I say, ‘Sure, it’s consistent.’ A lot of people think of a fund and think of the person’s background as being primarily in finance, which is what I do. But when people ask me to distill what I do into a few lines, I build companies. That’s what we do. So yes, Fund Two has a lot of ancillaries, but every fund has a lot of ancillary, because the good thing about state-based operations is that other than the capex – which, if you’re fairly sophisticated you have access to debt capital – you don’t have to dump a tremendous amount of capex into these state-based operations, so they’re not eating up a lot of the capital we’re using. They can be capital intensive at times, but for the most part a lot of the raw capital we deploy is going to ancillaries even if the final ownership when you look at what generates value is equal.”

The Merida portfolio also has brands, and I noted that a lot of the brands are now moving from state to state as essentially IP plays, entering into partnerships but not necessarily investing in their own capex in those states, and asked what he thinks of that model.

“We are an investor in 1906, and they have a very unique way” he said. “They have a mobile lab, and so they have local partners that have the licenses, but they want to control the manufacturing process. Do I like it? I’m not sure my personal predilection matters, but what I would say is that for some companies it makes absolute sense. One thing that you worry about is resources, and I think companies underestimate how much resource has to go to supporting their brands locally. It’s not just slapping them on a shelf. You might not get the sales you want if you’re not supporting your brand, and so you now have a small brand company that needs a rotating infrastructure to make sure that there’s a consistent effort across the states they’re in. Sometimes I look at it a little bit as vanity. I’m not sure it’s the biggest moneymaker, but I do think it’s appropriate and a valuable thing.

“Obviously, Cookies has done an amazing job, and there are some other brands,” he added. “We’re not invested in Cookies, but I can admire something from the outside. I think there are several other brands, like Cann, that also do a great job. I think that in cannabis, there are a lot of different ways to success, and I think that in certain places that model makes 100 percent sense. One of the things I would get concerned about is if someone is like, ‘We want to do the same thing in terms of launching in all these states.’ And you ask them, ‘Well, how much are you going to allocate each day to make sure you can support or have a consistent business?’ Because the one thing you don’t want is to launch and then have the effort peter out, which is what a lot of brands see. They’ll have a big bang, and then it kind of tailors off without the support or the retail relationships, and then what happens is that their partners also contract manufacturing for other brands, and you lose that.

“So, that’s one area where I’m interested in a company like Petalfast that we invested in, where they handle the brand development for local California brands and help with the dispensary,” he continued. “I think Petalfast is going to be a big success across multiple states, because you’re going to see the same complexity and problems as more states get more efficient and you have a lot of wholesale product available, and people are looking for diversity on the shelves, and brands are like, ‘Without having a massive sales stack, which is huge overhead, how do I get on the shelves and get the feedback from the shelves in the right way so that I can make sure that I’m being responsive and can continue elevating my brand?’ I like the ancillary plays that have brand development as a model itself, so we invest in ancillary based on the feedback that we see in the portfolio and also just observing other companies.”

A few cultivators also are in the portfolio. I queried Baruchowitz about Canndescent, which thus far has remained California-based but which has tremendous potential in other states, and asked him when he thinks a brand should make the leap.

“One thing that we try to do holistically when we’re assessing what we’re going to add to the portfolio is not just will we have a good return on the capital deployed, but what is the intellectual return,” he replied. “And so oftentimes, we invest in companies that we think we can learn a lot from. You know what they say, it’s like being long-term greedy. Understanding the potential value of a topflight outdoor brand like Henry’s Original, which also has a manufacturing excellence that is well-respected – the way they cure, the packaging, the authentic brand. In my opinion, Canndescent makes just incredible flower, and also the way they segregate the five effects – calm, cruise, create, connect, and charge – which I like, and when they were doing that they were really the only ones. I know a lot of people have copied it in different ways, but that’s fine, and I respect those companies as well that do those graduations. I found that Canndescent makes a great product, and it wasn’t just about the packaging, but the actual underlying product. When you open up the jar and consume it, the product is amazing in all respects, but the amount we can learn from what Canndescent has been through, the amount we’ve learned from Henry’s on manufacturing excellence, and the real topflight leadership of Jamie [Warm] and Josh [Keats]. Oftentimes, we’re making down payments on stewardship and knowledge and learning, and we just felt like those were two good companies that we could invest in, learn a tremendous amount, and make a great return on our capital, but also really accelerate our knowledge.

