Our conversation with cannabis venture capitalist Michael Gruber

Source - Grown In: Illinois (Newsletter)

Decades before cannabis emerged as a business growth opportunity in Illinois, Michael Gruber started his career as a dot-com venture capitalist in Silicon Valley and has continued his work in Chicago for the past 20+ years.

A Queens native and Kellogg graduate, Gruber is a managing partner at Chicago-based Salveo Capital, a cannabis industries-focused venture capital firm. The firm has 19 portfolio companies in its first fund, which was approximately $25 million.

Salveo is currently raising another fund that will invest in local and national cannabis-related companies. This includes startups that “touch the plant”, such as growers, processors and merchandisers. Other Salveo and personal investment targets are of the “pick and shovel” variety; companies that innovate to normalize a $300 billion dollar industry that is thousands of years old yet still operating largely in the black markets.

In this Grown In: Illinois conversation, Gruber shares advice for newcomers to an industry he embraced about seven years ago. He also shares commonalities and distinctions between today’s cannabis sector and what transpired during the Internet boom, bust and renewal.

Grown In: What advice do you have for investors, entrepreneurs and professional service specialists who are interested in expanding into the cannabis sector?

Michael: The cannabis sector is an amazingly interesting space but, at the same time, interested parties should be aware that it is also quite complicated. The discrepancy between illegality on a Federal level and legality on a state level makes many actions and decisions more nuanced, which means there are meaningful differences across state lines. Understanding the market and regulations is critical. In addition, with the industry growing so fast, it is important to look for strong compliance and governance within companies when deciding where you might want to work. Each person just has to be comfortable with a little ambiguity and, of course, risk.

Grown In: Illinois has several leading growers, processors and merchandisers of commercial cannabis - including Cresco Labs, Green Thumb Industries, Grassroots Cannabis, PharmaCann, Revolution Global and Verano Holdings. How does our industry infrastructure compare to other states, and where do you think we have competitive advantages?

Michael: Illinois is clearly positioned to benefit from the expansion of the cannabis industry. I’m proud to say that Illinois is home to some of the country’s largest and best managed cannabis companies. Still, the state’s medical program had a weak start relative to other states based on a limited set of qualifying conditions, difficult application procedures, and more. This has created an environment where there is an incredible amount of untapped demand from patients and customers. Given the state's stringent licensing program across cultivation, processing and retail, each of the established companies within Illinois will have the opportunity to benefit greatly as adult use is launched on January 1, 2020.

Additionally, Illinois is a progressive leader with respect to the social equity program it has established which will allow for new craft producers and businesses in communities historically impacted by the criminalization of cannabis. Lastly, as cannabis becomes more mainstream and is used for everyday health and wellness, Chicago’s stature with leading pharmaceutical and health care companies, along with being the nation’s distribution hub, will put Illinois in a prime position for the future.

Grown In: Your career as a venture capitalist started in the early days of the dot-com boom. How do these early days in the cannabis sector compare to what you experienced during the dawn of the Internet industry?

Michael: Yes, I worked in Silicon Valley in the 90’s in the middle of the dot-com boom and saw it through to the bust in 2000, and have continued to be a venture investor through today. Also, I had been active in building companies as an operator and being an individual and fund investor.

Then, the innovation and excitement was amazing - and, smart people from other industries joined in by the day. At that time, no one knew what the “dot-com” industry would become, the market was being created… which ranged from new business models to greater efficiency in operations.  

Cannabis is different. The market already exists. It’s a product that has been used for over 5.000 years and, today, there is an existing $300 billion global market the vast majority of which is illegal. So, the big opportunity is to take an existing market and to bring it to the legal regulated market.  

The excitement level is similar and there is clearly a similar brain migration to cannabis, as some of the brightest from tech and Wall Street make their way into the industry. Additionally, the passion and dedication people have for the plant and its healing properties is so inspiring and I, along with the rest of the participants, should be grateful to the trailblazers that were active in the industry even when illegality hung over their heads.  

Finally, it’s satisfying to know that the lives of people young and old, sick and healthy are being improved through cannabis usage. And, with further research, innovative formulations will be developed for a range of health issues.

Grown In: Talk about your investment strategy for ancillary "pick and shovel" cannabis businesses that "don't touch the plant”.

Michael: Our Salveo Capital fund invests across the entire cannabis ecosystem, which also includes hemp. When we first launched the Fund in late 2016, we were more focused on the “pick and shovel” space based on a host of reasons, which included regulatory uncertainty, poor management within “plant touching” businesses, greater capital efficiency, and what we believed to be more likely M&A activity.

That being said, as the industry matured, we saw changes which made our “opportunistic” strategy drive us to invest in a greater number of businesses that were involved across the entire ecosystem. This includes areas such as cultivation, processing/manufacturing, and retail.  Again, given that this industry has many constraints due to federal illegality, there remains a need to create unique solutions for the industry. Ultimately, as federal legalization happens, large established companies across a range of verticals (alcohol, food & beverage, pharmaceuticals, etc.) will be more openly active in the sector. Acquisition will be become a common activity and we believe Salveo will be uniquely positioned to be rewarded during this period.

Grown In: For some or perhaps many, there remains a stigma associated with engaging in anything cannabis-related. Did you ever experience any hesitation engaging in this space, and do you have any words of wisdom for others who want to dive in but may feel some trepidation?

Michael: I have now been involved in the cannabis industry for close to 7 years. The environment back then was quite different than it is today. There clearly used to be a stigma. Before I got involved, I thought hard about that… as it seemed like, once I got in, there was no turning back.. and that I might never get a normal job in future. 

Clearly, most were not willing to take that risk. Of course, that is where the opportunity lies -  stepping in, when others won’t. Luckily for me, I had been an entrepreneur my entire life, operate well with risk, and had strong support from my family. 

Today, cannabis is a hot topic at house parties and in cocktail conversations with many now trying to find an entry point. And so, it is almost like a badge of honor now. It’s amazing to see people talking about their usage or the industry openly where that would have been extremely rare even five years ago.  

That being said, with excitement brings a rush of new people to the industry. They may possibly be joining for the wrong reasons, which could set them up for over-hyped expectations. So, I’d say to any would-be newbie cannabis people, come enter the space, but be aware that it isn’t all a road to riches.

Being a successful cannabis company is hard work, so be prepared to roll-up your sleeves and execute.