Nov. 3, 2020

Legal weed: The winners and losers

We’re all but certain that recreational adult-use marijuana will become legal in all 50 states at some point. We’re not sure when...but we are sure there’s money to be made on the inevitable.

Who makes that money, though, is another question entirely. Will it be small marijuana startups that have cornered one small, specific part of the market? Will it be major multinational corporations that got in on cannabis early with paradigm-shifting investments? Will it be both?

That’s what we’re taking on in this episode with Karan Wadhera, managing partner at Casa Verde Capital.

If you’re seeking an insightful guide to the legal weed world, chock full of predictions for profitability, look no further. We’ve got you.


Kinsey Grant, Morning Brew business editor and podcast host [00:00:09] Hey, everybody, and welcome to Business Casual. It is me, Kinsey Grant, and if you smell skunk, don't be alarmed. Let's get into it. [sound of a ding]


Kinsey [00:00:18] In the before times, the future of legal weed was set to be a major 2020 story after what can best be described as a bumpy 2019. It was about time to see which cannabis companies really had what it took to make it in the big time. And then COVID hit. We got distracted with a global health crisis, and a recession, and a new headline every single day that none of us had on our bingo cards for 2020. But, through it all, the cannabis space has been chugging along. 


Kinsey [00:00:45] Now that we're getting a little more used to the sprinted marathon that is 2020, it's time to take the time to think long and hard about where cannabis has been and where it's going. This has the potential to be one of the most important investment themes of our generation. But the question marks are large and they are in bold font. We are all-in on CBD, but recreational adult use marijuana isn't legal in all 50 states, at least not yet. It's hard to make a gold rush fortune when the gold can't be sold everywhere, right? 


Kinsey [00:01:14] So today, we are going to explore what happens when, and maybe if, marijuana becomes legal here in the states. All 50 of them. Will it be a watershed moment for the legions of upstart cannabis companies? Will it be Big Tobacco 2.0? Let's find out. And let's do it with Karan Wadhera, managing partner at Casa Verde Capital. Karan, welcome to the show. 


Karan Wadhera, managing partner at Casa Verde Capital [00:01:35] Thanks for having me. Pleasure to be here. 


Kinsey [00:01:36] So for the multilingual among us here, that translates to Greenhouse. I'm sure that's on purpose. Greenhouse Capital. [laughs]


Karan [00:01:42] Exactly. 


Kinsey [00:01:43] So it should come as no surprise that Casa Verde is a cannabis-focused venture fund. Might come as a little surprise to some of our listeners here, though, that it was founded by Snoop Dogg. [chuckles] It's a very cool job, very, very interesting background that you have. So, Karan, I am excited to have this conversation today. I think that cannabis is obviously a hugely compelling investment theme and just industry to cover, in general. I, in a previous life, did almost exclusively cover cannabis. So trust me, when I say —


Karan [00:02:09] Oh, wow. 


Kinsey [00:02:09] I will try to avoid all the corny jokes, [Karan laughs] mostly because I have made [laughs] all of them before, and I know that you're probably tired of hearing them. So we are going to jump right into it. Are you ready? 


Karan [00:02:19] Let's do it. 


Kinsey [00:02:20] All right. So, we'll get to timing in a little bit. But I want to start here because I think it's important to understand the answer to the question before we try to understand the business implications of that answer. So the big question is, why isn't recreational adult use marijuana legal federally in the United States? 


Karan [00:02:37] Oh, man. That's a big question. And it probably goes back almost 100 years, honestly, where it was very politically driven. And we saw a lot of propaganda here in the U.S. that prevented cannabis to become the burgeoning industry it is today. And it started with Reefer Madness, which was, you know—you can go look it up on YouTube—these insane videos, which purported crazy claims of what would happen if you consumed cannabis. 


Karan [00:03:10] And then continued on with the Nixon era, the Reagan era. These drug laws were just so onerous and made it so that cannabis would remain to be this Schedule I narcotic once the schedules were created, which didn't happen until a few decades ago. Cannabis got put in the same category as heroin, which is just insanity for anyone who knows anything about the plant. It's had an uphill battle forever, but there's always been a tremendous amount of support from consumers. 


