Cannacurio Podcast Episode 24 with Graham McConnell of Nth Round

In the latest episode of the Cannacurio Podcast from Cannabiz Media, my co-host, Amanda Guerrero, and I discuss hemp licenses, trademarks, and retail point-of-sale data. We also speak with Graham McConnell the co-founder of Nth Round, a comprehensive equity management platform for companies of all stages and sizes.

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Cannacurio Podcast Episode 24 Transcript

Amanda Guerrero: Welcome to the Cannacurio Podcast powered by Cannabiz Media. We’re your hosts, Amanda Guerrero and Ed Keating. Hello, hello, and welcome to the show, everybody. We've got a really great show ahead with some very interesting data highlights.

Today, we'll be joined by Graham McConnell, the co-founder of Nth Round. Nth Round is a comprehensive equity management platform for companies of all stages and sizes. They are also a Cannabiz Media subscriber, hooray. But as always, let's check in with Ed to see what he's learned this week for us on the data front.‍

Ed Keating: Thanks, Amanda. So we brought in some new data last week, a lot of updates actually, from Oregon, where we brought in 57 licenses and Canada where they've issued 20 more licensed producers in terms of their marketplace.

And then, we just recently wrote up an article on a recent trademark case with Edible Arrangements where they complained that somebody is using a trademark similar to one that they own. And I dug down into the licenses, and I thought it was interesting to find that one of the reasons why they might be so interested in this is because they are actually growing hemp and manufacturing it in Connecticut, plus they have...

‍Amanda Guerrero: No way.

‍Ed Keating: Yeah. Plus they have about a dozen or so licenses in the south where their stores can use CBD in their offerings. So I think they've got a very interesting angle in terms of why they're so interested in defending their trademarks.

‍Amanda Guerrero: Yeah. That's interesting. I wonder if we're going to start seeing more lawsuits like that moving forward within the hemp space specifically?

‍Ed Keating: It's a good question. I know that with Edible Arrangements, they're pretty well-known for defending their intellectual property...

‍Amanda Guerrero: Yeah.

‍Ed Keating: ... and have done that for a long time so they make that clear in a lot of the news coverage, but this one was just sort of interesting to see having worked on the Connecticut licenses myself, to realize under a different brand, they are growing and manufacturing products. So it'll be an interesting one to keep an eye on.

‍Amanda Guerrero: Very interesting. And I see a lot of the data highlights are focused on cannabis. We've had a lot of hemp come in over the last few weeks. Are we seeing hemp license updates slow down, Ed?

‍Ed Keating: Yeah, pretty much. A lot of the hemp licenses, as we've talked about in the past, tend to focus on the grow season, so a lot of them get issued in March and maybe April or before that because people want to have licenses so they can put seeds in the ground. And then after that, a lot of the states are done. I mean, they run it through the Department of Agriculture, licenses are issued, and then we wait until the end of the year when they all expire.

A few states have ongoing licensure where you can sign up any time but a lot of the growers now are more in like a harvest situation, so a lot of new licenses are probably not going to be issued at this point. So we expect to see some of them ending in end of November, end of December.

‍Amanda Guerrero: All right. Well, sounds good to me. Thanks so much for the update, Ed. When we come back from our commercial break, we'll be joined by Graham McConnell, co-founder of Nth Round. Stay tuned.Welcome back, everybody. I have with us Graham from Nth Round. Graham, welcome to the show.

‍Graham McConnell: Great to be here. Thanks so much for having me.A

manda Guerrero: Yeah. Thank you for joining us. We're so excited to have you on here. It's been a few weeks in the making. So tell us a little bit about yourself, Graham. You and the Nth Round team are providing a pretty interesting solution to a sector within the cannabis industry and beyond. What kind of sparked this idea?

‍Graham McConnell: Yeah. So I grew up in the Philadelphia area, and after college, I came back home and worked at a startup in a town called Radnor outside of Philadelphia. I got stock options in that company and was really excited to be a part owner in that enterprise only to two years later find out that I really didn't know what those options were worth and was actually ended up kind of giving them up because I didn't realize the rules around executing those options. So...

‍Amanda Guerrero: Yeah.

