Cannabis Investor Emily Paxhia On How Businesses Can Survive A Crisis

Restrictions imposed by the COVID-19 outbreak have affected virtually every industry on the planet. Cannabis was no exception.

Nonetheless, many investors strongly believe this crisis can actually make the industry more powerful, help it establish itself, and show that it is a “recession-resistant industry.”

Emily Paxhia, a co-founder of one of the longest-running dedicated cannabis investment funds, spoke with Benzinga about the challenges imposed on the cannabis businesses by the coronavirus outbreak.

Paxhia’s fund, Poseidon Asset Management, had more than $85 million in assets under management and an internal rate of return (IRR) of 53% net of fees at the end of 2019.

This March it closed the fundraising for its second fund, which utilizes a venture capital strategy, reaching $145 million in total assets under management.

While the second fund is a “pure VC fund” — solely focused on providing venture capital to private companies — Paxhia explained that her first fund was “a hybrid of hedge and venture capital structure” and invested in both public and private markets.

Hands Are Full

At the moment, Paxhia and her brother, the second co-founder, are not interested in raising a third fund, and that has nothing to do with the current COVID-19 situation.

“I think we have our hands full with the first two funds and there's a lot to do so. We're pretty excited,“ Paxhia said. “It's a great time to be an allocator as long as you can be patient and work through these somewhat challenging climates, but there are really good companies in the industry that do still need investment dollars to continue to grow."

As an industry veteran, Paxhia already experienced many challenging times — especially back in 2013. At the time, Paxhia was having a hard time finding service providers, everything from banks, through lawyers, to administrators, with the biggest challenge being raising money into the fund.

So, in regards to the difficulties imposed by the COVID-19 pandemic, Paxhia told her founders, that they should be "battle-tested" by now, and also that they should realize that for the first time they are not alone.

“The rest of the world is kind of in the same boat with us. We're seeing Fortune 500 companies, massive multinational companies, facing significant friction points," she said. "Like airlines, hotels, anything in the hospitality space, and suddenly we feel like we're in good company with these enormous companies that have a much longer tenure in business.”

Challenges Seen As Opportunities

Paxhia shared the fact that cannabis was in its 25^th month of a bear market before it was impacted by the COVID-19 crisis in the U.S. The first effects the industry had seen was a supply chain disruption in China, which also had a positive side.

“That created a lot of challenges from the supply chain, but it also created opportunities for other companies that do their packaging through other countries to step in and to create a name for themselves," Paxhia said.

A lot of these challenges also present opportunities, Paxhia explained. If cannabis remains an essential business, it should be stable.  

Preserving Cash As The Key To Survival

According to Paxhia, “the operators who've been more prudent with their capital” have the biggest chances for survival.

Also, those who have a few years of experience, retailers with access to growing, production, and distribution should do well. The same goes for ancillary-focused cannabis companies and those offering data services will manage to fight imposed challenges.

However, there could be a difference between how susceptible public companies are versus private companies. Public companies, she says, are directly “susceptible to the kind of the psyche of the retail investors in the public markets.”

Paxhia further recognizes the possibility of the adult-use cannabis market ending up being more negatively affected than the medical cannabis market because there are states in the U.S. that don’t deem adult-use stores as essential businesses.

“I think we should make sure people have all of the access to all of the things that they feel make them feel well, more than ever, so I'm worried about that," she said. "I don't think that's a prudent response by the regulators.“

The key to surviving in this situation, according to Paxhia is “preserving cash.” Expectations for 2020, definitely need to be revised, and “we also advised that the teams take a very difficult and hard look at their organizational charts so they can make important employment decisions,” said Paxhia.

While we all seen massive layoffs in the industry recently, with many companies citing COVID-19 as a reason for these moves, Paxhia agrees that some of them are using it just as an excuse as they were in a very difficult financial situation even before the crisis. Then again, others are thinking the long term, and “we'd rather they're proactive rather than reactive,” Paxhia concluded.

Cannabis As A Recession Resistant Product

Because cannabis is “a very complimentary product”, going well with all kinds of activities, like movies, reading, eating, relaxing, and wellness it can turn around to be a “recession-resistant product”, believes Paxhia.

Hence, she claims it will “continue to be a part of the consumers’ wallet or their spending decisions, even if we do move into a recession.”

Paxhia thinks that the U.S. will, unfortunately, face a similar scenario to the one of the Great Depression, and she is wondering if cannabis will have the same fate that alcohol had when it faced prohibition.

Photo courtesy of Poseidon