Updated: Jan 31, 2021
A few years ago I lived in a state that legalized recreational cannabis (aka marijuana, ganja, hippie lettuce...). It was a big deal at the time. Really big deal. Nobody knew what was going to happen as a result of this: Would federal agents continuously raid the state arresting citizens since it was still a schedule 1 narcotic? Would children become addicted now that it would be presumably easier to access? Would the fabric of society fray? Would entrepreneurs make truckloads of money? I was hoping the answer to that last question was resounding "Oh HELL yes!"
Around this time I was also dabbling in politics (might post on that later if I can find a way to anonymize it). Through my political connections I found out about a business opportunity in the upstart cannabis industry of the state. To say I was intrigued was an understatement, I saw nothing but dollar signs and was ready to throw a pile of cash at it before I even knew the details - but thought it prudent to understand the details first anyway.
A fine older gentleman was selling his cannabis grower license (the state had a limited number of licenses). This license was being sold for $160,000. It included a grow facility lease. He had not built out the grow facility, had not grown a single plant. There was no inventory, equipment, operational or business processes, customers etc. as part of this deal. Simply the license and the lease.
A couple of my political connections hit me up about this opportunity. They were...
Squirrel (CEO): I'll refer to him as Squirrel because his focus was constantly shifting to the "next big thing", not making the current "big thing" better.
Cheeseball (CMO): Nothing but a sales guy. A cheesy, slick, vapid sales guy.
Squirrel & Cheeseball pulled together a well written business plan on this opportunity. I reviewed it and it looked solid! Cheeseball had some experience in the industry, and Squirrel had been in multiple leadership roles over his career & by the looks of it was successful. The numbers in the plan looked promising. Where do I sign, lets go!
They shopped the business plan around to several other targets...I mean investors as well. Ended up getting a group 5 suckers...I mean investors to throw money into this venture. My initial investment was $20,000 (the other $5,000 comes into play later). For my investment I became a 5% owner of the business. Time to start printing money baby!
We were off to the races! Squirrel was busy building out the grow facility. Lots of investments were being made in grow lighting, shelves, plants, packages, labeling, you name it. I volunteered on a couple of weekends to help get the place up and running. It was exciting!
Cheeseball was out there building connections with retailers where our product would be sold. He was constantly giving us good news about all of the sales we'd be making once our plants were mature and producing buds! Oh man, we were going to be rich!
While we were waiting for our own plants to mature we bought flower from other growers in bulk that we then packaged to sell to retailers under our own brand. We thought this was a great way to bridge the gap and earn a little cash flow to help fund the early stages of the business.
What could go wrong? Turns out, a lot.
1st thing that went wrong: Squirrel was in over his head. He could not grow a plant that lived to save his life. We had bugs. We had rot. He was trying to run this business as well as work full time. He was packaging the resell product at night after his day job. He was crumbling personally as well. Squirrel was fucked up. Our product was fucked up.
2nd thing that went wrong: Cheeseball was a compulsive liar. These connections that couldn't wait for our product dried up as soon as we had product ready for them. He blamed it on the packaging. Nevermind the packaging was his creation. When the investors started asking him hard questions he disappeared from the business completely. Ended up moving to the other side of the state, never to be heard from again.
3rd thing that went wrong: The market was SATURATED in cannabis. Estimates were there were 3x the amount of cannabis on the market than demand. We couldn't give away our product at that point.
4th thing that went wrong: There were a handful of major players in the industry. They were able to lower their prices to a point where smaller companies couldn't compete. These major companies were buying up the licenses from these smaller companies for pennies on the dollar to remove competitors from the market. Rapid consolidation was underway.
At this point we were desperate. We had piles of product that we couldn't sell, no plants that would live, no way of making cash flow. Squirrel had a connection at one of the major growers that he reached out to. He was able to strike a deal with them - we would become their "joint rolling vendor". Basically they would deliver bags of flower to our facility, we turn that loose flower into joints for them to sell. Only problem was we needed a couple rolling machines. Enter in my additional $5,000 investment. Side note on that investment: It was a loan that Squirrel agreed to the terms on. We got the agreement in writing - but in email, not a promissory note. This hurt me in trying to write this off on my taxes later on - lesson learned.
So now we have a couple of rolling machines, and have pivoted the company to be a joint rolling enterprise. We hired a contractor to actually do the rolling for us, with Squirrel helping out there as well. We were making just enough to cover the lease & pay the contractor. We were not making enough to cover all of the other fees & expenses to keep the company afloat. In addition Squirrel's marriage was on the rocks and he was heading towards divorce.
It was a dark time for the business.
Squirrel called me and said he was done. He wanted me to take over the CEO position, and he would give me all of his equity stake on the company. I entertained the idea, had a conference call with the grower we were rolling product for as well as the contract we had rolling the product. Found out that the contractor was wanting to go work for the grower directly, and the grower really was only using us as a favor to Squirrel as the grower themselves were having financial problems due to market conditions.
I told Squirrel I wasn't interested in taking over the CEO position and we should wind down the company. He agreed. We still owed the older gentleman we purchased the license from a lot of money so we decided to just give him back everything and walk away.
Squirrel had a conference call with the other investors letting them know it was over. One of the investors was a mom who had taken out a second mortgage to make this investment. She was in tears. This was $20,000 she couldn't afford to lose. It was a sad call. It was a sad moment. It was the end.
I learned a TON from this investment and experience that I'm thankful for. Nobody likes to lose money, let alone $25,000, but I'm glad it happened in the end. Some of the lessons included:
Know your industry: Things may look exciting from the outside, but unless you really know the innerworkings of an industry - you really don't know enough to make an investment. Or at least an investment that's not absolutely saturated in risk.
Know your partners: Understand their background. What have they successfully done? Are there references from their past business dealings you can reach out to? Dig beyond the surface of what they want you to see or you want to see in them. Find the truth.
Know your risk tolerance: My $25,000 investment was never going to break me if it went to zero. Not to say it wouldn't suck to watch it go away, but it wasn't going to have a meaningful impact on my life. The same cannot be said for the mom-investor who lost her second mortgage as part of the company's demise. Be prepared for risky investments to go to zero.
So that's it, a brief overview of how I lit $25,000 on fire. I've used these lessons to propel me into future investments - some of which I'm actively involved with or making as I type this. I'll be sharing lessons from those deals in future posts so stay tuned!
Remember, as Nancy Reagan used to say, just say no to bad investments!
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