“I hope it comes across in our materials,” he added, “that we are extremely intellectually curious. There’s an intellectual rigor amongst the team at Merida that I think is unmatched in the industry because of the way we challenge each other, and also because when you get a bigger portfolio, you’re interacting with a topflight executive 10 times a day. The amount of feedback, the level of discourse, really does help us accelerate our own knowledge and helps us plan for the future. Those two companies (Canndescent and Henry’s) are far different, and then you have our investment in Indus, which became Lowell Farms, and we have a lot of faith in George [Allen] as well. It’s a different kind of company. But manufacturing excellence, brand excellence, authenticity – there are some common themes – but you have to look a little deeper into what each company does from an excellence perspective to understand the full spectrum and continuum of our investment.”

Does Merida have input and influence on the destiny of these companies, where they’re going and what they’re going to do? “I’d like to think that any investor does, not just Merida,” said Baruchowitz. “I do think that at times Merida can have a deep impact on a company’s thoughts because we’re well respected with making good judgment, but I also think that we’ve learned a lot and we try to deliver that knowledge in a way that helps companies make the best decisions. Remember, in early cannabis, every CEO is the smartest guy that’s ever lived since the beginning of time. I often think of when Mark Anthony is talking about how he’s not going to talk about Caesar, but he’s going to talk about the guys who killed him, but it’s a backhanded way of slamming them. That was cannabis forever. ‘Oh, I’m not going to say anything bad about that brand other than they really suck.’ That was circa 2014, but nowadays what we try to do when we’re influencing companies is to think open-minded and partnership-minded, and positivity minded in how they look at other brands and positioning. If we make a respectful suggestion, I think it’s very hard for somebody to think, ‘Oh, these money guys don’t know anything.’”

Do they also present opportunities? “A thousand percent,” he said. “And in fact, in two weeks we are hosting what we hope to be a senior executive from every portfolio company if they’re coming in New York, for networking and some intellectual programming for the entire day to make sure that the companies in our portfolio have a deeper connection to each other to facilitate that, because, as we all know, one of the biggest value destroyers in the space is the friction it takes to achieving that, so we’re very proactive in facilitating that.” That meeting took place by the time this article will publish.

I asked Baruchowitz if it is a part of Merida’s job to manifest the idea with these companies that all of the industry categories and elements work together. “I spend a fair amount of my day strategically manifesting that,” he said. “I would say that we are respectfully aggressive in making sure companies are in the ecosystem and not just connect to each other but know each other, because that creates more potential opportunity. You can say to someone, ‘Hey, here’s John. He runs this company, and they do this.’ But people are busy and they’re in the flow of their own day. What we try to do is tell a CEO or senior executive, ‘Give us someone who has some time to connect with this company so that we can get to a deeper place.’ And I would like to think that the proactivity with which we do it, and the intellectual rigor we bring to it, is something that if it’s matched, it’s not matched by a lot of people in the space.”

Are the state-by-state compliance and regulatory requirements not a challenge to that goal of unanimity? “You bring them all together, and you have some intellectual programming on areas where you think there’s overlap,” he said. “But most important, when we connect companies, we try to have a call to action, so that those companies have a reason to stay connected and to keep rubbing on each other. Because the more they rub together, the more they can figure things out. And these are not just talking points I’m rolling out for you. We have a deep commitment to making that happen, and in fact, you can go back to 2017, when we did a connectivity at the Sunset Marquis in LA that had 150 operators and investors. You can look back and see in my writing, in my Twitter, in all those things we’ve done, a deep commitment to this over time that is now manifesting itself in more powerful ways.”

To IP or Not to IP

Merida’s portfolio contains a couple of companies that have intellectual property as one of their main component. Does that mean Merida has its own IP portfolio as well? “No,” said Baruchowitz. “I am by the way a former attorney who’s done a fair amount of work in protecting intellectual property, and I’ve done a few presentations in front of the USPTO in my life supporting patents when I was at a very large public company with a very big patent portfolio. So, our approach to IP is two things. Number one; don’t over-index importance to patents now, whether it’s filings or otherwise, because in an emerging space that still has a federal illegality component, it’s unclear what the future of IP is. I’m talking more like brand IP, but let’s call it brand equity, because I think people mistake IP for brand equity. Now, obviously a company like SoRSE that does beverage technology, we get that. Phylos, Rev Genomics, those are real intellectual property as opposed to brand. So, the way we look at it is we tell people, you have to be able to operate your business with no IP defensiveness right now. Assume there is no defensiveness. Now, you should go through every reasonable step to be a responsible corporate steward who protects shareholder equity through protecting them, but at the same time if you’re just having patents without a functioning business model, that doesn’t seem like a very good way to run your business.”