Karan [00:03:48] And I think the government, as well as a lot of mainstream media, put a very stigmatic view on cannabis, cannabis consumers, forever. And it made it really difficult for legalization efforts to be taken seriously. But over time, you know, really starting in the mid- to late '90s, as you saw, certain states, California being one of the earliest, to adopt medical programs, that began this sort of slow crawl towards where we are today. 


Karan [00:04:17] And in the last few years, that kind of growth has been exponential. But the federal government has still stayed the course with its current classification of cannabis. And there have been some movements that were positive. They weren't necessarily laws enacted. But under the Obama administration, we have something called a Cole Memo, which sort of laid guidelines as to say, hey, if your states follow these few rules, we will not prosecute you from a federal level. 


Kinsey [00:04:48] OK. 


Karan [00:04:48] That was then ripped away with Jeff Sessions and now there are more bills that will make it easier. But yes, it's a big, complex [chuckles] question you asked. [Kinsey laughs] There's lots of reasons. But we're slowly chipping away at it. 


Kinsey [00:05:00] So how come this has been such a state-by-state effort? We've seen a number of states take this on, and it has become legal at the state level and a couple of states, what, like 11 or so — 


Karan [00:05:10] Eleven. 


Kinsey [00:05:10] At this point? But how come it is state by state? And do you think that that is—eventually, will we ever reach a point where all 50 states have said, yeah, OK, l let's do it. 


Karan [00:05:20] I think it's an interesting question, and I think it will happen in phases. So the state by state, again, you know, that's just a way our country is structured. States have a lot of power in what they can legalize and measures they can pass. So, when you look at what generally starts with like medical legalization and then moves into adult use legalization, allows initially patients who have certain conditions or a license to purchase cannabis. 


Karan [00:05:52] And then when it becomes adult use, it's just like alcohol, in that if you're above 21, you can go into these legal dispensaries and purchase cannabis freely. There's different rules as it pertains by even county in these states. But there's many reasons that drive it. But honestly, the number one reason is money, right? Cannabis provides a tremendous amount of tax revenue to governments. 


Karan [00:06:15] And so when you legalize cannabis, you can start taxing cannabis in all parts of the value chain, from the cultivators to the manufacturers, to the distributors, to the lab testing regimes, to the retailers. There is tax at every step of the way and governments make a lot of money. There's a lot of other reasons why people should be legalizing cannabis. You know, the positive medical effects it can have on many folks, to social justice causes. But at the end of the day, like, what is primarily driving it? It's money. 


Kinsey [00:06:47] The legalization process so far has been, I think, pretty fragmented state by state. Certainly —


Karan [00:06:52] Correct. 


Kinsey [00:06:52] When you get a state like California, that's the size of some countries. But other than that, it has been fragmented. What does that mean for the growth of the cannabis space on the whole? 


Karan [00:07:02] So, while it certainly stunts it to some degree, cannabis is still a pretty incredibly large legal industry here in the U.S. So, I think we anticipate that it'll be roughly a $16 billion industry this year, and that will grow exponentially year by year as more and more states come online. So while it has definitely been stunting the growth to some degree, the momentum at the state level is so strong that the cannabis industry sort of continues to grow. 


Karan [00:07:32] So there are five states that have some sort of legislation in front of them coming, you know, for this November, New Jersey being one of the, you know, right in your neck of the woods, you know, one of the major states that is voting on adult use. So, as these additional markets come on, that adds to the total market opportunity. 


Karan [00:07:50] But absolutely, once we start to see some level of federal intervention and starting to change, whether it's rescheduling cannabis, which is probably one of the more important things that needs to happen, cannabis is a Schedule I narcotic, like I said. And for context, cocaine is a Schedule II narcotic. The minute you start moving down the register there, there is a lot more you're able to do, whether it's opening up financial systems, research, etc. 


Karan [00:08:16] But then you also need to remember, and this is kind of how Casa Verde is set up, that there are a number of businesses that can kind of operate outside of the regulatory regime because they're not involved in what we call touching the plant. They're not growing. They're not selling. They're not manufacturing. But they are involved in compliance. They are involved in point of sale, in staffing, in financial services, all these things which still support the industry. 


Karan [00:08:42] It's kind of like, you know, you referenced the gold rush earlier, right, like the sort of picks and shovels that support it. So there is still a tremendous amount of economic opportunity even as we sit in this kind of fragmented landscape. 


