Mitch Baruchowitz’s investment firm Merida in midtown Manhattan, has deployed $50M in capital to 17 cannabis-related companies in the last year and a half.
While his investee companies are growing quickly and the market is dynamic, Baruchowitz likes to say “We invest in the boring parts of the cannabis industry.” That includes any technology or equipment related to cannabis that gets widely used like laboratory testing services, compliance and data collection software, production equipment, and packaging. “There is a lot of traction in lab testing,” Baruchowitz said for example, “because it’s part of the supply chain, so everyone needs it and you can’t get around it.”
He jokes about boring products and services, but his team uses a rigorous methodology to choose those investments. The 16-person Merida team evaluates cannabis companies using a set of metrics to complete a quantitative scorecard to go along with qualitative information. The first question is always: how big can sales get? “We look for products that have large potential markets,” Baruchowitz said. “We don’t want a small brand or niche product that might not grow at the rate the market grows.” The national market is expanding “so we want something that will grow along with overall industry increases.”
One of these investment areas is compliance validation. Companies that run afoul of local and state regulations risk losing their license to operate so compliance is critical and tools have been created to help. Baruchowitz’s investee company Simplifya, makes software that works with cannabis cultivators and processors’ seed-to-sale software, to help those companies audit and assess themselves. The program helps businesses stay compliant with all regulations using things like checklists and reminders, and creates the necessary records and paper trails that banks and law enforcement might require. “Compliance validation is huge,” said Baruchowitz.
In his evaluations of potential investees, Baruchowitz looks for a management team that has experience applicable to the new business. “They may not have worked at another cannabis-related company, but they should have expertise in software or chemistry if that’s what they’ll be running,” he said. “There’s a behavioral taxonomy for management that includes 32 different aspects” he said Merida uses, including how closely records are kept and how well financial information is tracked.
Merida’s first investors were high net worth individuals, wall street executives, and doctors who believed cannabis could help patients. Recently, fund managers have started meeting with family wealth offices, Baruchowitz said, especially those with holdings in alcohol and tobacco that want to balance those categories with higher growth, higher risk cannabis investments. “We have more than 50 family offices in the pipeline to meet with,” he said.
“The industry is moving at lightspeed,” and funders need to understand the nuances and challenges companies face, said Nick Kovacevich, CEO of KushCo. Merida has entrenched itself in the industry he said, “and that knowledge allows them to keep pace.” Before he launched the fund, Baruchowitz worked with marijuana companies in Colorado and started growing operations in Connecticut, Minnesota, Nevada, Maryland and Pennsylvania.
Some of the companies Merida has invested in are KushCo Holdings which sells a large variety or packaging and other products that support the cannabis industry; GrowGeneration, which does commercial equipment sales; New Frontier Data, a data analytics and business intelligence company; Simplifya, a technology company helping businesses track cannabis compliance; Steep Hill Labs, a cannabis testing company; Canndescent, a premium edibles company; Valley Agriceuticals, a New York-state licensed cannabis cultivator and manufacturer of medical-grade medicinal cannabis; MainStem, a business-to-business marketplace and Emerald Scientific, a maker of cannabis science supplies, equipment, and information.
Stock prices of the publicly traded KushCo Holdings and GrowGeneration are both up from their launch. KushCo launch January 2016 at $2 per share and has recently been trading at over $5 per hare. GrowGeneration launched in November 2016 and ended its first day of trading at $2.30. It recently traded at $5.30. Most of the investment and return information is not shared because the company is privately held.