Do you see that occurring? “There have been companies that have come to us and talked about their IP for 45 minutes, and then at the end are shocked that won’t invest because they’ve over-indexed,” he said. “I mean, if you ask around about our reputation, I think we’re a tough check. We are going to be very direct and very straightforward and very honest and transparent about the potential of a company and its brand equity and its IP. When people come with a very distinct approach to IP, I get concerned that they’re over-playing the IP because their business model is not ripe at this moment. It’s very hard in cannabis if someone says they’re developing this IP and it’s going to be so valuable in two years, because we always caution companies to not build bridges to islands if you don’t know the inhabitants of the island, or if there are any inhabitants there at all. Don’t spend a billion dollars building a bridge to a small island in Micronesia unless you know that there’s a natural need for that bridge. That an expanded allegory that I hope we don’t run with, but the point is that you’ll run out of money before your business takes off. Sometimes businesses are just too early. There is going to be IP in the space. There is going to be defensible intellectual property. I just tell people not to go broke over-indexing into it.”

Doesn’t everyone need to be more efficient in the current economic environment? Are you telling clients to focus on their business and their brands? “Definitely a combination of that, but I think it’s hard to generalize what I’m saying to any individual company, because each conversation is definitely unique,” said Baruchowitz. “To answer your question on a broad basis, what we are generally saying to companies right now specifically is you have to run a business that works. And that may change over time as your IP ripens, but just showing up with IP or patent-related, you’re going to have a rough ride in this space where there’s so much innovation, and a lot of people don’t understand IP, where you can make one change to an existing defensible technology and all of a sudden you have what’s called the novel step that allows you to do what you’re doing. And also, there’s been a trend over the last 20 years of patent defensibility declining anyway. I think the courts have been much less likely to uphold patents in the general intellectual property market, if you think about people sitting on patents. So, that has been a change in the world, and Merida has a broad perspective on the world because we have a lot of professionals with broad historical backgrounds in finance, legal, and marketing. One of our operating partners, Tom Harrison, was the chairman of Omnicom. He knows a lot about trademark and intellectual property and brand development. But we are cautioning companies to not be a one trick IP pony, because that is a good way to be out of business in a year.”

In Search of Revenue

I wanted to talk about revenue, a taboo subject for many. I really wanted to know how many of the companies in Merida’s portfolio are profitable, but no one ever uses the P word anymore. In lieu of that, I asked Baruchowitz how many companies will go under or will have to sell before the future arrives, and what are the catalysts that will be necessary to save these companies?

“I think it’s interesting what you just said, because you clearly have done your work on me,” he said. “I use a bifurcated phrase when someone asks me to give them a general sense of our strategy. I talk about the future that will arrive versus the future that will be built. So, the future that will arrive is when we describe the MSO model, which is large-scale production, dispensing, distribution. We all know that the $100 billion or so of current consumption that’s illegal will be legal at some point. That’s the future that will arrive. It’s inevitable, and everyone knows it. We don’t know the timing of it, but it’s going to come. The future that will be built is what are the models, what are the companies, what are the innovations that are going to come in the next three, four, five years that both accelerate the future that will arrive and also change it, shape it, reoriented it.

“And so, the future that will arrive is going to arrive,” he continued. “As far as who survives to get there, I think that’s one type of company. The company that will survive are companies that are built to be profitable. They may not be profitable now, but they’re built to be profitable. The way they do SG&A, the way they think about governance, the way they think about expanding, the way they think about new opportunities; they’re thinking of their company as a profitable company, and the only reason they’re not profitable today is because they’re in hyper-growth mode and they have access to capital. That doesn’t describe more than maybe 10 or 15 percent of companies, but if you said to virtually every MSO in the first or second year, ‘I need you to run profitably,’ they could cut costs and pull back on capex and everything to run profitably. I’m not saying that about every company, but I would say that of the top 20 largest MSOs, or just companies in the space, that probably describes 16 of them.

