The Risky Business of Legalized Cannabis

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It’s hard to grow a business that remains illegal in most states. | Reuters/Baz Ratner

In 2014, Hadley Ford was looking for a new job. He logged on to LinkedIn for the first time in years and saw thousands of pending invitations. He accepted them all. One of those invitations was from Randy Maslow, an old friend. Maslow called Ford a few minutes later and pitched him a radical idea for a new business that had the potential for enormous gains but also enormous risk: They were going to legitimize the business of marijuana.

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Hadley Ford | Cole Wilson

Today, Ford is a managing director and CEO of iAnthus Capital Holdings, a publicly traded provider of startup capital and advice for cannabis businesses.

Investing in marijuana was a radical departure from Ford’s earlier career. Previously, he had followed the well-worn path for people with business ambitions: He earned a BS in business from Boston University, where he was valedictorian, and was an Arjay Miller Scholar at Stanford Graduate School of Business (Class of 1991). He worked as an investment banker at First Boston, Bank of America, and Goldman Sachs, then founded and led a company called ProCure, a provider of proton therapy as a treatment for cancer, which he left in 2013. He never would have predicted that a short while later he would be touring greenhouses to examine their pot plants.

Ford talked to Insights about what drew him to this sometimes seedy business and how he’s working to make it as socially acceptable — and profitable — as selling beer.

Funding the business of marijuana is a pretty big departure from your earlier career. Why are you doing this?

I knew Randy from my days at Goldman. We invested in his company, XO Communications, and took them public. I sat on his board while it was private and he was general counsel and SVP of business development. After the public offering, he retired, set up a virtual currency company, then retired again. He called me in early 2014 and said, “I found the next big thing and you ought to be in it with me.” He’d had a very successful career in tech so I expected to hear about ones and zeroes. He said, “Cannabis.”

What was your reaction?

I didn’t see that it could scale nationally. Cannabis is still illegal in most of the U.S. That means you can’t trademark or copyright your product or manufacture and distribute across state lines. You might have a few storefronts, like a restaurant, which you fund through friends and family, and maybe you make a nice living, but you can’t easily build a really large, national business.

How did he convince you to join him?

He started off by saying this is a $50 billion market moving from black to white. He said, “There has to be a national opportunity. Let’s figure it out.” We went to a bunch of conferences and met with many operators to learn more about the business. We learned that if you’re an entrepreneur in the cannabis business, you have no access to institutional startup or growth capital. There are thousands of entrepreneurs who want to grow, process, or sell cannabis but they don’t have access to financing at the local bank and they need advice and counsel on how to run a company efficiently. We saw an opportunity for a merchant bank.

That’s the logical part — the how. But why are you really doing this? There must be other ways to make money.

I am a child of the late ’60s and early ’70s. For me, it’s about “power to the people.” You don’t want the Man telling you what to do. Why should anyone tell anyone else that they can’t grow it and use it and do what they want with it? Individual rights trump someone in an office in the state capitol telling you what to do. I’m not a user, but I do have a passion around individual rights and helping people build companies.

Where do you think that passion comes from?

A strong entrepreneurial spirit runs in my family. My parents were driven A-types but also very libertarian. They were progressive socially but conservative in a “stay out of my bedroom and kitchen” kind of way.

Can you be successful in this business if you don’t smoke? Is it like in the movies where you have to partake in order to be trusted?

In the cannabis world, you do get guys who have been growing plants in Colorado and California for decades. They say stuff like, “You gotta respect the plant.” You’re not considered authentic to those people unless you worship at the altar of the cannabis plant. There are also entrepreneurs who just want to build businesses. I’m comfortable in either world. The common denominator is they all need capital.

Once you and Randy decided to do this, how did you get started?

