This podcast is all about the medical cannabis industry. It’s a fascinating talk. Our guest, Brendan Kennedy (Founder and CEO of Privateer Holdings) started Privateer Holdings to focus investment and operations around the legal cannabis industry globally. This includes bringing more more professional discipline to this growing industry.
Privateer Holdings has raised over $82MM over 2 fundraising rounds from high net worth individuals, family offices and institutional investors like Founders Fund (Peter Thiel). Brendan and his team are the leaders in the legal cannabis industry with three wholly- owned subsidiaries (Leafly, Tilray and Marley Natural) which are expanding globally across Europe, the United States, Canada and most recently in Australia.
In the podcast we talk about how Brendan changed the focus early-on from strictly investment to more of an operator model. We also talk about why Brendan decided to get into the legal cannabis industry, what the government should do to improve the industry, and why is there not more medical cannabis research in the US.
Dave: Hey, everyone. Welcome to another podcast with Flyover Labs. We appreciate you listening to us. Today, we are very lucky to have Brendan Kennedy, he is the CEO of Privateer Holdings as well as President of Tilray and Leafly, and Privateer is a private-equity firm focused on the medical cannabis industry, so I am really excited to have Brendan on today and I think we have a lot to chat about. Brendan, thanks for joining us.
Brendan: Thanks Dave. I really appreciate you having me on today.
Dave: Definitely, and so let’s dive in and I am curious how your career evolved, and now you know, your focus on medical cannabis, and so, you know, what’s you past and what interested you in this industry? Well obviously there are a lot of opportunities, but yeah, what did you see in it?
Brendan: Sure, so I have a little bit of an eclectic background. I have an undergraduate degree in architecture, masters of science in engineering. I wrote software for project management for a while and I ended up starting two small technology companies as an entrepreneur in Seattle, one in 1998 and another in 2000, both of them had extremely moderate exits and after that went to business school and I have an MBA, and so coming out of business school I was recruited by a Venture Capital Bank in Silicon Valley to start a new ____4:22____ to the area as a founding team and was the COO of that company. I left after 5 years and we grew that from 0 to 3000 clients, mostly venture capital bank startups and venture capital firms and 5 years ago came across a technology company in the medical cannabis space, I guess really almost 6 years ago, May of 2010, and thought, well that’s something really different from these new technology apps and game companies and things like that that was up and about in Silicon Valley and I put together a small teams to go around the world and try and understand the medical cannabis industry and the legal cannabis industry all over the world and that is really how we started Privateer Holdings.
Dave: Interesting, and when you started looking at the industry 6 years ago, how was it different compared to now, especially like legalization acceptance, like, has the climate changed?
Brendan: Yeah, I guess, so in May 2010, what started this was this technology company I was looking at and then I happened to listen to a radio show on a drive from St. Francisco to Santa Clara talking about California Proposition 19, which was about 6 months later in November 2010, and that started the search I put together with my partners, I put together a team to go around and understand this industry, and so we went to places like California and Colorado and Oregon and Washington, and went to Canada and Jamaica and Israel, Netherlands and Spain to understand cannabis around the world and ultimately got to the point where, you know, we really understood our thesis, you know, our thesis was that this is a mainstream product consumed by mainstream people all over the world and because of that the end of prohibition was inevitable and so we believed that almost 6 years ago and we certainly believe it today, you know, over the last 6 years, we have grown from about 15 medical cannabis states and zero recreational states to 24 medical cannabis states and 4 recreational states and I think we will see 10 more states enact some form of medical or recreational legalization in 2016.
Dave: Interesting, okay, and does each state have their own kind of rules, laws, and guidelines around medical cannabis?
Brendan: That’s exactly right. Each state implements its own regulatory framework and own laws. Interestingly, in many cases, the regulations are, you know, not only different from state to state, but they can be completely opposite. For example, that would be for instance something like packaging. If some states and some countries require all the packaging to be transparent so that you could see the whole flower, you could see the flower that you are purchasing; on the other hand other states require all the packaging to be completely opaque so that no one can see the product that they are purchasing, you know, that’s a total example, but you can look at these 200 to 300 page regulatory documents that are completely different from interstate and country to country.
Dave: Wow. That keeps your regulatory and legal team busy.
Brendan: Yes. I would say the compliance and legal costs in this industry are really different from any industry that I have ever worked in.
Dave: Really? Interesting. Even more than, I mean, well, it’s probably similar to like, I suppose the pharmaceutical, but may be even more so.
Brendan: That’s true.
