MedMen – The First Billion Dollar Marijuana Startup?
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As much as some people love to hate Uber, it’s the most valued startup in the world today with a valuation of $68 billion. It is one of 228 other startups that are worth more than $1 billion, something that we now refer to as being “a unicorn”. The idea behind the term is that unicorns are extremely rare, and will account for the majority of returns in a venture capitalist firm’s portfolio. With 9 out of 10 venture capital (VC) backed startups failing, it’s these unicorns that pull all the weight when it comes to showing the types of returns that investors will demand for such risky investment propositions. If at any time you want to see how many unicorns there are in the world, CB Insights keeps the master list. Here are the last 5 startups to become unicorns according to that list:
We’re not surprised at all to see China representing 3 of the last 5, considering that they are dominating the globe in everything from artificial intelligence to robotics. We’re also not surprised to see an Israeli company make the list, OrCam, which we covered recently in our article on how Technology for the Blind is Worth Billions. What we were surprised to see though is that a cannabis startup has now made it onto this list. With so many venture capitalists now dabbling in the cannabis scene, it was only a matter of time. We decided to take a closer look at the first unicorn to come out of cannabis that wasn’t the result of an evening spent taking powerful psychedelics.
About MedMen
Founded in 2010, Los Angeles startup MedMen has taken in $53 million in funding so far to build what Mashable calls “an Apple Store for pot products”. (That’s a surprisingly low amount of funding for a company worth a billion dollars.) Shortly after our article was published, the company was kind enough to reach out to us with some exact details around their previous funding rounds and the private equity funds they raised. These are as follows:
The company raised $15 million of venture funding from Cap-Meridian Ventures on April 18, 2016. Those funds were used to continue expanding its presence in California on the heels of AB 243 and 266 (MMRSA) with a fully integrated presence. MedMen Opportunity Fund I, a private equity fund, launched in June 2016 and raised $60 million in 9 months. MedMen Opportunity Fund II, also a private equity fund, launched May 2017 and raised $75 million in approximately 6 months. The company raised $38 million of private placement that closed on Feb 14, 2018. Captor Capital accounted for $25 million of the total. The pre-money valuation was $1 billion. (Captor put in $25 million for 2.5%)
While there are all kinds of numbers being thrown around out there, these are from the horse’s mouth. What we were particularly interested in was the investment by Captor Capital (CNSX:CPTR) which is actually a publicly traded company. A look under the hood shows that in fact, this transaction by Captor Capital is much more convoluted than just a traditional venture capital investment.
The background of MedMen is pretty straightforward. They have now grown to 700 employees and are planning to dominate the high-profile cannabis markets, mainly New York, Las Vegas, and Los Angeles. According to an article by Bloomberg, “MedMen’s management group and two funds own or operate 11 businesses: eight dispensaries, two growing facilities and one manufacturing plant“, a portfolio which included one license to open a dispensary in Manhattan for which they spent $26 million to acquire. Fast forward to today and MedMen is planning to do a reverse merger on the Canadian Stock Exchange where they will begin trading under the ticker MMEN according to an article by the Green Market Report. That billion dollar valuation came about from a single investment by Captor Capital, a firm that isn’t exactly your typical VC.
The story of Captor Capital begins with a company called NWT Uranium Corp, a Canadian investment company engaged in the gold and precious metals sector. In June of 2017, they changed their name to Captor Capital and towards the end of 2017 their financials looked like this:
The above numbers are in Canadian dollars, so this is a company that had a whopping $3.15 million USD in assets as of late last year. Just 5 months later we see that their market cap sits at around $60 million USD with shares of the company having appreciated more than +2,000% since they began trading in October of 2017. So what happened?
In November of 2017, Captor raised $3.95 million USD to acquire 21% of a company called I-5 Holdings which was described as follows:
The company currently has operations in Washington and California, including core asset, MedMen, which operates I5 Holdings’ two dispensaries, including a 8,148 sq. ft. dispensary in Santa Ana, CA. Santa Ana is the only city within Orange County (population 3.17 million) to allow dispensaries and MedMen holds one of only 20 available licenses. I5 Holdings also includes MainStem, a technology company that provides industry-leading products to cannabis businesses and Mellow Extracts, a service for hire extraction lab that serves as a wholesale supply chain partner for leading brands.
In January of this year, they raised an additional $15.8 million USD to acquire the remaining shares of I-5 Holdings. Then just several weeks ago, Captor Capital raised another $44 million which we can only assume is that they will use to acquire the 3% of outstanding shares in MedMen which will set them back $30 million. After all the dust has settled, Captor states that they’re not solely investing in the cannabis sector going forward but also in other disruptive technologies, like esports for which they’ve made an investment in Millenial eSports (CVE:GAME). They also continue to have exposure to natural resources with their holding in URU Metals (LON:URU) which is engaged in exploration and development of mineral properties in South Africa and Sweden.
According to an article by Marijuana Business Daily, “Going public in Canada will give the company more resources to acquire licenses. In order to purchase those licenses and turn those dispensaries into MedMen-branded unique retail concepts requires capital, and that’s what going to Canada allows us to do,” said MedMen.
Conclusion
The fact that MedMen managed to secure a billion-dollar valuation so quickly is not unsurprising given how much attention we’ve seen from investors in the cannabis space. It’s somewhat comforting to see that a syndicate of investors has ascribed this valuation as opposed to what we originally thought was just a single investment by a uranium company turned disruptive technology investment firm. What we do know is that as soon as the floodgates open and retail investors get the opportunity to buy shares in MedMen, they will probably drive the valuation even higher. Should shares of MedMen begin trading on the CSE, we’ll dig into their filings to give potential investors a clear look under the hood and compare their financials to their billion dollar valuation.
MedMen plans to list sometime in the second quarter of 2018. If you want to trade shares of Captor Capital (CNSX:CPTR) or MedMen (if and when they begin trading), you’ll first need to open a brokerage account with a broker that lets you easily trade shares on foreign stock exchanges.
Share
Captor Capital …or whomever…invested $30 M in exchange of 3% of MedMen (MM) raises lots questions and eyebrows as well as places others firms in the cannabis space and Feds on notice. Why? Assuming the published MM financials were used to project future cash flows and were discounted to arrive to a present value under some set of assumptions not published, there is no way to justify a billion dollar plus valuation. This is somewhat believable if either party retained a qualified valuation firm and applied the intrinsic valuation approach which is more realistic and complex when comparable or benchmark values are limited as in the case of the cannabis sector ; frankly, I doubt the method was used. In any case, if the deal is a financial engineering move by mutual agreement to benefit from such deal structure and outcome in the future including scaling to be the 800 gorilla (or perhaps a few 500 lbs. ones) in this emerging sector to capture and control market, this onion (deal) needs to be peeled and scrutinized very fast, carefully and well. Otherwise, this may quickly become the template for peers to imitate and accelerate the formation as well as increase the number of vertically integrated firms in a nascent industry. Eventually, the deal may serve as a platform to design and encourage an oligopolistic presence/structure similar to film-making, technology, spirits, telecommunications, etc. Also, regardless of the motivation, if any of the above mentioned scenarios are true, the deal may well serve as a MEGA barrier of entry to emerging and smaller, existing cannapreneurs (and more so those of color and women). Hence, their numbers will be reduced while placing them at a lasting competitive disadvantage. Furthermore, the social equity considerations will be of little or no value and, by default, eliminate the goal of ‘leveling the playing field’ for the lesser capitalized and connected. Welcome again to the prospects of wealth concentration in the few and by the few. Just saying!