‍Graham McConnell: I went from there to a public equities investment manager and kind of got to see the opposite end of things, where there's so much infrastructure around public companies, the employees of those companies get the benefit of as soon as their options vest or their equity vests, they can turn around and sell it on the open market. So we just started playing around with ideas of how we could make that better in the private world.

‍Amanda Guerrero: Wow. That's incredible. And also, really important solution. I come from a recruitment background myself, and the education around options and what that actually means to employees is not something that's readily available, especially within a startup environment. And unless you have the resources to do that research on your own or really take the time to understand it, it can be a little confusing and overwhelming.

‍Graham McConnell: Yeah, definitely. And honestly, the VCs that back a lot of those companies, they benefit from the lack of transparency there. They like their golden handcuffs and the fact that everyone's tied up in the enterprise until there's some kind of liquidity event, so I think educating people is a big part of this and also kind of just changing the interaction between VCs and their portfolio companies.

‍Amanda Guerrero: Yeah, absolutely. So with Nth Round, can you tell us a little bit more about some of your most interesting fundraising experiences thus far? I know that you guys just went through a raise and have worked with a few other groups.

‍Graham McConnell: Yeah, absolutely. So one would be, in the cannabis space, would be a guy by the name of Bob Pease, he used to work at a company called Franklin BioScience in Pennsylvania.

‍Amanda Guerrero: Oh my God, yeah.

‍Graham McConnell: He has a new enterprise called Sunrise, and he just completed, in the last month or two, his raise. I don't want to give too much away, but to be honest, we can't really take much credit for that fundraiser because he already had success previously and had a great network to reach out to.

So that's one and then another would be, we're starting to work with some accelerators. One down in the Miami area is called Rokk3r Labs and they have six of their portfolio companies that they'd like to fundraise for. So we are spinning up sites for all of them and basically improving fundraising automation is what we call it, signing documents, getting accredited investor questionnaires filled out, all of that kind of legwork that's involved in raising money. So we're really excited about that as well.

‍Amanda Guerrero: Awesome. And with Nth Round, do you guys also work with a lot of Canadian groups?

‍Graham McConnell: We have worked with some. I will say I think the fact that the public markets have, for lack of a better word, just not been so kind to the cannabis companies, and that, I think, has created a little bit of a headwind for us. I mean, I think the market is still strong and will continue to be successful, but for whatever reason, I think that has left a bad taste in some people's mouth.

But I will say, I think our platform could be argued is a better alternative to going public or at least having that goal as the end state. If you can be an evergreen company, do right by your shareholders, and kind of instill patience in them in terms of being long-term investors in the company, you may not really need to consider going public at some point in the future.

‍Ed Keating: So, Graham, I used to work a lot in the Securities and Exchange Commission, sort of rules and regulations publishing area, so this is a really intriguing business that you've created. And one thing that I wonder in terms of regulations is: what do you guys have to abide by? I mean, obviously, and you've touched on it, there are accredited investors, there's also investor communication rules. So what do you have to comply with and how do you manage that process?

‍Graham McConnell: Well, almost all of the raises that we help with are Reg D filings, so you're absolutely right that there are rules around accredited investor. There are actually statutes that say you can bring into up to 35 non-accredited and not a lot of people recognize is available to them.

And then in terms of reporting, we're absolutely trying to make that as easy as possible for companies. We encourage any company on our platform to at least communicate on a quarterly basis, others like to do it on a monthly basis, which is even better, but one other thing that we're pushing is if you can start to engage with shareholders, with investors using video, it's actually much faster for the founder to create those kinds of communications.

I mean, yes, you want to report your financials, but creating a five to 10 page document every quarter is actually more time intensive than creating a 5-minute video and just kind of filling in your investors on what's the latest going on. So I think there are opportunities there to ease that communication.

‍Ed Keating: Interesting. Now, what about things like valuing these options. I remember trying to understand these fiendishly complex Black–Scholes formulas to value options and whatnot, and it always seemed to be a bit of a dark art. Is that anything that you guys get close to or do you help advise your clients on?

