Cannabis VC firm: We see a new push for legalization in post-COVID world

Entourage Effect Capital Managing Partner Matt Hawkins joins Yahoo Finance’s On The Move to assess how the coronavirus has impacted the cannabis industry.

Video Transcript

ADAM SHAPIRO: So we keep telling about coronavirus and its impact on the economy. But more specifically, what is the virus's impact on the cannabis industry? To help us understand that, Matt Hawkins, Entourage Effect Capital Managing Partner, joins us now.

And, I mean, this is going to be state to state to state, depending on the laws and the cannabis legalization efforts in each individual state. But is there a-- is there a headline for what kind of impact the virus is having on the growth of cannabis in the United States?

MATT HAWKINS: For sure. Thank you for having me. It is-- I mean, the biggest thing that happened to us was being deemed an essential business in all the legal states. And as a result, short of Massachusetts-- Massachusetts is still essential and medicinal, but not adult use.

But everywhere else, it's been deemed essential for adult use recreationally. And as a result, we've seen record sales on a monthly basis since the shutdown began. It's really quite amazing.

DAN HOWLEY: Matt, you know, we've heard some rumblings recently, some stories, about cannabis potentially helping with COVID. I don't think there's really been anything proven to that point. But have you seen sales amid the outbreaks kind of take off similar to how alcohol sales have reacted?

More people obviously at home, looking for something to do. Gaming is obviously very big right now, and so is streaming. So cannabis and those might line up pretty well.

MATT HAWKINS: There's no doubt about it-- that's been the case. I think there's something else that's in play here that a lot of people don't really think about. If you take a step back and think about the cannabis industry, it's really a conversion of a marketplace from the illicit business into the legalized one.

No one realized how big the illicit market was prior to legalization across the board, starting in 2014. As a result, you've been-- and in some of the taxation laws, some of the regulatory hurdles in legalized states, have made it difficult to have that-- you know, that conversion happen quickly.

What we're seeing right now because of the increase in sales leads us to believe that people really aren't going to their street corner to buy this anymore. They're actually going into the stores, where we were one of the pioneers. Our industry was one of the pioneers of, you know, social distancing and safe retail outlets with, you know, masks and gloves, et cetera, along with curbside pickup and delivery.

And so as a result, I think you have shoppers that are saying, you know what? I don't need to go buy this, you know, illegally anymore. I can go pay a little bit more and buy it legally. And I think that, along with states needing tax-dollar revenue coming in after all of this-- including the federal government, by the way, with the trillions of dollars that have gone out the door with the CARES Act-- we think there's going to be a push for legalization in a post-COVID world.

JULIE HYMAN: So Matt, it's Julie here. But even with the demand, even with sales going up, that hasn't necessarily translated into good businesses, right? I mean, we've seen that happen in Canada, which has legalization. The cannabis businesses there have struggled because, at the end of the day, it's a commodity business.

So how do you make it profitable? How do you-- I mean, as an investor, how do you decide what to invest in, and what differentiates one cannabis business from another?

MATT HAWKINS: Well, first of all, that's one of the misnomers about the industry. You look at the public companies, especially the ones, the Canadian LPs that started. Their model was not just around Canada, you know, sales. They wanted to be outsource providers to the world. And what happened was, their cost structure just got way out of whack, and they're unable to do that.

So we don't invest in Canadian companies. The only company that we think has a real chance [INAUDIBLE] [? Acreage. ?] I think some of the others, Aphria and Aurora, could be repositioning themselves nicely. But for the companies that are just focused on Canada, I'm right there with you. I don't see the market.

The US, however, there are absolutely several multi-state operators that are now EBITDA positive and then some. There [AUDIO OUT] you add ancillary companies that are-- that are crushing it right now in this times of the pandemic.

So we're actually really, really bullish on the industry as a whole. And because there's no institutional capital at play here, that's the only reason why there's been a level of distress in the industry is the dearth of capital, which makes investing on the private side like we do something very exciting.

ADAM SHAPIRO: Matt Hawkins, Entourage Effect Capital Managing Partner, thank you very much for being here "On the Move." And we will be right back.