We thought we could raise a couple hundred million and roll up our sleeves. But we learned that for the same reason Citibank wasn’t providing a prime-plus-2 loan to entrepreneurs who want to build a greenhouse, we weren’t going to easily raise capital for a new fund. So we went to Canada. There, issuers can sell securities related to cannabis and investors can buy them. There are a dozen public companies in Canada that touch the plant, as well as banks and salespeople, traders and research reports. So far $500 million has been raised for building cannabis operations. We structured a public vehicle that raises money in Canada and uses the money to fund businesses in the U.S.

Have you made any investments yet?

We have invested in three states, and we are in term sheet discussions with businesses in four more states.

How has the transition been for you? Do you find people from your banking and healthcare history treating you differently now?

In my last business I raised $800 million off my Rolodex. A year and a half ago I started this company as the same guy, with the same Rolodex, and I’ve raised $9 million.

How do people react at cocktail parties when you tell them what you do?

It’s a much harder cognitive dissonance than you might imagine. I had a couple of friends who said, “You are a fool. You will end up in prison.” There is a lot of caution, people are leery, but I haven’t been shunned. I don’t have a scarlet C painted on my forehead. I’ve always been very entrepreneurial; people probably always thought I was crazy to take those risks.

Do I sense a little pride from being an outsider?

Yes! I want to stick it to the Man. You want to be on the edge of the bell curve. Nothing ever gets created if you are just copying.

The cannabis business is still not mainstream. Do you ever worry about your own safety from people who are on the other side of the law?

There are some wild areas in California where you hear about Hell’s Angels and guys guarding their property with AK-47s. What I have seen is a bureaucratic, orderly transfer of wealth from the black market to the white market. The states have been vigilant about keeping the black-market element out. If you have any infractions, if you were ever tagged with a felony drug conviction, you can’t be in this business. You have to go through an FBI screening and background check.

What are the entrepreneurs like in this category? Are they different than what people might expect?

You find all sorts. People you wouldn’t want to cut your lawn, as well as sophisticated and thoughtful entrepreneurs. We look for startup situations where someone has been awarded a license. We look for a track record or background of success in running a business. Someone who ran a franchise or a restaurant, for example.

How do you do your due diligence?

We have an experienced staff that can handle the financial end of things and we have cannabis advisors and contacts who can vet the cannabis operations. There are little things we look for as well, such as how does the owner respond to term sheets? How do they respond to tasks in the diligence process? How long does it take to for requests to get done? We spend a lot of time together to make sure there is a comfortable feel. You can tell a lot just by looking at the plants. Do they look healthy or sick? You’d be surprised at the differences you’ll find. You can also check online and see the reviews. Leafly.com is like Zagat for weed stores.

How do you find talented people to help these startups? Are there corporate lawyers and accountants you can turn to for advice?

We have some cannabis-experienced accountants and law firms, but it’s still early. The jury is still out: Are we too far on the edge? Is the wave going to crash on top of us? Sometimes it’s not great to be first. But we have hired experienced people and we have aligned ourselves with smart, capable advisors and like our chances.

What are your biggest challenges right now in building your business?

The timely access to capital and projects.

What does the future look like — in one, five, and 10 years from now?

One year? A lot like today, but maybe with cannabis legal in some new states. We will see a lot more investing by smaller institutions and regional banks providing credit, though probably not the big banks yet. In 10 years it will look more like the alcohol business, with dry counties and wet counties. The states will determine who makes the money. It will be managed and run and tested like alcohol. There will also be a lot more research done on the plant.

What is the best business book you have read?

Good to Great by Jim Collins. People and focused execution matter more than anything else. There were a lot of lessons in the book, but the way it manifested itself for me was like this. Imagine your typical year-end review — you’re in sales and you come in for your review and the Dilbert cat says something like, “You’re a good salesperson, but you need help in filing,” and the company spends resources on fixing your filing. Now you may have been an A-minus salesperson and a C-minus filer, and after a year of effort you will become a C-plus filer and still be an A-minus salesperson. What should have been done is to spend the time, effort, and resources to make you an A-plus saleswoman. Imagine a team of A-plus performers in all the things that matter to your company. That creates value. My only job is to figure out what someone can be great at, get them the resources they need, and get out of their way.