A Marijuana Venture Capital Firm Has an IPO
If you were watching the market yesterday, you may have noticed the complete lunacy on display as shares of Tilray breached $250 per share. It’s almost impossible to fathom such irrational exuberance. When the company CEO sat down on CNBC’s Mad Money recently, talking about his company reaching a $100 billion market cap, people must have actually interpreted that as solid investment advice. Just to put this share price increase into perspective, at yesterday’s peak, Tilray was more valuable than any of the below companies:
- Best Buy – Sold $39 billion of technology products, services, and solutions in 2017
- Hershey Company – Sold $7.5 billion of confectionery products in 2017
- Tyson Foods – Sold $38 billion of chicken, beef, pork, and prepared foods in 2017
- Stanley Black & Decker – Sold $12.7 billion worth of tools and storage, accessories, and security solutions in 2017
- Nasdaq Inc. – A financial exchange that cleared nearly $4 billion in 2017, and ironically, the same exchange Tilray trades on
Compare those numbers with the $20.5 million in revenues that Tilray managed in 2017 and you can get some idea of how much this stock is being driven by hype.
We recently penned a piece titled “Buying Marijuana Stocks in 2018 – Is it Too Late?” in which we talked about how there’s probably going to be a correction soon. We also talked about how “experienced investors could try and play the short side of the trade now, but it’s not a good idea to bet against irrational people who are stoned out of their gourds.” You can almost feel the pain of shorts like Citron, who scratch their heads and wonder just how dumb the herd can possibly be at this point. Anyways, enough with all the pessimism and negativity. We’re here to get rich by investing in marijuana stocks, right?
In this article, we’re going to talk about a cannabis IPO that quietly debuted in Canada today. It might be just what the doctor ordered for all those investors who need a place to park all the cash they’ve made on Tilray.
If you had to choose which marijuana stock is the biggest today by market cap, and you agree that Tilray probably isn’t deserving of that label given the extreme levels of hype we’re seeing, then the biggest marijuana stock today would be Canopy Growth. When we wrote about Canopy less than a year ago, their market cap hadn’t even reached $2 billion. Today, it’s more than 5X that size having breached $11 billion. The reason we’re bringing up Canopy is because they’ve spun out their venture capital operation, Canopy Rivers, in the form of a reverse merger that just began trading on the TSX Venture Exchange under the ticker RIV. That IPO is what we’re here to talk about.
How a Marijuana Venture Capital Firm Works
Canopy Rivers is best described as a marijuana venture capital firm, so before we dig into the IPO filings, let us briefly review how a venture capital firm operates. Startups typically obtain funding by approaching venture capital firms and selling shares which represent a stake in the company. Let’s just say you had a startup and sold 10% of your company’s shares to a venture capital firm for $1 million. That implies that your startup is worth $10 million. The venture capital firm would then put down your investment on their books at $1 million and then adjust it accordingly, based on what valuation they are presently ascribing to your business. Of course, a venture capital firm also has to incur the typical costs of running a business, salaries, office rent and the like. The hope is that eventually some of those startups will see liquidity events that result in significant returns on the original investment so that in the long run, the investors who gave the venture capital firm money (they’re referred to as LPs) will see a return on their investment.
Digging Into the Financial Filings for Canopy Rivers
Now that we have a basic understanding of how a marijuana venture capital firm like Canopy Rivers operates, let’s dig into their filings to see what investments they have made to date. But first, a note from our over-worked editor:
While we usually convert all numbers into U.S. dollars, it’s going to be easier if we just use Canadian dollars all the way through. To the more than 50% of our readers who come from ‘Murica, all you have to do is just multiply everything in your head by 0.77 as you’re reading. It’s that easy. Or, just pretend they’re U.S. dollars and ascribe a 30% premium to everything – which won’t matter – because, in today’s market frenzy, nobody will even notice.
Now that we’ve decided to proceed forth using Canadian dollars, it looks like Canopy Rivers has invested $73,940,002 million so far in 11 startups:
In the above table, “contributed capital” refers to investments that have already been made while “committed capital” refers to the total amount they have committed to invest over time. We can see that both Spot and Agripharm will take in further funding from Canopy Rivers. As it turns out, they plan to fund those add-on investments using the $104.4 million they secured back in July:
They’ve also managed to secure the funding needed to run their own operation for the next two years at a cost of $5 million per year along with $65 million to use for investing in marijuana-related startups.
Now that we know about what investments Canopy Rivers has made, we want to see how they’ve performed so far. That’s the sort of information that can be gleaned from tables like the one seen below:
The first thing that stands out here is the appreciation in TerrAscend (TER.CN) stock warrants. (Warrants are kind of like stock options except even more confusing.) Turns out that TerrAscend actually saw a liquidity event back in March of this year when they had an IPO. Since then, shares have appreciated around +93% and a quick look at the market shows that right now they’re trading up +22% for the day:
Things appear to be going nuts with marijuana stocks, so you have got to be wondering by now, just how Canopy Rivers has performed in their IPO debut today. Before we talk about that, let’s just quickly go over the terms of the offering per an article by Bloomberg today:
Canopy Rivers completed its $104 million private placement offering in July. Its shares, which will be listed under the symbol RIV, were priced at $3.50 a piece giving it a valuation of about $600 million, according to a company filing.
Any investor who purchased shares before the IPO at $3.50 must be stoked right now. That’s because the Canopy Rivers IPO which debuted today is (as we type these words) up more than +150% for the day. And the day isn’t even over yet folks.
Canopy Rivers is now valued at well over a billion Canadian loonies. The amount of interest from investors was so high today that they halted trading for a bit because of an “order imbalance”. People who are buying those shares right now should ask themselves what exactly they’re paying such a premium for. Is it the promise of future returns in startups that the company has on their books? Is it the follow-on investments that will be made with the $65 million? Maybe it’s the hope that TerrAscend takes off to the moon and becomes the next Tilray. Who knows, but are we really supposed to believe that a major Canadian Bank mispriced the IPO offering by that much, and that the true value of the shares is now worth +150% more than what they were sold for in July? Seems more likely that given all the hype, the offering was richly priced in the first place.
With the frenzy that’s taking place in marijuana stocks at the moment, companies are best served to raise as much capital as possible while giving away as little equity as possible. Whenever an industry has money being thrown at it like we’re seeing today, everyone steps in to get a piece of that pie. When the dust settles, only the most competent firms will emerge and show investors the sort of return on their money that the cannabis market promises. That’s where you want to be looking towards bigger companies that are staffed with tenured executive leadership teams. You also want to look for legitimacy in who the company works with. In the case of Canopy Rivers, they’ve established legitimacy in their offering by working with a major Canadian bank. The following was taken from the aforementioned Bloomberg article that was published today describing the deal:
Canadian Imperial Bank of Commerce led the deal with GMP Securities LP and Eight Capital, marking the first time a major Canadian bank helped a cannabis company gain a listing on a Canadian exchange.
In a future article, we may do a deep dive into the startups that marijuana venture capital firm Canopy Rivers has invested in to see just where investors in RIV are placing their bets.
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