Jon Trauben: Choosing Smart Cannabis Investments

In our latest Q&A interview, we explore the background of Altitude Investment Management and hear directly from an investment professional about how to create a winning business plan and what it takes to get your fundraising efforts noticed in the cannabis space. Read the interview below to hear how investors approach the cannabis space, the benefits of investing in plant-touching businesses, and how to stand out in a crowd of “groundbreaking” cannabis business ideas.

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Ganjapreneur: How long has Altitude Investment Management been operating in the cannabis industry, and what made the cannabis industry attractive from an investment standpoint?

Jon Trauben: Altitude was officially founded in 2017, but the partners have been investing in the regulated cannabis space since 2016 and saw an opportunity to bring professional institutional fund management to the industry. We knew cannabis had considerable investment potential for two reasons. We understood that the industry had a massive existing customer base both nationally and globally for this product, and we saw the opportunity to move that existing customer base through the legal channel and help it develop into a mature industry. At the same time, we saw the opportunity to participate in the early stages of that global opportunity while it is illiquid and inefficient because of prohibition and because it is still a start-up industry.

What background do the principals of Altitude have in the cannabis industry?

Since 2016, we have been fully and exclusively immersed in the cannabis industry by studying, analyzing, and investing across multiple verticals including plant-touching companies. The partners collectively bring to the table decades of experience in alternative asset, distressed, real estate and European investments through our prior careers. We make informed investment decisions and develop high conviction through deep analysis and research on opportunities and management teams and have successfully applied our skill sets to this industry and economic opportunity. 

We are also firm believers that the “fast money” trade-in cannabis is over and it has moved to “smart money” investing. The smart money investor finds the opportunity when the other capital is scared. Operating as a smart money investor means we have to have contacts, knowledge, and in-depth understanding of the industry to uncover the best-in-class opportunities.

For a startup or an established company, what are the benefits of working with an investment management firm for fundraising?

For a company looking to raise capital, a firm like Altitude can provide a broad-based footprint and contacts within the industry –both from the company’s standpoint and with other investors. The most lucrative benefit of working with a firm is getting traditional VC value-add which brings along money, relationships, and validation of their business strategy. Additionally, companies can gain access to personalized advice to help them grow, navigate issues, and, most importantly, receive guidance on liquidity and exit opportunities.

Why would investors prefer to work with investment management firms?

The regulated cannabis industry is very broad-based and complicated, but also very opaque. Unless you’re living in this industry 24/7 like we are, you simply don’t have the knowledge, context, or information flow to make educated and informed investment decisions. 

Our work in the industry has shown that the startup cycle is basically over in North America and we’re moving into the growth phase of the industry.  As such, the ability for individual investors to have any standing or clout at this phase has greatly diminished. Consequently, we see financing transactions revolving around lead investors that are fund vehicles that can use the power of their checkbook (i.e. the ability to write bigger checks and lead financings) to drive the best economic terms and attain the appropriate corporate involvement for its investment.  Previously in the start upcycle, companies were only raising $1-10 million and smaller investors were impactful. Nowadays, the individual investor that offers $50-250,000 just does not have the same value for a company is trying to raise $10- 50 million. We think it’s a continual reinforcement of access to funding driving the next leg of opportunity. 

Can you share an example of how Altitude has contributed to the success of a company in your portfolio?

A core part of our investment strategy is connecting our portfolio companies to customers and opportunities across the industry and setting them up to cross-pollinate within our portfolio holdings. Companies like to have Altitude as their lead and on their cap table because we help them to succeed in a number of ways and provide validation as we become an investor and bring along other capital to help them grow across the industry at large. 

We were able to execute this for our portfolio company PathogenDx, a cannabis and hemp pathogen testing company that uses patented DNA-based technology. We co-led their original round back in 2018 and now sit on the board of the company. They recently completed a subsequent financing of $7 million and we helped the company attract a lead investor and fill out the financing round. Our firm was able to assist the investors with their due diligence and analysis and we guided them through the process of acting as the lead. By being on the company’s board and having a bigger footprint in the industry, we had the ability to bring in a quality investor to the table to effectuate this capital raise. 

How does Altitude approach investing in plant-touching versus non-plant-touching businesses?