Kinsey [00:08:54] So within this legal framework that we have now, there, like you mentioned, are a ton of different steps at which we can invest or can think about investing or think about the profitability of companies within this chain, from growing the plant to actually getting the product to consumers. What do you think is the most profitable, or has the most promise, or maybe the biggest margins within that chain of growing the plant to then getting it into the hands of the people who want to legally consume it? 


Karan [00:09:22] It varies, and again, depends on the maturity of the market. So in certain states, just pure cultivation is incredibly profitable right now. The cost of what it takes for you to grow the plant doesn't really change. Maybe it improves as you get better and better efficiency. But the price you're able to charge is completely reliant on the demand in the market. And in many states, demand is through the roof and supply is limited. 


Karan [00:09:49] So while it still only costs you—let's just make up numbers—$100 a pound to grow it, you're selling it for $3,000 or $2,000. Even $1,000. Even at $1,000, that margin is incredible. But in limited-license states, and I can kind of go through what that means, the margins are generally very, very high. So there are a number of states, as they institute adult use in their markets, where they will limit the number of folks who can actually grow or manufacture or retail. 


Karan [00:10:22] So in Massachusetts, for example, which isn't too far away from you, there are a handful of licenses at the moment. So every one of those players is printing cash because there's so much demand and there's only a few people who can actually grow and sell. 


Kinsey [00:10:36] Like supply and demand on [laughs] steroids. It's crazy. 


Karan [00:10:37] Yes, exactly. And so what happens is early in the cycle, almost every one of these businesses does well. Whether you're cultivating, manufacturing, you're distributing, you're retail, you're tacking on fat margins and you're making, again, a healthy profit. When it gets more and more competitive and there's more and more licenses, that cost starts to come down. Then it becomes challenging. 


Karan [00:11:01] So in certain markets, you can just have a product on the shelf and it will sell. We don't need to get into the details of what the product is or anything. There's so much demand, if it's a cannabis product, it will sell. But as you move into more mature markets, Colorado, Washington, Oregon, even California, there starts to be preferences and a lot of competition. 


Karan [00:11:19] So just like any other industry, it starts getting into brands and quality and price point, and it becomes a lot more competitive. So what's so interesting about cannabis is like you're in it in somewhat of a hyper-growth scenario, watching an industry become mature and institutional like you would have seen with alcohol over the course of 100 years. 


Kinsey [00:11:41] Yeah. So we know that competition is, in theory and usually in practice, good for [indistinct] and consumer. We get lower prices, we get more of a variety to choose from in terms of products. What does that competition mean for the operators within the cannabis space? I could kind of see it going either way. On the one hand, like you said before, it gets a lot harder to make super-big margins and you have a lot more people who are trying to win over. And at the other end of the spectrum, though, it, I imagine, has to kind of lend credence to an industry that has struggled with [chuckles] this stigma for so long when there are more players. 


Karan [00:12:17] Yeah. And so it's a delicate game and it's a balance. And states treat it differently depending on what their view is. So I think ultimately, for the consumer, competition is good. It generally brings prices in line and you're able to get quality product at more affordable prices than maybe what they would have been earlier. So I think it's great from that standpoint. 


Karan [00:12:41] For the operators in the space, yes, it's challenging, right. They would prefer if they were [chuckles] still only one of a handful of players there, but they do get a head start. So you have to continue making your business more operationally efficient, continue to gain market share. So even as they open more and more licenses, you can be competitive. I think this just comes down to kind of like any business. People, you know, sometimes get fat and happy and lazy if they don't have to do a lot of work and make a ton of money. 


Karan [00:13:08] You saw a lot of people in California—so California, like I said, still has a very large burgeoning black market. And as we saw the legal industry come into play, many of those players said, we don't want to play in the legal space, we will never make as much money. But eventually, it's gonna be hard to be an illegal operator in California. It's not that hard right now. [Kinsey laughs] You're probably OK. [chuckles] But, once enforcement comes into play and once the legal market can be more efficient, and they're competing against you on price, and you're not lab-tested and you have not gone through all these things, it's going to become tough. 


Kinsey [00:13:42] Yeah, especially in a state like California where people care deeply about health and wellness. [laughs] 


Karan [00:13:46] Yeah, exactly. 


Kinsey [00:13:47] It's easy to see they'll be priced out, and also just law enforcement [indistinct] [chuckles] to make up for it. 


