Playing With Picks and Shovels: An Exclusive Interview with Antony Radbod and Tim Rotolo of Cannabis Investment Firm Archytas Ventures
By Laura Kuhl
Jul 12, 2018
A PotNetwork Exclusive
While Canada celebrates the legalization of recreational marijuana and prepares for national sales, banks in America are still encouraged to file suspicious activity reports on any suspected cannabis transactions. Less than 400 banks in the United States are willing to work with the cannabis industry, locking many marijuana stock investors out of a $40 billion sector.
Albeit frustrating, banking regulations in the United States create a very intriguing environment for private marijuana investments.
More than marijuana is needed to run a cannabis business, and there are plenty of ways investors can become involved and hands-on without having to touch a single federally prohibited substance. The constraints of such a strict regulatory framework force many private investment and holding firms to get creative.
Enter Archytas Ventures, who is situated in California. It is a Los Angeles-based firm that is none too shy about investing in cannabis. Founders David Kivitz, Tim Rotolo, and Antony Radbod knew that their strategy would succeed if they could tap into the right niche.
“We understood that we had to create some sort of value,” Antony Radbod said about building up the firm. “Everything else was so grossly inflated, between real estate, technology, and staffing was so expensive. Cannabis presented a very interesting opportunity, and timing was absolutely perfect.”
Using timing to their advantage, the three looked for what they call “the picks and shovels” of the cannabis industry. These are the ancillary companies and brands that make success possible by providing support in any aspect of the industry short of actually growing and transporting marijuana.
Archytas’ first shot at a pick and shovel play came in November of last year with Xtraction Services when they offered them a $5 million investment to help fuel the company’s expansion. Xtraction Services leases CO2 extractors to cannabis companies who are creating concentrates for vape pens, edibles, and the like. While it is (technically) federally illegal to transport cannabis concentrates across state lines, it is not illegal to transport extraction equipment. This legal grey area is where Archytas investors thrive.
“It’s a lower-octane investment strategy,” Tim Rotolo explains. “By playing to the picks and shovels, you get to move across state lines, and you don’t have all the restrictions. We’re capped on the upside a little bit, but we also have much less downside risk should things not work out as we expect.”
Make no mistake; these marijuana investors are not playing it safe. However, the team at Archytas Ventures is playing it pretty smart when it comes to their marijuana investment strategy.
Founders Tim Rotolo and Antony Radbod sat down recently to discuss their unique investment strategy. They offered insight into the ways “picks and shovels” can overcome the United States’ regulatory framework and how they are helping their investors keep up with the mind-boggling momentum the cannabis industry is generating right now.
Please share a bit about why you were ultimately attracted to the cannabis industry. Why did you decide to focus on investing in smaller, United States-based companies instead of looking into Canada?
Tim Rotolo: At the core of our investment philosophy, we are value investors. We have to figure out where we can find that value. It just happens to reside mostly in the United States because you have this big regulatory discount.*
Antony Radbod: The fact that the market is currently illegal is the opportunity that’s created for us. It keeps valuations compressed. It gives us the opportunity to be able to play and get exposure early on without having to pay that premium.
T.R.: Cannabis has the benefit of being a fast-growing market that is incredibly scalable. And right now there are very few organized pools of capital trying to invest in it. The fragmentation of capital provides a really unique opportunity. The fragmentation and state-by-state regulation creates a lot of complexity and elasticity which creates an opportunity for us as investors. The federal illegality stops a lot of groups from spending time in this space. The regulatory framework rules out every big equity firm, most every hedge fund… and those organized pools of capital are just kind of pushed aside. Although it seems like more and more are getting comfortable with it.
Which one of you first picked up on the "picks and shovels" catchphrase, and what was it that inspired you to invest in that part of cannabis specifically?
A.R.: “Picks and shovels” is actually from a Mark Twain quote. We thought it fit well with our narrative. When we first got into this space, we were looking for a rollout strategy. Being able to identify platform services and products that are not restricted by licensing was extremely appealing to us. We think that a group like Xtraction Services gave us this access. Identifying the winners this early in the game is not only extremely challenging, it’s also extremely expensive. We are looking for opportunities to protect our investors. This gives us the same economics that our investors were looking for when they got into this industry.
T.R.: Going back to our core strategy, we are looking for companies that can move seamlessly across state borders. We want to partner with groups who have clients that we are selling picks and shovels to. If they are successful in moving into all fifty states, into Canada and beyond, we will participate in that growth. We certainly want to align ourselves with groups that have that ambition. Our goal is to position ourselves for the point at which the market is legalized. When strategic acquirers, like we’ve seen happening in Canada, want to come get exposure to the industry, we will have a brand and a Rolodex of clients that are very attractive to them. That’s the way we secure an exit for our investors.
Was it this mobility that attracted you to Xtraction Services, or to extraction in general? Tim recently told Forbes that Xtraction Services goes as far as to go on site to work directly with cultivators. Is it your goal to be an investment brand that is more hands-on with their business model?
A.R.: The primary reason why we deploy on-site extraction technicians, inorganic chemists, thermal-dynamic engineers is to implement best practices and to create efficiencies for whatever customized product that group or organization wants to make. Some people want to take something to crude, some people want to take things to a finished vape pen product, some people want to make CBD lotion. It’s really about helping train the client and teaching them how to properly use this, how to create efficiencies, and how to really make a great end product for the user.
T.R.: The industry is really exciting and moving incredibly quickly. Canadian legalization is a step in the right direction for the global community to understand that cannabis is really about more than just recreational drug use. Extraction and extracted products, in our view, are going to become a majority of the industry. The idea of smoking flower and people using dabs and concentrates is not mass market. What’s going to make this a $100 billion market is mothers and fathers in their forties using ten-to-one CBD to THC extracted vape pens to help relieve anxiety? CO2 extraction is a very important part of that ecosystem, and we are providing this extraction equipment to any market.
Do either of you have any advice for investors, whether they are looking to shop on the stock exchange or invest with some of your companies?
T.R.: Just be very careful. In any industry, any very rapidly growing industry, there are always people trying to take advantage of investors. Take time to meet management and really understand what the business plan is and where your capital is going. There is real value that can be added by professional investors and take an opportunity to find organized pools of capital and make an investment in a fund. Unlike the S&P 500 which is an incredibly efficient way of getting exposure to the stock market, this is not a do-it-yourself industry. It’s so complex; it’s moving so quickly. It’s a commodity industry at the end of the day, so being on the wrong side of commodity price compression can really leave an investor who thought they were getting a great deal in a bad place.