‍Graham McConnell: We stay out of the business of valuing options. There are plenty of firms out there that do company evaluations and a lot of companies look to [inaudible 00:10:06] evaluations to put a price on their options, but there are other companies that just stipulate a price and that's at their discretion really. So, yeah. I mean, we try to leave it mostly up to the company. We don't want to get into any hot water trying to put a value on our customers.

‍Ed Keating: Right. Right. No, that makes sense. That makes sense. Because what it led me to think about is there's a company that I was aware of called Computershare, and they bought up a lot of the companies that were in this space for public companies many years ago. Are you sort of like a Computershare for private companies - really handling all those types of functions aside from the valuing of the options?

‍Graham McConnell: Yeah. I'd say we are pretty comparable to them. I will say, we're not a... I'm not positive whether Computershare does this, but we're not a broker dealer, so we were never in the business of trying to market someone's equity and sell it on the open market.

‍Ed Keating: Got it.

‍Graham McConnell: We respect the fact that these are private companies and it's completely up to them who their investors, who their shareholders are, so we leave a lot of that up to the companies. And that goes back to what I was saying about options. We're providing a platform for these companies but not trying to overstep our bounds there.

‍Ed Keating: Right. And some of your brand message really seems to be a lot about founder control, and leaving the founders with as much control is probably a good thing, but that leads me to the next question of: walk us through how do you guys make money? What kind of models are you using to earn compensation?

‍Graham McConnell: So we have a SaaS model, pretty standard. We charge an annual fee and there are different tiers of that. We tend to base it off of number of shareholders, which to be honest with you is not a great metric, especially, I think, when you look at the cannabis space where you may raise money from 50 individuals and they're a relatively small check sizes, each one, so it's difficult.

We're really trying to align the value delivered with what we're charging. But just to give you an idea, for companies with over a hundred shareholders, per se, for example, that would bump you up to the next price tier because the more investors, the more shareholders that you're having to manage, the more value is there.

‍Ed Keating: Yeah. That certainly makes a lot of sense. I know Amanda touched a little bit about this before, but have you seen any peculiarities about doing this in the cannabis space? Because from what I've seen just sort of looking in from the outside, a lot of the raises seem to be around ancillary companies. and I'm sort of curious what you've been seeing from where you sit.

‍Graham McConnell: Well, I definitely think one thing that is attractive about the cannabis space is that there's really, I don't know if attractive is the right word, but it's really an underserved market in terms of banking and capitalization. So a lot of these institutional players just won't touch cannabis. And I mean, that's a problem in and of itself, but that means that you have to turn to more individuals, like I was saying, and look for other sources of capital.

‍Ed Keating: Mm-hmm (affirmative).

‍Graham McConnell: And I think that lends itself to a platform like ours, where you can kind of take control of taking ownership over the relationship with your investors, commit to being transparent with them upfront, and align them with the long-term goals of the company so that they're in it for the long run.

‍Ed Keating: Oh, that makes a lot of sense. Now, one thought that occurred to me as we were talking is one of the most public fundraisers I've seen in the space is High Times, where they've tried to raise money for a really long time in the public market. Any thoughts on that and how you guys probably could have helped them?

‍Graham McConnell: Yeah. To be honest, I don't know a whole lot about their raise. I think it's difficult to be a player in the public markets when you're a cannabis company. A lot of people don't realize that there are really high costs involved with being public.

We helped one company that was actually going private and they were spending, I think, $600,000 a year just to be public. And when you look at that in relation to High Times, I think you have to say to yourself, "Is that really worth all the benefits that come along with being public?" Because I mean, don't get me wrong, there are definitely benefits to being public, but is it worth that $600,000 every year?

‍Ed Keating: It's a great point. At one point in my career, like you, I worked for a small public company, I had some options, and we definitely should probably not have been a public company because you're right, you have all these auditing fees that you're paying to get accredited financials, you have directors and officers insurance, you've got to hold board meetings and you have to pay listing fees, and you're right, it gets really expensive.

And so some people like the impression they have, like, "Well, we're a publicly traded company," but it certainly does come with a heck of a lot of headache, so I think, if you can keep great companies operating on your platform, that's probably a much better place to be.

‍Graham McConnell: Yeah, absolutely.

