Thanks for sharing the timestamps and it was a pretty solid episode. I've included transcripts from the interview below. As well a link to the episode here.
Just to follow up with my interpretations:
At the 18:40 mark, Patrick Rea who is being interviewed says: The valuations for states with unlimited licensing like Colorado are going to be lower when it comes to an acquisitions, while states like Massachusetts are going to demand a higher valuation multiple.
Which makes sense and I agree with. No mention of actual valuation multiples though.
At 28 min mark the following dialogue occurs:
Interviewer: For a listener that’s comfortable with their Schwab account, their fidelity account, their vanguard account. What is putting money into a cannabis fund like yours (Venture investing in private companies) going to do for their portfolio. How should they think about it and position sizing and that type of thing?
Patrick Rea: Yeah yeah, when I think about all venture capital in the cannabis industry I think about the high risk, but it can also be high return. You’re investing in privately held companies, they’re not liquid, they could succeed or fail with or without the right help and support.
So they’re definitely risk there, but the reward is the 10x returns that I think a lot of investors looking at the cannabis industry kinda assume that they will get. As the industry grows and you have these large multi-state operators, they’re great you know, they’ve earned the right to have these billion dollar valuations, they’ve done it, they’ve put together the assets across multiple states, they’re operating, we’re seeing incredible growth, but they’re at that stage where they’re already public, you know and investing you may not get a 10X in a company like, that’s a publicly traded multi-state operator, you may get a 2x or a 3x, um but a lot of investors that join the cannabis industry, they think about the cannabis industry the way we do and they want the bigger returns. So investing in venture gives you that opportunity where you can get a 10X, like you know, with the investments (we make) where in some areas in the later stages, it’s just not part of the uhh the math doesn’t work out right, they’re not going to grow by 10x in a couple of years. But in venture you can still achieve those rates of return.
Basically I interpret this as him somewhat defending venture investing and his fund. I believe his opinion is biased as he obviously needs investor funds to grow his fund and venture investing in cannabis pays his bills. It's in his best interest to make the case for higher returns via venture vs public companies. I do agree that venture investing may offer higher returns at the cost of higher risk, low liquidity and the fact that it's not an option for many of us due to the high cost of entry.
In summary, I believe his comment about a 2x/3x was in regards to investor returns and not company multiples. He argues that investors in public companies may see 2x/3x returns on their investments while venture/private investors are more likely to see 10x returns. I don't agree personally as I think there are multiple public companies that will give investors 5x to 10x+ returns over a 3-5 year period. While there are other companies I have small investments in SHWZ is my largest holding at 60k shares. I believe this is the best opportunity of the publicly traded cannabis companies and should be trading at around a 3-5x revenue multiple in just Colorado if we can show sold growth and positive cash flow next quarter. Without any further acquisitions and assuming we achieve the expected revenue/EBITDA guidance I expect a $4-$6 stock price by the end of the year.
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