Karan [00:13:52] Yeah. 


Kinsey [00:13:52] What does all this mean for institutional investor interest? A lot of the companies that we talk about in the cannabis space are smaller companies. And, I think we have this sort of expectation that these are sort of upstarts that are trying to make a difference —


Karan [00:14:06] Right. 


Kinsey [00:14:07] State by state. And none of them are super huge, but that, I think, is something we should stress test here. Is there institutional investor interest? 


Karan [00:14:15] Absolutely, yeah. And cannabis has kind of everything that you can imagine. So, a lot of what we have done has been in this kind of—call it technology space. Investing in software businesses, hardware businesses, service businesses that are much more aligned with what institutional investors want to see. It also is ancillary, doesn't touch the plants. They get a little more comfortable there. 


Karan [00:14:39] So we've seen a number of institutions come into our space. We've worked and helped to bring in a lot of them, from Tiger Global to Drive Capital. Howard Schultz recently came in to co-lead a deal in our portfolio. And then even large conglomerates like Imperial Brands out of the U.K., coming into the space in one of our deals. So, yes, I think there is a lot of interest there. 


Karan [00:15:04] And then you also need to remember, one of the interesting things about cannabis, because it was so difficult for some time to raise capital traditionally in the private markets, a lot of cannabis companies, even here in the U.S., went public in Canada, where there is a full federal legal infrastructure. So, yeah, any one of these topics we could spend your entire episode on. [Kinsey laughs]


Karan [00:15:25] But one of those things it did is it's created now publicly traded organizations that are quite large. So, even from the U.S. perspective, GTI, Curaleaf, Trulieve—these are companies that are publicly traded worth billions of dollars. So, yeah, there also are some pretty large companies, we call them multistate operators here in the U.S., that are being developed. And you can actually publicly trade those stocks. 


Kinsey [00:15:52] So why should they invest in the first place? Is it still possible to be ahead of the curve in terms of investing in cannabis? 


Karan [00:15:58] I mean, absolutely. We're in still the earliest innings of the growth here. Again, let's put it in perspective. We think the legal market this year in the U.S. is something like $16 billion. The black market is conservatively four to five times the size in the U.S. 


Kinsey [00:16:16] Wow. 


Karan [00:16:16] Right. So just on that alone, encompassing what is the illegal market into the legal infrastructure is a huge opportunity. But then don't forget, we're now discovering some of the populations that are sort of quickly the fastest growing in terms of cannabis consumption are baby boomers and seniors, as they are looking for alternatives to opioids or other pain medications and looking to cannabis for some relief there, or even just for recreation alternative. There's another massive population of people who are just starting to understand how they could consume cannabis in a way that is appealing to them. So the kind of, again, like blue sky there is massive as well. 


Kinsey [00:16:56] OK, we've gotten a great understanding of where we are in the legalization conversation and this sort of interaction between the institutional investor side and the cannabis industry as a whole. In just a second, we're going to talk about why all of that matters. But first, a short break to hear from our sponsor. —


Kinsey [00:17:15] And now back to the conversation with Karan Wadhera. I want to run through some of the major investments that existing giant corporations have made in these a little smaller, but still pretty big cannabis corporations. Altria. We had Constellation Brands, Anheuser-Busch. Some of these big, generation-defining companies have been making investments in the cannabis space. What does that mean for the legitimacy of the cannabis industry as a whole? Does it offer anything for operators within the space? 


Karan [00:17:44] Yeah, I think absolutely. Any movement of that sort is positive to the narrative, which is that, hey, if you were doubtful, it's clear that some of the largest conglomerates in the world care about this industry and want to get a piece of it because they see the opportunity. That's really what it does. And I think that helps sentiment on the whole. Whether they made great investments into great companies is—we will see. 


Karan [00:18:10] I think we know the companies they invested in quite well. They're really good people. I think, as I mentioned, though, the only channel for Ultra and Constellation, in particular, was these Canadian-based, Canadian businesses. Canadian-based and Canadian listed. And they are limited in what they can sort of approach. They can't invest in the U.S., where there is this still-continued divide between federal and state legality. They've attempted to in certain ways, but it's very complicated and difficult and somewhat shady. [chuckles] 


Karan [00:18:42] So they're limited to Canada and then some of these other markets where they can participate. So Europe is a burgeoning medical industry. They're starting to have some touch points into Germany, into Portugal, into Spain, into the U.K. But those are still very tiny compared to the behemoth that is the U.S. in the industry that's building here on a state-by-state basis. So, I think it is positive. It shows that there are real businesses that are legitimizing the industry. How it all plays out—that's yet to be seen for those particular firms and the investments they made. 


