I had been under the impression that we are now in the era of gathering picks and shovels when it comes to the smart direction legislators are heading about cannabis. But in a recent chat with Derek Peterson, I became convinced we are much further along. Peterson is CEO of Terra Tech Corporation, which is making huge strides in the burgeoning cannabis market. He asserts that the real era of picks and shovels was in the black market days of cannabis, “but now we are in a gravitational shift to a regulated market.” He points to the development of brands in the cannabis market (such as Whoopi Goldberg and Jane West and his company’s own IVXX brand) as signaling a huge shift in the thinking of those investing in the cannabis market.
Peterson comes to the cannabis market from a background rather different from those who were in the market a few years ago. He was a branch manager at Crowell, Weedon & Co, the largest independent broker-dealer on the West Coast. He held a similar position at Wachovia Securities and was then a Senior Vice President at Morgan Stanley Smith Barney.
Peterson leads Terra Tech, a “vertically integrated cannabis-focused agriculture company that is committed to cultivating and providing the highest quality medical cannabis and other agricultural products.” He spoke to me persuasively about how the cannabis market spent so much time over the last decades becoming commoditized in the black market of yesteryear. When the product was rather fungible and being quickly delivered in a brown paper bag or Ziploc bag, there was no incentive to deliver consistent brand quality. With increasing regulation (also known as decriminalization or legalization), capital is flowing in. “Capital infusion was way too risky when seizure and forfeiture were significant business risks,” observes Peterson.
Peterson and Terra Tech are riding the wave of “real money flowing in.” Peterson presently identifies the two hurdles in the cannabis business as permitting and branding. Those hurdles are due to the dichotomy of disparate state and federal regulations. As the regulatory landscape becomes harmonized, traditional economies of scale can be leveraged. Peterson cites Starbucks as doing a great job of taking a commoditized product and branding it.
As far as real money flowing in, Peterson was candid about his company’s progress.
Terra Tech was founded in 2010 and it took a year to achieve a $1M investment raise. The company went public in 2012, and it has already been infused with $20M in the last couple years.
Peterson asserts, “Once Obama and Holder made cannabis prosecution not a priority, the risk / reward ratio shifted. Peter Thiel invested in Privateer, and the market momentum shifted.”
I asked Peterson about his biggest challenges. Interestingly, he said that he has many of the same issues that all startups have. But in his business, he also faces many issues invisible to start ups. He reiterated the supply chain hassles; packaging requirements within California require staying on top of regional differences. There is a state wide initiative on the docket for 2018, but for now Peterson deals with differing protocols from city to city in California: packaging, amounts, seed to shelf protocols, even down to font sizes and colors. All those issues will get harmonized with statewide legislation.
He points out that restrictive legislation means more of a black market. In New York City he is able to get faster delivery of pot to a hotel room than getting a slice of pizza, with no sense of consistency and with a risk of toxins.
Peterson bemoans the black market mentality that lingers in many states because it offers very little recourse for overt operators such as Terra Tech; if suppliers steal, they disappear and there is no recourse for robbery or even non-delivery.
Peterson is firm when he says he supports cannabis legislation, but more legislation is not automatically better. Responsible and entrepreneurial-friendly legislation is what Peterson wants, “responsible legislation will bring about responsible business.”
He likes how alcohol is legislated, and would like to see the same for cannabis. “The system for alcohol has evolved and it works. But the cannabis legislation in NY State is a failure because the black market still exists.”
At this point in the conversation, I was put in mind of the landmark work done by noted economist Hernando de Soto. In his brilliant book The Mystery of Capital, de Soto eloquently elucidates why extralegal economies remain unable to achieve the growth seen in western countries. His main focus is on the inability of (especially post-Communist) countries to provide a means by which citizens can record title to their real estate, which would thereby unlock the value and trigger economic growth. But de Soto also describes the crushing burden of operating in the shadows, which are some of the issues Peterson explained as well: ducking attention from authorities; inability to raise capital; insurance available only from local bullies, mafia or corrupt politicians; compartmentalize operations to spread risk but not attain efficiencies and inability to overtly market or advertise the product.
I asked Peterson about the small time cannabis operator who has been keeping his freak flag flying in the cannabis market and is being pushed out by big corporations. Peterson acknowledged that the little farmer who has been in the business for decades had prison risk and lots of other risks. “Kicking out the stoners is a terrible approach. A synergy with old and new is the best process.” For example, Peterson relies on old school growers for a boutique medical strain via Terra Tech’s IVXX brand
Terra Tech has taken a page out of the playbook for regular produce, building a business network of co-operative farmers not unlike what the dairy industry has done. The national brand ensures consistency, but the consumer is getting local product. Peterson provides the administrative skills that the old school growers simply don’t have. He likens it to the wine business, were the old school artisans are paired with new school business skills. He is adamant that no commercial grower can match the artisanal boutique growers. “Compare Budweiser to your local microbrewery. That said, economic Darwinism will weed out the folks that can’t adapt to a co-op model like other agribusiness.”
What do you think?
Are we past the point of gathering picks and shovels or is the cannabis market on the verge of exploding?