Dave: Interesting, so could you give maybe a brief overview for everyone about your Privateer Holdings Tilray and Leafly. You are doing very interesting things with all of them.
Brendan: Yeah. So, you know, when we were first looking at the industry 6 years ago, the initial thing that we got wrong was that we thought we were building venture capital funds and realized pretty quickly that this industry was different. The sophistication of the founding teams and management teams of the companies in the industry were, you know, they were just less sophisticated than what I was used to in Silicon Valley and the companies were slightly less professional. They’ve certainly improved a lot over the last 6 years, but we realized that we needed to actively manage and operate the company in our portfolio, so we founded Privateer Holdings as a holding company; a private network holding company that invests, builds or acquires portfolio companies around the world in the cannabis industry, so we had 3 wholly owned subsidiaries in our portfolio. A company called Leafly, which is the world’s cannabis information source, so if you search for any strain of cannabis anywhere in the world, typically Leafly will come up as a popular Google result, like for instance, if you search for something like Blue Dream or any of the 2000 strains, Leafly would come up first. It provides information on cannabis strain, locations that provide them and their daily content around cannabis that our content team produces. The second company is called Tilray. Tilray is a federally licensed medical cannabis producer, processor, packager, and distributer in Canada, so we hold essentially 20 licenses in Canada where we grow cannabis, we package it, we ship it directly to patients, and then we also export from Canada to other countries that has national medical cannabis programs, and then the third company is called Marley Natural that we have done in partnership with the family of Bob Marley. We announced that brand a year ago, November 2014 and launched it 10 days ago, so the first Marley Natural accessories and body care products and cannabis went on sale 10 days ago in select locations.
Dave: Wow! Interesting, so we got you fresh off your Marley launch and Marley, I mean, I don’t know how you got that name, that’s impressive. You are selling, I know, it’s more of products like soap and lotion and stuff. Is that right? It’s not actual cannabis or…?
Brendan: It’s for ____12:30____, so there’s a body care ointment, soaps, lotions, creams, balms that use hemp seed oil and Jamaican botanicals, and so those items can be sold in all 50 states and internationally.
Brendan: And we are working with different retailers to distribute those. There is an accessory line that, it’s all glass and American black walnut, you know, really different cannabis accessories, you know different from the typical accessories in this industry which are a bit dorm-roomish or ____13:14____ in design and looks and then cannabis, so that whole flower and cannabis oils and extract and those products launched in California. Again, the accessories that I just mentioned, we can sell those in all 50 states and internationally.
Brendan: The final product line is, it is soft goods, clothing and hats and things like that around Marley Natural.
Dave: Okay. So you guys must be one of the leaders in this industry, especially with that brand, that doesn’t hurt. I was curious, did you raise outside money to start your private equity firm, I know, it sounds like you have a great VC background, I imagine you might have raised some money from them or how do you get it going?
Brendan: Yeah, so we, you know, we started with our own capital. We bought the first company with our own capital and raised an initial round of $7million, mostly from individuals and raised a second round of capital that was $75 million and that included a few venture capital firms and family offices that invested in our firm and really it included the first institutional investment, not only in our company, but in the industry as a whole, a group called Founders Fund led by an investor named Peter Thiel who was one of the founders of PayPal and the first outside investor in Facebook, that has invested in things like SpaceX and Airbnb and the Lyft, and they invested with us. It’s a little bit of a different industry, it is a hard industry for people to raise capital in, but fortunately we had something where we have had some success today.
Dave: Yes, and I remember reading about the Founders Fund a while back, what year did that happen?
Brendan: We announced that in January of 2015, so a little over a year ago.
Dave: Wow, that’s a sizable round. So I am curious, up in Canada, how are the prices set when you sell directly to consumers? Are you setting the prices or is that regulated?
Brendan: It’s not, it’s a fully competitive market and so we set the price, which enables us to produce products that are differentiated in the market place. In Canada we are known for a large variety of strains, we produce about 50 strains in our facility and we are also known for potency and so we have about half a dozen strains that are over 28% THC, so very potent strains for people with severe illnesses.
Dave: How potent is, I guess, what you would call typical marijuana, let’s say 20 years ago buying marijuana, what would be the potency back then compared to the 28% now?