“I’m very focused on can a company become profitable,” he added. “If you say to me, ‘Yeah, I can be profitable, and here’s what I have to sacrifice,’ a lot of companies don’t even understand that; it’s a different discussion. ‘Can you run profitably?’ ‘No, I’m going to lose money this way no matter what for three years.’ I tend to be a lot more skeptical of those companies. I’m worried if the future will be built. That’s that bridge concept. Are you building a bridge to a future that may not arrive? And that in my opinion is a different animal.

“So, what I would say is about 20 percent of the Merida portfolio either runs at or close to profit, or they could run at a net income, let’s use that instead of EBITDA. They could run where they’re making money every month, so that’s about 20 percent of our portfolio. Another 20 percent is very close to that, but they’re in a growth mode where in order for them to capture enough of the revenue curve that they think they can achieve, they have to spend this way; they’re kind of on a monorail. Everything is in place, the friction isn’t really there, and now it’s about execution and implementation. Then you have a bunch of companies in the middle range; they’re early enough where you can see their way to profitability, but there’s definitely going to be some guidance, there’s going to be some guardrails, and there’s going to be some stewardship, and we’re going to be heavily involved in shaping that future. Maybe it’s giving them enough biz-development support so that they don’t have to spend money on that marketing budget. One of the reasons why companies are so eager to talk to us about investment is because we can reduce their budgets, we can speed them to profitability through that ecosystem development, which if you believe the sincerity of my words, we are hyper-aware of. I mean, we really believe in the ecosystem. Not only that, but seven dinners over the years! This thing we’re doing in July, we are very aware of our ability to bend the curve of someone’s profitability or their stability.

“Then you have 20 to 30 percent of the companies that are doing something on the bleeding edge,” he added. “And it’s interesting what they’re doing; they have a market niche, or they have a big potential market, and we’re along for that ride. We bought the ticket, we’re supporting that company, developing that company, and it’s about more of the future that will be built. If you’re successful in those companies, those 20 or 30 percent that have a lot of stress, you’re going to make massive returns. Think of a New Frontier, which, if they’re able to monetize the data that they’ve collected – they have a medical card division that is issuing cards, and it’s very stable, so they’re able to take that medical data and turn it into actionable insights, and also continue expanding their presence in the medical markets and use that as the clinical research source to open up – then you have huge winners.

“So, I think a good portfolio is one constructed of companies that are close to or near profit,” he reiterated. “It should be companies that easily see their way to profit but really need to grow a certain way before they do that. And then you have a bunch of companies that are doing fine; they have a lot of challenges; there’s a lot of fragmentation and they’re working through it, and they have a good partner in Merida and maybe other funds. And then you have 20 or 30 percent where they’re doing something on the bleeding edge and profitability isn’t the first consideration, but it’s not not a consideration. We always say to companies, ‘Don’t tell us about how you exit; tell us how you make a profit.’ But you can see the opportunity in the addressable market, and you can see how big it can be if they hit some of the sweet spot of the business they’re doing.

“However, if you’re doing a portfolio like that, sometimes you’re stuffing the shotgun full of birdshot and you’re standing one-inch from the target, and sometimes you’re shooting from five-feet away,” he concluded. “We try not to invest in the sniper shot from eight blocks out. That’s not really us. We don’t think we’re built that way. That’s like a point-of-sale. You have to nail it, and you have to be willing to spend a ton of money, and you have to be willing to risk a lot more than we’re willing to risk for those companies to pay off. I think we’re better built with companies that have a more definable path, that we can put them in the ecosystem, and then help them develop more quickly.”

Creating the Future Together

When Merida brings all these people together in the one room, does it lay out a future that you envision and how everyone in their particular sector will get there, or do you tell them we need to envision and build this future together and that’s what they are here to do?

“Oh, we’re very much a… let’s call it a nonhierarchical-thinking company,” said Baruchowitz. “We may lay out what we think the vision is, but we think that everyone should internalize that. When we articulate a vision of the future that we think is going to occur, we articulate it so that when companies interact with us they understand exactly how we think. We do that so that we can get to a more germane and productive place quicker rather than feeling each other out on what we think about the world. So, when we get into a room, we’re expecting those companies to give us the feedback and to help deliver a portion of that vision in that shared collective. But one of the reasons we externalize so many thoughts and so much content, is because clearly Merida has its own vision even though we’re investors. It might have some plasticity to it, but our vision of where we think the sector is going is fairly clear, and I hope you agree, fairly well-articulated in a lot of content. We think that gives companies the ability to put their own twist on it, and give us what that twist is, and that allows us to get to a deeper and more productive and intellectually rigorous place much quicker.”