Kinsey [00:19:16] So, we've been talking about this in a state-by-state approach. But let's say tomorrow, federal legalization happens. Who stands to gain the most? Is it these big companies that are already publicly listed and have the backing of existing larger corporations? Or can the smaller companies also make a huge mark on the industry? I guess like who wins? Small or big? 


Karan [00:19:38] It's a complex question because, again, you have to define maybe what we think full-scale federal legalization means. So what many people think of it as is: Does legalization hit the same way it hit alcohol? So, like, there will be a moment and a day. Cool. Now, anyone in any state can just purchase cannabis. You can make the cannabis in California, ship it to New York. It'll sell in the New York stores. Things like that. 


Karan [00:20:02] If that happens, there's gonna be a ton of bloodshed because there has been so much infrastructure built in states where it probably shouldn't be the case if there was full-scale federal legalization. Think about it like any other industry. Like where does all the wine in the U.S. come from? Largely California, Oregon, like the West Coast, where there's the proper climate to grow it appropriately. And then it's sold all over the country. All over the world. 


Karan [00:20:29] If that happened to the cannabis industry, the same things would happen. Like California and other areas where they have great experience in growing the product from an agriculture perspective, and they can do it the most affordably, they will end up dominating one part of that cycle, which is cultivation, and maybe others for manufacturing. There's no need for there to be cultivation facilities in every single state in the U.S. So I think if full-scale federal legalization happens, while it would be a very net positive for like the big headline numbers—retail sales and things like that will go through the roof—there's a bunch of folks who will be caught with some unattractive assets and it will impact them dramatically. 


Karan [00:21:08] However, I think what we will see is much more federal guidelines to make it easy for things to continue to operate on a state-by-state basis. And you continue to have the microeconomies, the California cannabis economy, the Oregon cannabis economy, you know, Texas eventually, things like that. And so, when that happens, and it makes it plausible for investors to pour more money in in a way that they feel is a lot more risk-adjusted now—they don't have to worry about maybe federal intervention in a negative way—then I think most of these businesses benefit. You're small or you're big. 


Karan [00:21:44] Because now you're gonna have a ton of real money driving in there. You can open up the sort of banking infrastructure, things of that nature. And whether you're mom-and-pop with two or three retail outlets or you're a big multistate operator, you're going to see a tremendous amount of capital flowing. And then I think what you will see at that point is consolidation. So you'll start to see the kind of rollup of a lot of these assets and some will do well, some won't. But depending on which way it happens, it can be like fully positive for everyone in the space or some will do well if they have the right assets and others will get impacted. I don't know if that made sense. 


Kinsey [00:22:22] Yeah. No, it did. I think it was also just a really illuminating example. And it sounds really, really shitty when we hear the word bloodshed, but that is the hard and the honest truth about as an industry matures, there are certain parts of that industry that go to the wayside. And that's just the nature of a business. Like, that is show business [chuckles], you know. 


Karan [00:22:40] True. 


Kinsey [00:22:41] But I think one interesting thing that you bring up here is—this California wine example is one that I think is going to stick with me, certainly. That there are states right now where cultivation is happening and this is just one example. Cultivation is happening and maybe it doesn't make the most sense or it's not the most financially logical or feasible situation. This opens a huge door, I think, to talk about this vertical versus horizontal integration. This is something you brought up when we first met. Can you explain a little bit more what integration looks like within the cannabis space right now and why that matters moving forward? 


Karan [00:23:13] Yeah. So a lot of the multistate operators that are public listed, and a bunch of other companies, are vertically integrated. And what that means is they grow the plant, they manufacture it, they distribute it, and they retail it. So they're involved in all aspects of it. And one of the appealing reasons to do that is when you sell, you know, we'll just use 7-Eleven as an example. 


Karan [00:23:37] When you go and you buy a Coke from 7-Eleven, you know, you buy for $2. 7-Eleven probably bought it for a $1. And they're making that spread of a dollar. Now, if 7-Eleven made the Coke and it cost them 10 cents or 20 cents to make that bottle of Coke, now they're making a $1.80 from that $2 because they've controlled that entire process. So that's where it's, on the surface, very appealing. You want to be vertically integrated, you capture more margins. It's great. 