Brendan: You know, so a lot of it was quality, so you can go to, you know, a place like Jamaica and you can find, you know, 8, 9, 10, 11, 12% THC strain, you know, a quality outdoor product involving California run by someone who really knows what they are doing can average probably around 20%, 21%, 22%, and once you start getting about 25%, you are looking at a product that was grown in a very controlled environment by experts, and so our facility in Canada, it’s a pharmaceutical grade facility, it’s a GMP (Good Manufacturing Process) facility. It looks a little bit more like something that you would see at NASA or if you have ever been to a pharmaceutical lab or a silicon wafer manufacturing facility, it looks more like that with people in clean rooms and people wearing suits, you know, body suits and masks, and really complicated equipment. It’s unlike anything I have seen anywhere in the world and I probably been in 1000 grow rooms.
Dave: Wow, and so do you do your own R&D on developing new strains at the lab?
Brendan: Go ahead.
Dave: Oh yeah. I was going to ask how large the lab is and how you got it started, how did you find the person to run that lab?
Brendan: Yeah, so we started that with 6 Americans and there is now 130 Canadians working at Tilray.
Dave: Wow. Ok.
Brendan: You know, we applied for license and bought a building and built the company, built the brands, and you know, in a short amount of time we pulled off a couple of miracles getting it done as quickly as we did. The facility itself is really a lab, you know, there are 40 identical grow rooms where we can test single or multivariable experiments side by side and so constantly innovating and learning and growing the same strain in two rooms side by side with different nutrients or different lighting with different feed schedules, you know, different amounts of CO2 or oxygen in the air, all different experiments to see what the best environment and conditions are for each strain and how they are different, you know, each strain or their different varieties, they are all a little bit unique in terms of what they are working for and when they are working for something.
Dave: Interesting. If you want to introduce a new strain or a modified strain, what’s the regulatory process? Is there any regulatory process in it? What if one had any claims along with that saying “hey it helps with nausea, chemo, or what’s the…
Brendan: Yeah, so that’s a really complicated question. Let’s start with the strain part. On the strain part, there is not really a regulatory body and there is really, there’s sort of an old school group of about 8 companies in Europe, predominately in the Netherlands, around Amsterdam, although a lot of them have moved to Spain over the last 5 years and I would describe them all as seed companies who have a breeding team focused on either, you know, looking for certain cannabinoids to be expressed, so high THC versus and high CBD or certain terpenes, so terpenes meaning things like pining or micing; the pining smells like a pine tree and micing smells like orange, and so lemoning which smells like lemon, and so they breed for those specific expressions. There is, you know, roughly 80 cannabinoids and terpenes in cannabis and so different strains bred by breeders show different things. There are lots of strain names like Jack Herer where multiple companies claim ownership, it is something that is constantly debated. It is not really a regulatory agency who owns certain strain genetics, although we are starting to see with the legalization of cannabis for medical purposes in Canada, some are sort of equivalent of the U.S. Patent Trademark Office, starting to see the Canadian equivalent look at registering specific genetics in strain.
Dave: Interesting. Okay, and do you see, are there, well, I guess, I have got a couple of questions. One is, what type of medical conditions, you know, for me I’m familiar with nausea and chemo for using cannabis, but what other type of medical conditions do you use cannabis for, and are there more and more studies coming out and showing the effectiveness of cannabis versus, you know, more traditional pharmaceuticals.
Brendan: So, I’ll start with the second part first. So in the U.S., part of the fact that cannabis was a result of cannabis being a schedule 1 narcotic is that schedule 1 means that there is no medical use. It’s a dangerous product that has a high potential for abuse, so cannabis is grouped with heroin and LSD, which means that we do not do a whole lot of research on cannabis, which means we sort of see to that intellectual property to other companies and other countries, so at Tilray we are funding or supplying study drug material to a PTSD study for Canadian Military Vets in Canada in partnership with The University of British Colombia. We are doing a childhood epilepsy study and an adult epilepsy study. In Australia, we are doing a chemotherapy-induced nausea and vomiting study. I am looking at a pain study there as well. In Ireland, we are looking at arthritis, glaucoma study and so we are supplying the claim-studied drug from Canada to different researchers and government agencies around the world, everywhere but the U.S. to research the efficacy of cannabis and medical cannabis product or a large variety of different illnesses and conditions.
Dave: Interesting. Yeah, I mean that brings up a good point that when I hear medical cannabis or marijuana, I think, you know for me it is more like, oh, street drug, but really you guys are just, I don’t know about next generation, but a pharmaceutical company in the sense that, you know, helping to treat people and doing it with an effective medicine. It just has a stranger history than more traditional pharmaceuticals.
Brendan: It has a stranger history, although it is a product that, you know, humans having been consuming for 5 to 10,000 years without causalities and without the addictiveness of certainly products like nicotine and tobacco, but also, you know, products like prescription pain killers and opioids that are so prevalent in the United States and around the world.
