Interview with Steve Schuman (Halley Venture Partners)

August 30, 2017

 

On September 19, Steve Schuman of Halley Venture Partners, will speak at Kahner Global's 3rd Annual Cannabis Private Investment Summit in New York. This event gathers industry leaders and investors for a day of collaboration and networking.  

 

Steve Schuman, managing director of Halley Venture Partners, recently chatted with us about his new investment firm focused on cannabis and hemp. After spending 15 years in public and private equity investment in agriculture, he decided to parlay his experience into the cannabis space.

 

"There's a dearth of both capital and professional investors, and so I just decided to strike out on my own," he says of his decision to start his own firm.

 

Here, he talks about banking problems, federal uncertainty, and why he would've done things differently had Hillary Clinton won the election.

This interview has been edited for length and clarity.

 

I see a lot of comparison of the cannabis market to other consumer products. These comparisons seem odd because these other products aren't Schedule I narcotics. Is it really fair for analysts to make comparisons between the cannabis industry and other consumer products?

 

It is still federally illegal, but because the Feds have a [limited] ability to really go after the legal guys, you see these companies trying to act more professional and act like more consumer-driven companies you'd see anywhere else.

 

The numbers are something I want to express -- the research to show you how big it is, where the profits are, where they might be, and how the economics really look vs. the hyperbole you see in the press where it's raining cash. That isn't quite the case.

 

I think everyone has opinions on how [the market] is going to look when federal prohibition is lifted -- trying to pull analogies from other industries and tailor those specifically to cannabis. It is a very different product than a lot of other consumer products out there.

 

Currently it's tough to get true and scientifically proven information to consumers. We don't really know what the strains really are until we actually genetically test them. We don't know what the different chemical components are in each strain and what those different terpenes and cannabinoids really do. So, there's a lot of work to be done.

 

Do you have any thoughts on the barriers cannabis companies have in accessing traditional sources of capital? Due it its Schedule I status and the difficulty accessing financial services, how should entrepreneurs be seeking out capital?

 

There's two issues there, one is investment and one is banking. High-quality companies that do touch the plant are typically able to get bank accounts. So that's somewhat of a fallacy out in the marketplace. Often, when I talk to a new potential investor, they say, "Oh, I don't know about all this cash flying around, and no one can bank." That really just isn't the case. There are [according] to media reports a few percent of banks that will bank the industry.

 

But on the investment side, it is almost exclusively high-net-worth individuals and family offices. The family offices typically don't have outside capital; it's their own capital and they can pretty much do whatever they want with it.

 

When you get into endowment funds, pension funds and those types of capital sources, they usually have a lot of restrictions -- investing in cannabis is typically not one of the things they can go after. Almost all venture firms and investment firms have investors that are those types of investors, so they can't funnel that money into the cannabis space either. What you're left with are some very specific investment firms like myself and some others out there that are bringing in money from the family offices and high-net-worth individuals.

 

The plant-touching vs. non-plant-touching distinction is really driven home in this industry. What would you say to an investor who is worried about putting money into something touching the plant? Are the risks really that much greater?

We won't make an investment to anybody who isn't banked completely whether it's plant touching or not. We can do both. On the plant touching side, it's not just the cash. If you're going to invest directly [do your] due diligence. Spend a couple thousand dollars or more to do very deep background checks into the companies. We background check all of our companies, looking for lawsuits, looking for criminal suits, looking for criminal charges -- all different types of things.

 

This is done in the traditional investment world as well, particularly in private equity firms that maybe buy out a family business or buy out an entire company. It's not your typical online $50 background check. That can help alleviate some of those issues. Then you go through and you check all the internet compliance and procedures the company has to manage cash. There are plenty of companies in the world that manage cash, every fast food restaurant, every casino, a lot of retail stores. It isn't something that we don't know how to do. The question is what level of trust and do you have of the owners of the company or the executives to keep that going.

 

Banks are slowly starting to come up with new innovations for cash management for this industry.

