Cannabis Musings - May 19, 2023
What Sam Zell meant to me, and how that relates to the state of the cannabis industry
Friends – earlier this week, Sam Zell passed away. May his memory be for a blessing. If you don’t know the name, Sam was a legend in the commercial real estate industry, growing from managing apartments in Ann Arbor, Michigan to building three of the largest public real estate companies in the country. The son of immigrant parents fleeing Europe during the Holocaust, he was an irreverent and creative investor and businessperson, and truly a unique personality – his legacy is beautifully depicted in a video that illustrates what he built.
Sam was also my boss for fifteen years. As some of you know, a large part of my legal career was spent as Associate General Counsel at Equity Group Investments, Sam’s family office and personal investment firm. During that time, I worked on and led corporate and real estate deals in nearly every asset class imaginable and across dozens of industries. The team had nearly unlimited flexibility, which meant that I worked on transactions large and small, simple and esoteric (such as distressed CDO equity trading and something that had to do with lesser prairie chickens), straightforward and hilariously complex (including the take-private of the Tribune Company, possibly the largest leveraged S-corp. ESOP in business history, and plenty of net operating loss deals). I learned an amazing amount from Sam and the team about business, investments, dealmaking, risk assessment, negotiating leverage, tax structuring, and networking.
Why am I reminiscing about Sam and my time at Equity Group in a newsletter about the cannabis industry? Well, I was rereading a small, illustrated book of his sayings today (which is also on his personal website), and some of them really connected with me as I think about the state of the industry today.
In particular, “Liquidity equals value.” Sam was always keenly focused on cash flow, not only because it pays the bills - liquidity also provides the basis for optionality. Sam never liked to be hemmed in to one outcome on an investment and always sought to preserve all available options for every decision. Liquidity allows you to take advantage of opportunities that are otherwise closed off if you don’t have access to sufficient cash.
The cannabis industry still suffers from a severe lack of liquidity. This has created an existential crisis for smaller and larger cannabis operators that can’t pay their debts (in particular as companies use unpaid taxes to improve operating reported flow metrics), and it also severely restrains growth – marketing budgets, expansion into new markets, retainers for strategic consultants like Hauser Advisory, product research, etc. The handful of lenders that historically have provided capital to the space have severely cut back their investments into the industry, while equity investors remain burned by the dramatic destruction of value that’s unfortunately occurred over the past six-ish years. This is particularly felt in new adult-use states like New Jersey, where the demand and need for capital to build that market is great, but the sources are few.
Blitzscaling an industry from scratch requires an uninterrupted pipeline of investment capital until its companies are self-sustaining. That’s not happening in cannabis any time soon, and I unfortunately don’t see anything on the horizon to change that fact (no, I don’t think that SAFE Banking will do it, nor will uplisting). The industry has little optionality at the moment, and that’s mostly something it can’t control due to illegality.
Sam also said: “Superior achievements are not obtained by accepting conventional wisdom as anything other than a historical reference point.” Certainly, the entire licensed cannabis industry is being built on this mantra - the entire thing is federally illegal. The industry is privileged to be filled with dedicated people who truly believe in the product and the mission, and what they’re creating is certainly not based on conventional wisdom.
Part of the disconnect is that we’re trying to do is fit something very unconventional into a very conventional system and market (Sam would say “The enemy is without.”). (This goes back to my oft-repeated joke that the cannabis industry suffers from a quantum mechanics duality of being simultaneously illegal and high-regulated.) We need to change the rules in order to gain control of the industry’s destiny and take advantage of its opportunity. We need legalization.
Indeed, in my opinion, the industry should be monomaniacally focused on legalization. That means collaboration and ending the infighting (how many trade groups does this industry have?), coordinated lobbying, and, most importantly, changing the public narrative about how cannabis is perceived (for example, consider the efforts of the Cannabis Media Council, which I proudly advise) so that it’s no longer politically unsavory for members of Congress to do the right thing. I’m pessimistic and realistic enough to know that this will take a very long time, but, as a participant in, and observer of, this industry for some time now, we could (and should) really do more to control our destiny.
As Sam said to me on numerous occasions, “Am I being too subtle?”
Be seeing you!
Hauser Advisory provides advice and strategy on business lifecycle events and cannabis industry navigation, tapping into a deep, national network and twenty-five years of dealmaking and capital markets experience.
© 2023 Marc Hauser and Hauser Advisory. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form.