I referenced an article that Baruchowitz was focusing on regions rather than companies, but he said there was no geographic connotation. ‘I meant regions as a metaphorical phrase. What I meant was regions of the industry. Medical is a region, and then you start to look for companies that have an articulated business model that we think fits. What I meant by that is, we don’t say, ‘Oh, my God, this a great company.’ I mean, we say that at times, but we’ll say, ‘We believe that we should be invested in a company that has manufacturing and production and curing and supply chain excellence in California.” We don’t know who that is yet, but then we met this company called Henry’s. So that allows me to articulate something that then creates a gravity so that those companies also come to us so that we’re not always just looking. I don’t want to be in the dark with a flashlight. I want a spotlight. Think about it; you’re not always going to find the right company with a flashlight. We need a bigger beam, and by articulating these things externally in the media, we help shape the people who also approach us. So, I meant that more like, we’ll think of areas of the industry that we think are must-invest, and then we start to work on companies that we think would fit that specific area or addressable market.”

I noted a map in the Merida deck that contained all of the Merida-led operations, all of which were centered in the eastern part of the country. “That is where we directly or through significant ownership have production, cultivation, manufacturing, or dispensary operation,” said Baruchowitz. “I think that’s one of the unique things about us as a fund. We have this operating vertical where we are the operator through a local partnership, or where we’re partnered with that operation through significant ownership, or we brought some of the genetics to the opportunity. So, our ancillary portfolio touches everything from every state. I think at one point we estimated that three to four percent of all sales touched a Merida portfolio company, and that was four years ago. We may be at a higher percentage when you factor in Leafly and other components of our portfolio. We’re touching everything, but if you’re going to operate, you’re obviously going to operate in the newer markets. There’s not much for us in Colorado, Washington, Oklahoma. Those high-volume markets are built for passionate local operators or for MSOs.”

Is this an evolution on Merida’s part that it wants to be an operator? “I’ll go back and maybe flip that question around,” said Baruchowitz. “Didn’t you start by saying it’s interesting that I started doing the thing you’re asking is an evolution?

Indeed, I did. “Is it an evolution,” Baruchowitz asked himself. “My first two licenses were in the most restrictive markets in the country, so think about the knowledge you get from those regulators, from the rules, from all of that rigor from a state like Maryland when you’re early on, and there’s a lawsuit and GTI is fighting for their license, and the rules are still being developed. When you factor in the knowledge you get, shouldn’t, as a good steward of capital, be looking at places where our knowledge is virtually unmatched? So, it’s not an evolution. I think it has something more to do with the vintage of time. I think a lot of states are going live. My co-founder at Merida, Kevin Gibbs, has built I don’t know how many facilities at this point, so we’re very good at it. And it doesn’t distract from the core investment element, so I think if anything we should be celebrated for being able to build a bifurcated model that allows us to engage in state-level development while still being what has got to be thought of as one of the top analytical investment shops in the space as well.”

Who could argue with that? Still, is investor fatigue a real thing, and if so is it an issue for the industry? “Oh, my God,” exclaimed Baruchowitz. “Yes, it is. We have a huge investor base, and we have a supportive investor base, and we’ve been able to continue pressing ahead. But I think if you generally look at some of the more itinerant investors in the space, there are a lot of funds that got stuck when they raised a fund, they raised a second fund, and then number three was almost impossible because of the timing. So, investor fatigue is a real thing. We’re suffering from it just like everyone else is. Luckily, Merida is big enough and has a diverse enough thrust and a diverse enough base of investors and opportunity that we’ve been able to continue having some wind in our sails.

“But the destruction of the public markets definitely affects people’s mindset and also fatigue around the hoops you have to jump through because of federal illegality,” he added. “I can’t tell you how many times someone goes to wire and still gets blocked from wiring, or they may lose a banking relationship because they invested, or their asset manager doesn’t know custody, so there is there’s still a lot of friction, and that does create fatigue. In a world where there are a lot of risks and you can take risk in 50 different areas, why risk money in an area where you can’t even put the stocks in your account? And interestingly, the more complex or more difficult it’s gotten with cannabis stock, the more we’ve gotten some interest, because people are saying, ‘You know what, I don’t have to have custody of an LP interest in a fund.’ So, it’s been an interesting dynamic. At times, you’ll see a surge in interest because the agents at the custodial trusts have made it so difficult for people to invest in public companies, and some people are like, ‘Okay, I’ll just write a check to Merida and then I don’t have to deal with it.’