 

Speaking about the new innovations regarding the whole cash problem, there's a lot of buzz about cryptocurrency. Do you have any thoughts how feasible it is for the industry?

I will couch this answer to say I'm not a cryptocurrency expert. but I don't have a lot of interest in that area. Just from my financial background, watching the markets right now, we're seeing all kinds of issues with cryptocurrencies coming on the radar of the regulators.

 

The big problem isn't managing the cash, the big problem is getting it into a bank. Because these business owners and investors who own these companies need to pay their other bills. To get that money into the legal banking system is the issue. I'm not so sure cryptocurrencies are really the solution, it's more of a legislative and lobbying effort on behalf of the industry to get some more protections and more ability for banks to work with the industry. It's also an impetus for the industry to act responsibly, and therefore not create issues to cause concern for the banks to stop banking us.

 

They seem to be a stopgap measure to solve the banking problem, but if you assume federal legalization down the line, they're going to be sort of irrelevant in the future.

Yeah and that is certainly one of our tenants in the investment process. Can an investment survive: 1) a severe federal crackdown on the industry and 2) a federal opening, a lifting of prohibition? If this company can only serve the industry for a few years, I'm not sure that's a really great investment. We're trying to avoid companies that look good now, solve a pain point but don't have a long-term future.

 

Speaking of a federal crackdown, there's a lot of uncertainty at the federal level. How do you go about evaluating a company's ability to withstand a crackdown, given that we don't really know much about what someone like Jeff Session might do?

We want to make sure companies have some plausible outlet just in case there is a greater issue. I think shutting down the entire industry would be very difficult and politically painful. Hopefully the industry would rally and have a few million people on the steps of the Capitol the week after a crackdown.

 

But one of the areas we look at is can [companies] pivot [their] technology into something else if they have to, whether it's a software company or an ag tech company. Some of the areas we really like are ag tech, mainly because these companies can justify high margins, and that allows them to do product development that may very well be able to be used in the traditional world.

 

We're looking at some robotic solutions that could be used in any other crop out there. We're looking at media plays that are not 100 percent cannabis but have enough cannabis to make them important and relevant, but also have outlets into other traditional media areas.

 

Being able to pivot, being able shift, and having a plausible back-up plan is very helpful. In a federal crackdown, and even in a one-off crackdown, there are thousands of growers and dispensaries and manufacturers, etc. You're in a school a fish hoping that you aren't the fish that the shark eats. But if you are an investor in that fish, you're going to be pretty unhappy.

 

Do you see a growing interest from investors in the space? There seems to be growing interest but at the same time the Trump administration has put a damper on things. What's your sense of that situation?

I think had Mrs. Clinton won in the fall I'm not sure I really would've formed this fund in this way. One of the greatest things about this strange situation is that it is federally illegal and state legal at the same time. That keeps a lot of investors away, which keeps valuations in check. It keeps a lot of sources of capital from flooding in, and therefore there are some great opportunities for investors, if they're willing to take some level of risk.

 

Now look, I want federal prohibition lifted as fast as possible. There are obviously grave medical concerns. My own sister has sister has MS and there are two drugs internationally that she could have access to that she doesn't have right now. From a personal standpoint, I'd love to see federal prohibition lifted immediately.

 

From an investment standpoint, having this situation is a very good situation. It just starves some capital from some of these companies and it allows us good terms. 

 

Would you say you are generally optimistic or pessimistic about this administration and how they're going to handle state cannabis programs?

I'm actually a little optimistic. They certainly keep making a lot of noise but we really haven't seen much movement and I don't think they can do a lot between some of the protections we have however thin, and the pushback they're going to get from state lawmakers.

 

Politicians love two things in this order: getting elected, and getting more taxes. As we've seen, politicians in states that weren't necessarily pro-cannabis see the tax money come in they've been a heck of a lot more conducive to helping the industry out. 

 

Mona Zhang is a New York-based freelance journalist and founder and editor of Word on the Tree. Follow her on Twitter @ZhangMona.

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