‍Amanda Guerrero: So tell us, Graham, how does a company like Nth Round utilize the cannabis media platform? I know John Pohlhaus from your team is the primary user, but for you guys, how have you utilized our platform?

‍Graham McConnell: Well, we really see it as a source of truth, to be honest. Looking at licenses that have been granted is, conveniently, a great way to find new businesses that are coming out and just hitting the market. So definitely, we use it as a database just to kind of understand the landscape out there.And then also, we rely a lot on word of mouth, but also just on campaigns to kind of reach out to people and get a sense as to whether our platform is a fit for them. We use that, like I said, as a source of truth so that we can get in contact with all of these companies and just see if there's a fit.

‍Amanda Guerrero: I love that answer. We definitely like to see ourselves as that as well, so glad that you guys are seeing some benefit from there. Now, looking towards where the end of the year, we're in Q4 right now, any big, exciting launches, plans, updates for the end of the year or maybe 2021?

‍Graham McConnell: Well, we're definitely doing a lot around tax reporting. The tax season is a huge pain for a lot of companies. If you have to send K-1s or if you have to send some kind of document to all of your investors, why not make that really easy instead of sending PDFs with password encryption on there? Why not upload them to your investor portal and tell everyone, "Here's your full history of documents spanning back five years." So we're trying to make that process really easy.

And then the other thing, I think we're leaning into this idea of slightly more institutional players like accelerators or incubators that they would like to onboard the platform for their portfolio companies and help them to fundraise. So...

‍Amanda Guerrero: Oh, that's exciting.

‍Graham McConnell: ... we're excited about that and we're continuing to build out features there.

‍Amanda Guerrero: Very cool. Very cool. That actually seems like it would be a perfect match for those accelerator groups. Have you guys gotten a lot of traction there?

‍Graham McConnell: We have. We've gotten some early traction. It's difficult with any new product initiative. You don't want to get too far ahead of yourself. You want customers there that are paying and getting value out of it so that you can get feedback from them, but it's just a tough balancing act because you don't want to build too much upfront without having the validation there. But we're confident. We're feeling confident at this point that we have enough customers in that space, so that's why we're making the investment.

‍Amanda Guerrero: Wonderful. Well, thank you so much for joining us on the show today, Graham. We look forward to hopefully seeing you sometime in 2021, once COVID is over and yeah. Hope to see you around.

‍Graham McConnell: Absolutely. Thank you so much for having me.

‍Amanda Guerrero: Yeah. Thank you. All right, Ed, let's take a look ahead and see what updates we've got from the data vault.

‍Ed Keating: So we're digging into the point of sale data. So for most of the summer, we've been calling into dispensaries and retailers across the country trying to find out what kind of point of sale they're using.

So far it looks like there's at least a dozen or so new vendors that have appeared on the list since last year. A bunch of them appear to be what we call one-state wonders, mostly in Oklahoma because that's where most of the dispensaries have appeared as you well know.

‍Amanda Guerrero: Yeah.

‍Ed Keating: What's been interesting in some of the early conclusions I've seen are a couple of companies are offering a free point of sale system, and it looks like it's all paid for through upgrades. So if you want to delete something, you have to pay for that or whatnot. So I thought that was kind of interesting and odd. And then...

‍Amanda Guerrero: A free point of sale. Can you do that?

‍Ed Keating: Why not? If you don't get the upgrades, you're probably going to have a really hard time. And then, I also have found a few what I'll call cannacurious point of sale systems, where they already operate and exist in other industries like pharmacy and retail, and now they're coming into the cannabis space. So they don't have a big install base, but they're testing out the water. So we'll see how that progresses, and that's really what I'll be working on really through the end of the month until you and I present this on another podcast for NCIA members.

‍Amanda Guerrero: That's right. Coming up on the 28th, we'll be joining the NCIA team for one of their webinars for members, so if you are a member of NCIA, don't forget to RSVP. We'll share the link with this posting as well so that you guys can register to get to know [00:21:15] a little bit better and review some of the point of sales data.

Thank you, Ed, for that update. Everyone, this is the Cannacurio Podcast powered by Cannabiz Media. We are your hosts, Amanda Guerrero and Ed Keating. Thank you for joining us. Stay tuned for more updates from the data vault.