Karan [00:24:04] The problem is it's very tough to be vertically integrated. And each one of these businesses—cultivation, manufacturing, distribution, retail—are completely different. And if you look at the more mature industries, you don't find that as often. I mean, it's happening in certain pockets, but for the most part, you go to a Walmart. There's products from all over. They're not all Walmart products. There are some, and there's white labeling happens. And so I think there is a big debate as to sort of how that will play out over time. And will it remain vertical? 


Karan [00:24:38] And many industries have to start vertical because it doesn't exist. So if you're, again, like we're in Massachusetts where the laws sort of lend themselves to be vertically integrated, you needed to grow, you needed a manufacturer, you needed to distribute to yourself and sell it, because that's kind of all you can do. There's no product to buy. You've got to grow it and sell it. 


Karan [00:24:56] As a state and these economies mature, we prefer, as investors, a lot more of that specialization. You are good at this. And this is all we focus on. We continue to get better and better and better at it, regardless of where you are in the value chain. And I think that's eventually how things go. Look, it's all yet to be seen. And I could be very much proven wrong. And, if the multistate operators and these other folks continue to be excel at every part of it, and at the same time create the most compelling brands, etc., then they would have done a very good job. I think it becomes harder to do so. 


Kinsey [00:25:36] Yeah. And I think especially in such a capital-intensive industry, we think about agriculture alone. Very capital intensive. Retail [chuckles]—crazy intensive. And this is really combining all of those things if you want to be fully vertically integrated. 


Karan [00:25:49] Right. 


Kinsey [00:25:50] All right. So we are going to take a quick break to hear from our sponsor. And when we come back, we're going to make some predictions, talk a little bit about timing. —


Kinsey [00:26:00] And now back to the conversation with Karan Wadhera. So we've talked a lot about what legalization might look like. I want to lean a little into the historical precedent that exists, at least the closest precedent that we have. What happened in Canada? This was a huge story. And we talked about full federal legalization and it was in North America and there were all these market comps we could make. What was the actual outcome? What's it been like since legalization happened? 


Karan [00:26:27] It's been very challenging. And I think it will continue to be challenging whenever we see kind of full scale federal legalization. Because the reality is, even though Canada was able to make that decision at the federal level, they also have a number of provinces, and each province was going to treat things differently, and their tax regime was going to be different, and their rules were going to be different. So it also was complicated. Not as complex, obviously, as the U.S., but still complicated. 


Karan [00:26:51] And a lot of things were put in place that made it not as liberal as, I'm sure, the licensees wanted. So they had a lot of trouble with—they kind of adopted this idea of plain packaging. And so everything looked exactly the same. I was hard to differentiate from brands. They rolled it out in terms of what could be sold. So initially, it was only flour for a long period. Then it became some vapes, then edibles or beverages were introduced. 


Karan [00:27:19] So it was all done a little sloppy, and it made the kind of anticipation for how big Canada was going to be. It changed people's perspective there. And some of the results weren't great. The reality is also you gotta remember, Canada is just not that big of a country. California, on its own, will produce more volume and sales, etc., than Canada will as a nation. So it's complicated, though. And as being the first major nation to legalize cannabis, first G7 country, you kind of become the testing ground for how this works and how things go. So it's been sloppy, I would say, but it's gotten better now we're a couple of years into it, and it continues to improve. But, yeah, it was definitely a challenging rollout for the country. 


Kinsey [00:28:09] Do you think that other G7 countries, or even just major developed countries, took lessons from what happened in Canada, or was it kind of just like, oh, shit like that didn't go as planned? [laughs]


Karan [00:28:20] Yeah, no. And I think that's what happens sort of across the board. That's what happens at the micro level here in the U.S. Colorado was the kind of testing ground. And then we saw other states follow suit, and the new states that will come online will get to benefit from those lessons learned. So, yeah, I think everyone is watching carefully. They're obviously testing the temperature of their own populace. 


Karan [00:28:39] One of the good things is cannabis is incredibly popular and there's massive support from a consumer standpoint for full-scale legalization and almost full consumer support for medical legalization. So all that helps. And, we're in many ways trailblazing and starting a new industry from scratch, if you ignore the black market. So there's a lot to be learned through that process. 