“So, back to the beginning of your question, investor fatigue is real, it’s significant, and that’s why I surround myself with people who find joy not just in what they’re doing, but in the challenges that we’re seeing, because the end trajectory is a lot different in that mindset instead of having people who just get discouraged and are negative,” he added. “It’s not like positivity can make unicorns fly in the air, but which would you rather deal with, someone who says, ‘These are the ten challenges, and this is how we have to approach it,’ or someone who is like, ‘These are the challenges, and you know what, we’re going to get crushed, and we might as well all turtle up.’ I think having the right mindset can help develop the right result at this period of cannabis because it’s easy to be defeatist right now. It is a dark period in the cannabis space, there’s no doubt about that.”

A Violence and a Velocity

On a lighter note, I asked Baruchowitz if he agreed with Tripp Keber, who waxed optimistic on a recent webinar, saying, in effect, “What we are hearing or being given the impression is that if and when safe banking hits, and I will acknowledge that we have been waiting a long time for this, that there are literally billions and billions and billions of dollars sitting on the sidelines that have not been able to jump in. And that will be transformative for the industry and will probably give big swift kick to the economy’s rear end.”

“Well, first and foremost, Tripp’s been in the space for a long time, so when someone who’s watched five or six high-amplitude cycles come and go, it’s worth noting what they say,” said Baruchowitz. “I do agree with that. I think the way I would maybe twist it a little bit is, there is a tremendous amount of disruption that a fully legal cannabis industry can have on a lot of industries, and I think the rapid growth – because of the obviousness of the transition from illegal to legal markets – is clear. I believe that more than the specifics of SAFE banking – which will have a big impact and it should pass because no one should be injured because people think cash is on-hand at a dispensary – it’s more about the directionality of what it says about the future. So, it’s about what the passage of SAFE banking or some other federal regulatory action would say to people who have been waiting for exposure to a disruptive agricultural, medicinal, or pharmaceutical sector, whatever it might be.

“That disruption creates in people a very aspirational belief in the future of the economic output from the industry,” added Baruchowitz, “and I think people are going to want exposure to that. And so yes, I agree that anything that directionally says the federal government is finally getting around to dealing with this is going to have an incredibly profound effect on stock prices, on how people think of companies. Now, a lot of companies have already run on the rocks, and I’m not sure if they’re savable regardless of what happens. And there are going to be some crappy companies that get saved by federal action, and there’ll be money just like there was before that goes into some of the wrong companies. However, we truly believe at Merida that the right companies that are well positioned and well run and have really strong business models that they’ve been executing on, will see such an immense amount of tailwind that, yes, once that changes there will be no looking back. There could be other challenges in the future, but there will be a velocity and violence to the movement of public securities and other institutional friction that I think it’s going to be profound. And I think that’s the way to describe it, a velocity and violence to the change that happens from that federal directionality.”

And it’ll be to the benefit of the public markets as well as private equity and each sector? “Yeah, certainly,” he said, “and that could sound like rampant optimism, but it’s not optimism as much as it’s just an acknowledgement that there are certain things that happen that have paradigmatic shifts, and I think the uniqueness of cannabis as the most widely used illegal substance in the world by orders of magnitude, by double-digit orders of magnitude, says no one knows. I can’t tell you the specifics of where that violence and velocity land. What I can say is there will be a violence and a velocity, and I try to invest in companies that I think are built for the tidal wave as opposed to companies running business models where the wave might be too big or too late. So, you’re always trying to invest in companies with a little eye to, what does it look like in the future when things are a little bit less fragmented, with a lot less legal friction? We actively think about this, and we agree with Tripp. We think that a good investor at this point has peripheral vision on not just what’s going to happen, but what the future looks like after these potential happenings happen.”

Until that catalyst happens, credit is still tight for people. So, does that mean that the terms are so advantageous for Merida that no matter what happens, it is going to be okay. “If you’re saying we’re getting great investment terms, in some way we are entering at levels that have more risk protection than past vintages,” said Baruchowitz. “So, I think that’s actually true in one respect, because everyone acknowledges that in this world, hope is not a strategy. You can hope that things change, but we have to prepare for the reality. So, with many of the companies that we’re investing in or otherwise right now, we’re saying to them, ‘Be very judicious and conservative with your cash.’ Like I said, have some peripheral vision for the change that may come right, but let’s have our clear-eyed focus on what needs to be done. They say survival is a necessary prerequisite for success, and right now, there is a very strong message from us coming: run your business in a way that is survivable for 18 months in this fragmented landscape but have some peripheral vision on what changes could happen.”

