An interview with Narbe Alexandrian, CEO & President of leading VC firm, Canopy Rivers
Could you give our readers an overview of your professional background, and what led you to Canopy Rivers?
The venture capital part of my career started at OMERS Ventures where I helped fundraise for two funds ($520M of capital), sourced and led multiple debt/equity financings, and was involved on the board level for several portfolio companies. I was focused on the tech sector and got a front-row view into the explosive growth of that industry as well as the entrepreneurs powering it. Fortunately, we were early investors into companies such as Shopify, Wave and Hootsuite, which gave me a great foundation for how companies can structure themselves for rapid growth and dominance.
When Canada legalized cannabis, I was seeing a lot of parallels between early cannabis firms and the large tech firms that had initially dominated Silicon Valley. These companies were vertically integrated, building out each step of their respective value chains as an in-house process. This was incredibly capital intensive and looked very similar to the early dot-com days of the internet. As the sector grew, the industry fragmented and specialized. These specialists would become hyper-focused on a specific area, creating a patchwork of integrated specialists that would each build out their section of the value chain.
I saw a similar path forward for the cannabis sector and that idea — that specialization rather than vertical integration will power industry growth — and it’s the backbone of our investment thesis at Canopy Rivers. We have some of these highly specialized companies in our portfolio, including Headset (retail data analytics), LeafLink (B2B marketplace), and Dynaleo (automated and scaled cannabis gummies production).
The industry has experienced a turbulent 12 months, with the downturn in public markets in 2019, followed by the COVID-19 global pandemic which has hamstrung many projects in 2020 so far. Sitting where we are today, what do you envisage has been/to be the true impact of these events on the cannabis industry, and what do you expect the recovery to look like?
The cannabis capital markets have been nothing short of volatile in the past 18 months. The Horizons Marijuana Life Sciences Index ETF reached an annual high at C$23.65 per share on March 19, 2019 only to drop 63% to C$8.75 by December 31, 2019. The ability for cannabis companies to access capital through the public markets has decreased significantly. Missed earnings, poor capital structures and broad governance issues have led to a loss of confidence in the markets, leaving many companies cash-strapped and unable to raise funds. Throughout this year and into 2021, I expect that cannabis companies will aim to stay private longer, giving them the runway to build out a solid path to growth/profitability before considering going public.
The economic challenges brought on by COVID-19 have become another uphill battle for many cannabis companies that were already reeling from high cash burns. We have seen a few of these companies fold already, and we may unfortunately see more in the coming months as cannabis companies face more difficulties than most businesses in accessing government stimulus funds and resources.
But there are also good signs for the industry. Recreational cannabis in Canada continues to sell well despite a looming recession. In many jurisdictions, cannabis has been deemed an essential service and, specifically in Canada, retailers appear to have stepped up to transitioning to curbside pickup and delivery without compromising the safety and youth access issues that many regulations focus on. Along with the many cannabis companies reeling in their spending, cannabis’ counter-cyclicality is another sign of the industry’s long-term growth potential.
As a leading VC firm, you must have thousands of pitch decks flowing through the doors – and virtual doors! – of Canopy Rivers. What type of businesses excite you in 2020, and why?
Our team has reviewed over 2,200 pitches and that number is growing every day. As the sector rapidly evolves, there are four sectors we’re keeping a close eye on:
- The biosynthetic production of cannabinoids, particularly minor cannabinoids, that hedge against organic cultivation methods.
- Plant science, where there are licensable research & development plays with agriculture technology companies that help disrupt the way we cultivate cannabis today.
- In consumer brands, where we’re seeing the proliferation of hyper-focused brands who understand their customer base wholly and are building niche brands that have shown early signs of customer loyalty.
- And finally, technology companies creating large data platforms that help cannabis companies understand their consumers and market trends. From January to March 2020, these companies made up 13% of all pitches we’d seen. However, since the widespread implementation of restrictions, 36% of the pitches we’ve seen have been from software companies. Broadly, software companies have fared relatively well during the economic downturn, and many “pick and shovel” companies—like Shopify in e-commerce—are helping businesses pivot by offloading cost centres to specialists which can help grow their business.
Equally as important, what type of entrepreneurs excite you? For those few business owners who get to meet with you, what are the character traits that are of intrigue? Moreover, what have you previously experienced that has been a real turn off?
We believe that a company’s team truly distinguishes it from its competitors. The big three questions we ask are:
- Does the team have deep domain expertise and experience?
- Have they experienced prior success as entrepreneurs?
- Can they recruit from adjacent industries?
Cy Scott and Brian Wansolich, founders of our portfolio company Headset, previously co-founded and successfully exited Leafly, an award-winning cannabis information platform. We think that their experience scaling Leafly and the lessons they learned along the way translate directly into their current operations with Headset. Melissa Jochim, founder of portfolio company High Beauty, is a beauty product veteran and serial entrepreneur with over 25 years of product formulation experience, including her role as a co-founder of Juice Beauty. She applies her extensive knowledge from the traditional beauty world to cannabis cosmetics.
As far as negative traits go, an unwillingness to adapt is a big flag. The cannabis industry is as fast changing as any sector, and founders need to build flexible operations and cultures that can respond to market conditions.
There are industry pundits that are talking about Cannabis 3.0, albeit with Cannabis 2.0 only having been ushered in quite recently. What would Cannabis 3.0 look like, and when could we expect it?
Our view is that the industry is developing according to five waves. The first was large scale cultivation, the second — which continues to develop to some extent — was the proliferation of ancillary businesses that make the industry better, faster, and smarter. These include analytics providers like Headset and marketplaces like LeafLink. Cannabis 2.0 in Canada and recreational legalization in some U.S. states ushered in wave three, which is the proliferation of brands and consumer products.
We might still be a few years out from the next wave, which we would see as the entrance of big pharma and the market expansion of cannabis as a therapeutic and ingredient in pharmaceutical products. This could be a major catalyst to legalization in less progressive jurisdictions and create exit opportunities as established pharmaceutical companies acquire cannabis companies. I think they’ll look for companies that have clinically tested products that have achieved a gold standard in consistency in standardization and are backed by rigorous peer reviewed research.
You can hear more from Narbe Alexandrian at the GCI Europe Virtual Summit.
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