Karan [00:29:05] And it's getting better because we do have a lot of interesting comparisons in more traditional industries, whether we want to look at tobacco or alcohol or pharma or CPG. That ends up becoming one of the bigger debates for states and legislators—is how do we want to treat cannabis. Are we creating an exciting recreational market or do we just want it to be a medical market? How should we handle the ability to advertise and market and tax it? So there's a lot of complexity to it. But I think definitely, with every state and country that comes online, the states to come will learn valuable lessons. 


Kinsey [00:29:43] Yeah. And we talk about how much demand there is and how much widespread support there is for medical and for recreational use. I'm interested to hear what the argument against this would be. [chuckles] Why? Why not, at this point? 


Karan [00:29:56] There are always going to be detractors who have their own interests at heart. When we were going through legalization here in California, it became apparent that one of the main supporters for anti-legalization was one of the big pharma companies, or creators of some of the bigger opioids, because their industry is at risk. I think for a long time, alcohol and tobacco were probably opposed too. I think now they've realized it's too far gone and it's coming. 


Karan [00:30:23] And so, instead of trying to fight it, let's make sure we have our fingers in the pie and make some investments and things like that. So —


Kinsey [00:30:32] Yeah. 


Karan [00:30:32] I think at this point it's tough. There are still people who are always going to have moral issues with the industry or something else. But I think, again, like I said, it's starting to erode from that perspective. 


Kinsey [00:30:44] Right. And speaking of moral and somewhat ethical issues here, one of the big conversations in terms of legalization and rescheduling, especially marijuana, has been that this is, in a lot of ways, a racial issue. We hear all the time that marijuana has been legal for white people forever, [laughs] for decades. And it hasn't been the same case for people of color. And I was looking at some stats before this. The ACLU says that despite roughly equal usage rates, Black people are 3.7 times more likely than white people to be arrested for marijuana. Why is this, and what would change about that with some sort of more widespread legalization? 


Karan [00:31:23] Why are minorities targeted more than non-minorities and people of color? I mean, that's a big question, and I wish I knew the answer as a minority myself. That goes deep and layered. 


Kinsey [00:31:35] Yeah. 


Karan [00:31:35] And I think clearly Black and Latino communities have been targeted, and they're overpoliced stop-and-frisk in places like New York. I think it's something like 86% of the people arrested for drug possession in New York City were Black and Latino between 2014 and 2016. It's crazy. So I can't give you a reason as to why our communities are more targeted from that perspective. 


Karan [00:32:01] But, what I can say is, when you decriminalize, or you legalize, yes, you're freeing up so many resources, like you're not targeting teenagers for having a joint. You're not going after these populations that are using cannabis for whatever reasons it may be. So I think that it frees up a lot of that policing. It opens up our prisons. There is so much positive social good that comes from it, given the current infrastructure that we live in, that there is a huge reason to push for it. So, yeah, I think it's massively important. 


Karan [00:32:43] And I think you're starting to see people realize that. So like we said, we have 11 states which have some form of adult use. You have 33 states that have medical cannabis laws, 16 states have decriminalized it. We are moving in the right direction. But certainly, there's still a long way to go. 


Kinsey [00:33:00] Yeah. I think this has been a theme throughout the year 2020 on this show—is that obviously we've been talking at length about the money to be made, the financial impact be made. But there also is a more ethical and impact-investing [chuckles] kind of impact to be made. 


Karan [00:33:14] Absolutely. 


Kinsey [00:33:14] It is important to keep in mind you can do both at the same time. So let's talk for a minute here about timing. What has COVID and the pandemic and the recession [chuckles] done to the cannabis industry? What has been the impact? 


Karan [00:33:27] You know, as I mentioned, it's been very positive. The first thing that happened was you saw cannabis get deemed essential. So while a number of businesses were shut down, cannabis businesses were operating. The second thing you saw was sales continue to rise during the pandemic. And in fact, many states having record months after record month. And I think that goes to show you, obviously, how important the industry is and that, even within a pandemic, we still continue to thrive. That's been very positive. 