Do you think there will be a recession, and if so, how will that impact the industry? “I do think it’s interesting that this is really the first significant bump in the economy since 2018,” he said. “So, the economy, even with COVID, has been pretty stable since 2018, and even before that you had a very strong market because it was coming out of the end of the global financial crisis. So, it is unique in this world right now and this is probably the toughest economy, but it’s hard to predict, because it used to be that cannabis was going to go through cycles, but the economy was strong. Now you have potential downstream acquirers and everyone in the tobacco or alcohol business is under a lot of stress. I actually think it’s good for the cannabis industry, because people are going to be looking for growth and certainty, and even if cannabis companies don’t have federal legal certainty, there is a lot of certainty to their future sales. I mean, when they change the laws, you know there’s going to be consumption, so the certainty of cannabis is growth. It might be lumpy and challenging at times, but I think people pretty much can look at the future, and we know that cannabis in a federally legal world is going to have a lot of legal growth over the next 5-6-7 years.

“I don’t think anyone disagrees with that,” he continued, “and I think when someone like a large fund that’s exposed to alcohol or pharmaceutical is looking at growth rates in those respective verticals at much lower rates, they might say to themselves, it’s worth deploying into cannabis in an aggressive way because that’s where the growth is. So, I think over the next two, three years, even in a recession, cannabis can be a flight to quality investment. But this is unique. It’s not just that we’re federally illegal and the economy is bonkers, and cannabis is going to go up and down. We’re now looking at sequential systemic stress, so I try not to predict those things so much. I try to be prepared. I tell our team, let’s just make sure that our peripheral vision is a little wider and that we’re not just focused on these little niche things. Let’s make sure we’re looking at the whole ecosystem.”

What about M&A activity in the near future? “I think you’re going to have two types of M&A,” said Baruchowitz. “You have defensive M&A, that’s survivability, and then you have corporate buying. Time may be an enemy of deals, but time is a friend of the operating company. Buying time, especially in a very dangerous world investment-wise. But there are two other things I would put out there with respect to the broader economy. I do believe consolidation will happen, and I think the hyper-local supply chain of cannabis is a big benefit to a world that’s going more local. I think a lot of people want to onshore manufacturing, so the fact that some supply chain accounts can be like 20 miles for the whole business, I think that’s interesting. I think it’s a homegrown industry that has a lot of potential. There’s a lot of virtue to cannabis in this world that we’re just not able to access simply because it’s a bloody landscape right now. But I think, like I said, that time is going to be the friend of well-built companies, and they are going to be able to hit their sweet spot, and not-well-built companies may have to do defensive mergers or defensive acquisitions. I think well-built companies will continue to consolidate, but much slower, and you’ll find small companies merging with each other or with bigger companies simply because they need the risk protection.”

And the craft or artisan operators, will they have a future? “I don’t know,” said Baruchowitz. “If two craft growers get together you don’t really get scale. A craft grower selling to an MSO so that the MSO gets a little more capacity and that craft grow gets a bigger brand distribution platform makes sense. But the one thing about cannabis that I think will change is the duplicative nature of capacity, so I don’t see an MSO buying a company if they have excess capacity. What’s the virtue of just bringing more capacity? It’s hard to generalize. California is a place where you can find craft brands blowing themselves up into a brand house. You could see these brands get together and say, ‘We’d be better together than alone.’ I’m interested in seeing some of the changes California is about to make with respect to taxation and other things. I’m a student of the of the past and the present, and I’m really excited to see what happens.

“Overall, I do get to take a deep breath because we’re diversified and other things, but it’s hard for us, too,” he concluded. “We’re grinding away every day, and I think we were acting just like the message we give to our companies, which is to be smart with your existing cash, extremely judicious in how you spend your time, and don’t do anything that adds risk without adding scale or virtue or value or accretion. There’s no point in taking on risk without understanding the consequences of that risk on both good and bad. And so, we’re telling companies what we stole from Josh Wolf, who we love on Twitter, which is failure comes from a failure to imagine failure. So, we’re imagining failure like crazy right now and we’re telling companies to imagine failure and then react to that.”

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