Investing in the cannabis industry presents some unique challenges. Seasoned cannabis investor, Micah Tapman of Canopy, goes over what investors should think about when valuing potential investments.

1. 1
Valuations

2. 2
Why are you listening to us
Since 2014, Canopy has been the leading business ecosystem
and investor in ancillary cannabis companies:
• Helped launch 80 companies
• Made100+ individual investments
• Portolio has created $140M in value
• Portfolio has raised $35M+ from outside investors
• 7 arcview pitch prize winners
• >20 failures

3. 3
YOU KNOW NOTHING
why smart investors act like idiots

4. 4
The Value Trap
• Overpaying guarantees sub-par returns
• There is no way to correct for overpayment
• The “right” valuation is an unknown
• So what are we doing here?

5. 5
Find the Tipping Point
The maximum purchase price that allows for the minimum expected
return on investment.
x = $/share
y = $/share at exit
EM = expected multiple
x = y / EM
x = ($10/share) / 10

6. 6
Complications…
• Time value of money (i.e., net present value)
• Equity dilution (i.e., issuing more shares)
• Taxes
• Opportunity costs
• Risk

7. 7
Time Value of Money
• A dollar today is worth more than a dollar tomorrow
• Inflation silently destroys the value of a dollar
• A Coke cost $.05 in 1950, today the same drink costs
$1.00…
• Or put another way, a nickel would only buy you 1/20th of a
Coke today

8. 8
• Company value = (number of shares) * (price per share)
• Issuing more shares dilutes (i.e., reduces) the value of each
individual share
• Think of slicing a pizza, more slices doesn’t mean more pizza, just
smaller pieces
• Shares issued for:
• Employees
• Executives
• New equity financings
• Acquisitions of other firms and assets
Dilution

9. 9
• Profit before taxes may increase net worth but…
• The most useful profits are after tax
• U.S. tax code allows tax free gains on qualified small
business investment gains (i.e., stocks purchased and held
for at least five years)
• May also be able to “roll-over” gains into new investments
• Tax rates vary over time and may NOT allow “grandfathering”
of existing investment gains
Taxation

10. 10
• Unable to use capital directly
• Limited use of capital indirectly (discounted value when
considered as an asset)
• Cannot invest the capital in other opportunities
Opportunity Cost

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• Unable to use capital directly
• Limited use of capital indirectly (discounted value when
considered as an asset)
• Cannot invest the capital in other opportunities
Opportunity Cost

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• Losing everything
• Not making enough to justify the potential losses
• Not making enough to justify the opportunity costs
• Technical risks (couldn’t do what we thought we could)
• Market risks (not enough customers)
• Execution risks (screwed up building the company)
• Financial risks (fiscal changes devalued the company)
• Legal risks (lawsuits devalued the company)
Risk

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• U.S. Treasuries: essentially considered a “risk free”
investment
• Interest rate of about 1.75%, probably ranging from 1-4% over time
• Municipal/State bonds
• Corporate bonds
• Junk bonds
• Public equities: 8%
• Real estate: 8-12%
• Factoring/short-term lending: 12-18%
Baseline Risk

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1) Cash paid out (after taxes & expenses)
2) Opportunity (leverage on another deal)
3) Intangibles
a) Bragging rights
b) Stimulation/energy
c) Philanthropic contributions
What is Profit?

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• Based on perceived risk
• Use baseline risk measurements as yardsticks
• U.S. Treasuries @ ~2%
• U.S. Public Equities @ ~8%
• Real Estate @ ~8-12%
• Short-term lending @ ~12-18%
• Private Equity/Venture Capital: > 18%
• Can this company generate enough profit for me to achieve
my goals, given my initial purchase price?
How much profit do I need?

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VALUING A COMPANY

17. 17
• Standard equity model: 40 years of earnings (discounted for
TVM)
• Value model: book value less market cap
• Market model: What someone else will pay for it
• Some other number based on my intangibles…
• I like owning this type of company
• Losses to offset other gains for tax purposes
• Other deductions
• Social benefits
• etc.
What is a company worth?

18. 18
Berkus Method (sort of…)
• Maximum value = X
• Divide X into categories
• Team = ¼
• Traction = ¼
• Total addressable market
= ¼
• Competitive advantages =
¼
Maximum = $4,000,000
Team = $750,000
Traction = $500,000
TAM = $1,000,000
Competitive Advantages = $250,000
= $2.5MM valuation

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Berkus Method cont’d
• What Works
• Nice and simple
• Easy to understand
• Covers the basics
• Based on data
• What Fails
• Devolves into petty arguments
• What’s a good standard/maximum?
• Geographic dependencies skew data
• Miss the forest for the trees

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Multiples of…
• Revenue
• TTM, annualized last three months (rolling), projected
• Very strong data – perhaps misleading
• Wrong incentive for many companies (chasing revenue too early)
• Profits
• Probably the wrong metric…
• Capital raised
• Easy but arbitrary
• Propagating mistakes made by other investors

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Projections (i.e. pro forma financials)
• Very common
• Arbitrary and delusional
• Definitions of a startup…
”A company operating under conditions of extreme uncertainty.”
“A temporary organization in search of a scalable, repeatable,
profitable business model.” Steve Blank & Bob Dorf
• Why expect accuracy from uncertainty?

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Backwards…
How much money does the company need to raise to reach an
exit event?
$10MM
$1MM on $3MM (25%) - $4MM post
$3MM on $9MM (25%) - $12MM post
$6MM on $18MM (25%) - $24MM post
Assume final raise drives to possible break even and good
acquisition potential.

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But…
• If we need more:
$40M
$1M on $3M - $4M post (25%)
$5M on $20M - $25M post (20%)
$14M on $56 - $70M post (20%)
$20M on $180M post (10%)
Likely potential for an IPO or PE buyout…however, significant
dilution to the founders and early investors.

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Ok… so what should I do?
1) Start with Berkus method (it’s easy)
2) Consider both the market model (what would someone else
pay) and the backwards model (how does this reach an exit
event)
3) Glance at the pro forma financials, than come back to reality
4) Balance valuation with control issues
Wait, what? Control issues?
Projected return = (probability of an exit) * (expected exit
value) * (ownership %)
Adjusted for NPV

25. 25
Wow, this is harder than I thought…
• Watch what other investors do
• Follow experienced and professional investors with good records
• Consider how poor investors operate
• Keep detailed notes (your memory is not good enough)
• Remember that a “winner” is always a winner – don’t miss a good deal
because of squabbles over valuation
• Winners will return 10, 20, 40, or even 100x your committed capital
• Valuation debates often benefit less with winners than with middle-of-
the-pack performers
• Control considerations may be equal to or more important than
valuation – trade valuation for control, or vice versa depending on the
team

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THANK YOU
http://www.canopyboulder.com