Karan [00:33:57] And I think the third thing is that governments now realize, obviously, governments have been hit massively from a tax perspective, with so many businesses shutting down and the loss of revenue and unemployment. So there is a real urgency to look for new sources of tax revenue. And cannabis is kind of sitting there and, you know, on a silver platter for [laughter] many of these states and places. So I think that's going to help tremendously. So, obviously, wouldn't wish a pandemic on anyone, but it's certainly been very positive for cannabis. 


Kinsey [00:34:26] Yeah. We think about some of these more—and I'm [chuckles] a little iffy on calling them a vice—but these vice sort of things, like alcohol, that sales often go up in a recession. Do you think that cannabis is a recession-proof industry? 


Karan [00:34:41] I do. Yeah. Absolutely. And again, we can use alcohol and tobacco as comps. Again, historically, even when they're mature, their sales either stay flat or they increase during a recession. And again, we've now just had this pandemic as proof of that, so we now have multiple months of data and cannabis sales continue to do well. So it was always a thesis of ours, but it had never been sort of appropriately proven. And obviously the pandemic has helped us from that perspective. 


Kinsey [00:35:13] Yeah, it's interesting to me because it's not cheap, hypothetically, against [indistinct]. [laughs]


Karan [00:35:19] No. It's very expensive. Absolutely. 


Kinsey [00:35:21] And people are still willing, even as incomes decrease, people are willing to prioritize [chuckles] where they're spending their money. 


Karan [00:35:27] Yeah. And I think it shows how important it is in certain people's live. And again, you can minimalize that, and again, try to target people as stoners or whatever else. But for a lot of people, this is actually their medicine and this is how, whether it's stress anxiety or more chronic issues with pain. And then for others, it's the replacement for the glass of wine or beer or anything else. And in many ways, a much healthier option as well. 


Karan [00:35:55] So, yeah, I think it's obvious and it will continue to, I think, cement its position. And I think in other mature markets, it's actually eating into the growth of other industries like alcohol. So, yeah, it's certainly something that I think continues to grow and I would absolutely categorize it as recession-proof. 


Kinsey [00:36:12] OK, good to know. So as we turn the corner here, we're almost finished. Got one more big question for you. This episode is coming out right around the election. There are supposedly [chuckles] two outcomes to this election. What would each of them mean for the cannabis industry in the United States? 


Karan [00:36:29] Well, first of all, vote. If you're not voting—no matter what position you have, it's very important. I think it's largely irrelevant. And so let me caveat that by saying Biden is incrementally more positive because their campaign have laid out how they will treat decriminalization, medical legalization, states' rights, etc., which is great. And so we know—we almost kind of know what's in store—or we think we know, right, there's still, you know, the Congress that has to sort of pass and ratify everything that the government would want to do. 


Karan [00:37:02] With Trump, even though he has not been vocal on his positions or where he thinks it should go, the reality is the states which are, again, pushing for legalization, whether it's medical or adult use, many of those are red Republican territory. Whether you're talking about Mississippi or Lahoma or South Dakota or even Florida and Arizona, these are all states which have, or are trying to have, sort of legal infrastructure around cannabis. 


Karan [00:37:34] So I think all of that is incredibly important to understand. That there's so much support within these governments that certainly that will have an influence on what the federal government does, even if it's under a Republican administration. So I think Biden slightly more positive, but I don't think by any means is another Trump presidency a negative for the industry. 


Kinsey [00:37:59] All right. Good to know. 


Karan [00:38:00] Yeah. 


Kinsey [00:38:00] Well, I love ending with the election question here and go vote. And also, it doesn't really matter for this specific industry. [laughter] It's so interesting. OK, well, Karan, thank you so, so much for coming on Business Casual. I really liked taking this industry apart a little bit with a fine-toothed comb here and understanding some of the stigmas that exist and what that means from an investment perspective, and trying to crystal ball into the future a little bit has been very fun and certainly very illuminating. So thank you so much for taking the time. I really appreciate it. 


Karan [00:38:29] No, thank you so much. It was fun. 


Kinsey [00:38:38] Thank you so much for listening to this episode of Business Casual. Like I said at the top, I used to cover cannabis a ton, and it's an industry that is endlessly fascinating to me. I think that my passion for it was obvious in my op ed column this week. But my column is always impassioned, even if it isn't full of weed puns. Go check it out to see what I'm talking about. Comes out every Sunday night, and you can sign up at if you haven't already. That's 


Kinsey [00:39:06] See you next time. [sound of a ding]