Initially, the Altitude partners were cautious of investing in plant-touching business due to prohibition.  However, after a thorough analysis of the risk profile, the partners got comfortable with those types of strategies. There is significant opportunity across the full spectrum of this industry, and plant-touching businesses are a primary and unique part of this market. From our own first-hand experience, we have seen that plant-touching companies are the leaders on the revenue side, as they are ultimately providing a product that the customer really wants. We have always believed that there are incredibly interesting and lucrative opportunities on the plant-touching side. In fact, two-thirds of our portfolio’s capital are invested in plant-touching companies. It’s our view that firms are missing out on a considerable industry opportunity if they’re not engaging with these types of companies.

What is the best way to submit a pitch, and what are some tips to stand out and be noticed in the pile of possible investments Altitude receives daily?

We’ve invested in 19 companies in the industry and we’ve reviewed over 1500, so the review process is highly selective and there’s a lot of due diligence in everything that we do. The companies that stand out the most provide a clear business proposal right off the bat and are realistic with their business strategy, revenue, performance projections, and valuation. We also want to learn how your product or service is specifically differentiated and if there is a defense against competition.

What qualities are you looking for when determining which companies to invest in?

At the top of the list is a qualified and experienced management team. We actively look for management teams with prior experience in the product and strategy they’re trying to execute and value individuals who take a mature and sober approach. Additionally, we appreciate company leaders who are candid about previous successes and failures in their business career because it shows how they have grown and learned from their prior experiences.

A lot of people also try to only pitch the positive aspects of their companies, but we appreciate when someone pitches the negatives and the challenges as well because it shows they understand what the issues are to their ability to execute. Demonstrating transparency and honesty is critical in this process. 

In 2019, you’ve expanded into Europe. What prompted that expansion? How has this experience differed from fundraising in North America?

We see a real opportunity in the rollout of European medical cannabis programs. Europe is several years behind North America in terms of its own legalization journey and we see an early opportunity to invest and support emerging vertically integrated and multi-jurisdictional operators in various European countries. Additionally, they are following a similar playbook in their enterprise value creation strategy that North American operators have developed. There’s a clear investment opportunity for us, and we are uniquely positioned to engage with this market. All of our partners have decades of experience investing in Europe, specifically our Partner Rod Stephan who lived and worked in both Zurich and London for 20 years. During that period, he led investment strategies for Citadel and my Partner John Brecker’s prior $3 billion hedge fund, Longacre Fund Management. He has a comprehensive understanding of the legal framework in Europe and also speaks fluent German. We also have a London-based strategic advisor and we recently opened an office in London which gives us a footprint and extensive industry network. We have the historical experience knowing how to invest in Europe, and we have the clout and presence to execute it. 

Another important aspect that differentiates us from our peers is that my three partners have decades of experience in investing in the distressed corporate world. The cannabis industry is undergoing a huge correction, and there are a number of companies coming out of this big start upcycle that are under a lot of balance sheet pressure and certainly there will be many failures. The ability to understand and navigate these distressed investment opportunities becomes a huge differentiator from our peers and positions us right in the middle of where many North American opportunities will lie.

The European cannabis opportunity has many similar attributes as the North American market, but there are also stark differences that we must accommodate for. One of the key differences is that medical cannabis programs are being sold through pharmacies and doctors instead of licensed dispensaries. This model brings different marketing challenges and it will develop into a different type of opportunity that will allow for less branding and marketing. However, the end opportunity could reap significant returns since consumers want legal access to safe, tested, quality products for health, wellness, and recreational purposes. The European industry may be developing differently, but demand is still robust and the medical market has become the market leader in the region.

What do you predict the next 5 years will look like for the cannabis industry on a global scale?

While we do not anticipate full federal or global legalization in the next five years, we predict a continued gradual relaxation of prohibition. Over time, that brings more capital and companies participating in the industry and a steady progress of cannabis legalization that usually start with medical programs, which are then followed by countries incrementally legalizing recreational programs.

In terms of long-term business opportunities, the industry’s supply chain needs to further develop and mature. We have not invested in pure-play cultivation since we believe that that strategy will face challenges of price compression and commoditization in the future. Where we have exposure to cultivation its via our investments in vertically integrated operators. Additionally, as the industry matures and professionalize, it pulls forward the services portion of the industry, and we anticipate continued opportunities for ancillary businesses in the coming years.

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Thanks, Jon, for answering our questions and sharing your experiences from investing in the cannabis space! To learn more about Jon Trauben and/or Altitude Investment Management, visit AltitudeIn.com.