Investor Insight: Douglas Leighton, Boston, MA
Our very first investor we’d like to introduce you to is Douglas Leighton, Managing Partner of Dutchess Capital. His story is a unique one and his perspective and understanding of this industry is something that every entrepreneur, whether cannabis-related or not, should take note of. Have you ever played chess without a board? He does… every day.
How did your entrepreneurial journey begin?
I was 10 years old. It was the blizzard of 1978 and my father had a tractor with a plow on it. I plowed out the neighborhood and made about $3,000 in one day. After that I was hooked on working for myself. I never looked back and have continued to only work for myself.
What was the motivating factor for you to invest in the cannabis industry?
There are several reasons. The legal cannabis market is slated to grow from $2.4 billion in 2014 to $10 billion in 2016. That growth alone should pique the interest of any investor. The black market is $50 billion annually and the legal market is $2.4 billion, that gap has to be narrowed as more states roll out their cannabis programs. This is also a unique market in that there is no need to market a new product; the demand exists, it is just being serviced illegally.
One thing many first-time entrepreneurs struggle with is raising money. How would you suggest someone to overcome this problem?
First, know your business. Know every number, ratio, and statistic. Don’t just make a pitch deck that looks nice; have it be reflective of your actual business plans and your actual ability to execute. There are several outlets to meet investors: The ArcView Group is the largest with almost 300 investors that meet quarterly and a great online source is 420 Funders where you can post your deck online and investors can read it.
Don’t just make a pitch deck that looks nice; have it be reflective of your actual business plans and your actual ability to execute.
What is your best advice to cannabis entrepreneurs when they pitch their project to you?
Explain to me the problem, your solution, your value proposition, and why you can execute on your business plan. Be concise and know every risk and challenge and how you are going to mitigate those issues.
Can you share your thinking on how to identify a company as a great opportunity?
Management is first. During the due diligence process, we can tell a lot by how the first call goes, how much time went into their proforma and their deck. You can find out what type of person they are in the beginning and then you have to make a bet that they can navigate the challenges.
The second is:
- Does the company, product or service have a high barrier to entry, a first-mover advantage?
- Is there any ‘sticky-ness’ to the business?
If you have management that is willing to put the time and effort in and the product or service is needed, then you have the makings of an opportunity. Then, post investment, how they execute and scale is another story.
What are the key ingredients in building a successful start-up?
24/7 work ethic. You have to love what you are doing, then it is not work. You must measure every metric to figure out what is working and what is not. Time management is also very important if you want to scale.
How does the role of the founder evolve as a company goes from seed to early growth to later-stage scaling?
This is an interesting thing to watch. There are some growing pains that go along with a person who has an idea, executes on that idea, and then has to enter into a more mature hands-off role. The great companies are those that lean on others with more experience for help. They understand that they can’t do it all. We have an incubator project here at Dutchess Capital and we like to guide these founders along to different people on our bench that can help at different points along the growth trajectory.
What is your knowledge in regards to investing in the cannabis industry?
It is risky. Everything takes more time and there are more roadblocks than other industries. In saying that, the rewards can be potentially larger if companies can scale quickly before others get into the market.
What are you doing to impact the industry?
We try to cross pollinate our portfolio. For instance, Dixie Elixirs would love to advertise on Facebook, Google and Twitter, but their policies will not allow for cannabis advertising. So we got Dixie Elixirs together with another company in our portfolio, MassRoots, which is a cannabis social network where cannabis companies are allowed to advertise. Another thing we are doing to impact the industry is the formation of our cannabis incubator. We have two companies as of now; one is called Roll-uh-bowl, which is an indestructible foldable water pipe, and the other is an R and D company in the ceramic space. We offer capital, guidance, office space, and access to our vast networks and resources. Most importantly, years of mistakes that they can learn from.
I also sit on the board of the Association of Responsible Cannabis Public Companies. The ARCPC advocates best practices for publicly traded companies dedicated to the cannabis industry through the promotion of the highest standards of integrity, fiduciary duty, and transparent reporting of each Member’s operations.
As an investor, what are some of the key things you wish cannabis entrepreneurs knew?
You are not going to sell your business to a Fortune 500 company. Just because you are in the growing cannabis industry does not give you the right to ask for a crazy valuation. In some cases, you should get a smaller valuation due to the high amount of risk involved. We don’t make any money until we have all of our money back, then we count return. They also have to remember, that we were there when they did not have very much, and our money helped them get to where they are today. Remember that.
What do you think some of the most promising niche sectors are related to cannabis?
First I’d say consulting. I think the “top-down” approach has the most potential. I will equate it to the concept of selling picks and shovels to miners. In the case of cannabis, it is the consultants providing guidance and selling the related products to a grower on the B to B platform. An example of this is one of our portfolio companies, American Cannabis Consulting (AMMJ:OTC) They are at the forefront of this industry with about 12 major clients in the US and Canada. They provide solutions for businesses operating in the industry through consulting and advisory services, as well as supplying businesses with equipment and products.
I also like the technology sector. One of our first investments in the industry is the semi-anonymous social network MassRoots. They are the largest social networking site for the cannabis community and have grown over 2,000% year over year. They are anonymously collecting a tremendous amount of data from their user base such as a user’s strain preference, time of day they consume, consumption method, and among other key data collection points. They will be able to monetize this data via sponsored posts of either localized merchants and/or national brands.
Dutchess Capital also likes companies in various sectors with ‘brandable’ consumer products and goods. Tripp Keber has done a remarkable job with his branding efforts with Dixie Elixirs and Edibles. I also think a brand such as Foria Pleasure, the world’s first THC infused personal lubricant for women, has done a stellar job with its branding and they have proof to show for it; they were recently featured in British GQ.
What do you think the next five years has in store for the industry?
Growth. There will be many bumps in the road and more growth. Investing in this industry is like playing chess without being able to see the board. Eventually ignorance will abate, the banking issue will be fixed, and the drug will be rescheduled.
There will be many bumps in the road and more growth.
What needs to happen in order to create a billion-dollar company in the cannabis industry?
Banking needs to be fixed and the drug needs to be rescheduled. Once those two items are fixed, it will allow for some real expansion. Some companies, like Dixie Elixirs are setting the stage now to be in the right spot when the change occurs. MassRoots has a chance to be very successful as well since they can scale globally with very little capital investment.