Dave: Yeah, and what you think is the biggest roadblock to really expand even more the medical cannabis, I guess in the United States especially. Is it the perception or regulations or ?
Brendan: No, I think it’s just time. If you looking at pulling numbers and even I was in Washington D.C., my last trip was in November and I met with 8 members of Congress and 6 of them were on the senate side, 2 were in the house. More interestingly, 6 of them were Republicans and 2 were Democrats and all the Republicans, they all realized that the end of cannabis prohibition is inevitable and certainly the elected officials realized that, but their staff are all, you know, 20 to 35 years old in age and they all know the inevitability of the end of prohibition or legalization, and so it’s just a matter of time, a little bit more research and a little bit more, few more Americans embracing legalization. Currently about 85% plus of Americans believe that medical cannabis should be legal and if prescribed by a doctor. You know, 8 out of 10, you cannot get 8 out of 10 Americans to agree on anything, but they agree on that, and about 58% of Americans believe that recreational cannabis should be legal, so it is all majority. I think we will get to around 65% in the next 24 months at which point it becomes pretty silly for the federal government to be arresting people and incarcerating them and prosecuting them and paying to keep them in jail when the majority of Americans believe that that’s a waste of time and energy in human capital.
Dave: Interesting and I have a couple of more questions and then I think we are about out of time. I have heard that some of these financial services and banking is tough with this industry, especially United States, is that what you found and is it the same in Canada? Do you have any dispensaries in United States? I don’t think you do.
Brendan: We don’t but we have one of the big 5 banks in Canada that know banking issues. It’s really different there and that we have a federal license. In the United States, we have had banking issues in the past and I actually have had my bank account shut down twice, the first time was very quick, the second time was with a large bank based in the Midwest, and one day a compliance officer stalled me and he was CNBC and said that is one of my clients, you know, I didn’t realize you were in the cannabis and we got a notice to shut down our bank account. We just hired someone from the U.S. Federal Reserve from the San Francisco branch to focus on banking and at bank compliance and so we got very good relationships with our banks and they understand what we are doing, and they feel very comfortable with their relationship with us, but it’s a huge issue from the industry as a whole, most of the companies in the industry are forced to conduct all transactions in cash, which creates a really dangerous environment, you know, I have been in a room with $1 million in cash, I have been in a room with $2 million in cash and it’s a little bit unsettling and it does not smell very good either.
Dave: No. Wow. That’s probably one thing, I was going to ask what the government could do to help make it safer, but it sounds like one thing they could do is help open up the financial services industry to the medical cannabis.
Brendan: That’s the number one thing the federal government could do to make the industry safer as a whole.
Dave: Interesting. So, what opportunities do you see in medical cannabis? What if there’s somebody listening, who’s like, I really like this industry, like what Brendan’s doing. You know, obviously, you guys are behemoths in the industry, but you know what other startups do you see, niches that are potentials in the United States or even across the world?
Brendan: Oh gosh! You know, we have between Privateer Holdings and the Leafly, Tilray and Marley Natural, we have about 250 smart professional employees who come to us from places like the DEA in the US Federal Reserve or places like Microsoft and Amazon and T-Mobile and quite a number of people from Starbucks. You know, we have people who are focused on, you know, legal work and compliance, accounting PR, HR, IT, and then a fairly large and substantial marketing branding team focused on marketing and branding our company. There are lots of jobs in the industry, it’s a growth industry. I think it’s a growth industry regardless of what happens internationally with the economy or global macroeconomic level. It’s going to be a growth industry regardless of what happens and regardless of what happens in the overall economy or on a state by state basis in terms of the growth base, so there are lot of jobs, there are lots of opportunities for lots of different people with a lot of different skill sets, and you know if someone was looking to get into the industry, I would look at other business models, you know, I have spent a lot of time reading about the end of alcohol prohibition in the 1930’s. I spent a lot of time looking at other industries that emerged like the emergence of bananas in the United States, you know, between 1900 and 1910, that was sort of a new agricultural commodity that wasn’t being sold in the US and then suddenly everyone was buying bananas. You look at the Internet, look at other products that have emerged and see what companies are in those industries, look at alcohol, look at all different companies making alcohol and all the various alcohol company niches and think about whether or not it is not particularly like that in the cannabis industry.
Dave: Oh! That’s a good idea. That makes sense. Alright, well I can keep talking for a while, but we should probably end the call, but I definitely appreciate your time Brendan, this is fascinating to learn more about what you are doing in the medical cannabis industry in general.
Brendan: Well, thanks so much for your interest Dave. I had fun.