Cannacurio Podcast Episode 68 with Joseph Lustberg

On this episode of the Cannacurio Podcast, Ed Keating interviews Joseph Lustberg, Managing Partner at Upwise Capital. They discuss Upwise’s journey, beginning just before COVID-19 and their expertise in cannabis financing, as well as insights on the types of loans offered, the challenges faced by cannabis operators, and how Upwise helps businesses secure capital.

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Cannacurio Podcast Episode 68 Transcript

Ed Keating: Welcome to the Cannacurio Podcast. I'm Ed Keating, your host, and on today's show, we're joined by Joe Lustberg, Managing Partner at Upwise Capital. Joe, welcome to the show.

Joseph Lustberg: Hey, thanks. Thanks for having me.

Ed Keating: Absolutely. So in, in, in learning about you and your firm, I heard that you founded Upwise about a month before COVID hit. I know you didn't know COVID was coming, but so what prompted that timing? And you know, what were those early months like?

Joseph Lustberg: Um, The early months were crazy. You know, all the lending stopped right when we started our company. We started in January 2020, rebranded as Upwise in January of 2020. Um, we did notice during those times that, you know, we were doing PPP loans and we were, you know, we switched over to the Paycheck Protection Program. Um, you know, we were very quick at, you know, deciphering the SBA website and figuring out how to do those loans and become a PPP provider.

Ed Keating: Smart.

Joseph Lustberg: Um, you know, it was a mess. You know, we collected, I think it was like 950 applications with like 25 documents for each one. And then we found an online lender that did it electronically. Did it in seconds. So we went the electronic route. Um, but during that time we noticed that grocery stores and dispensaries and liquor stores were the only industries that were still getting financed.

Yeah. Kind of opened our eyes a little bit to the cannabis industry that it was recession proof. Um, you know, continue to finance cannabis companies after we're, we're industry agnostic, you know, so for us really doesn't matter what industry it is, you know, try and find a capital source.

Ed Keating: Now I heard also that you, I think in your first cannabis funding deal, sort of all the way back in 2014, what was that like? How did that come about? Like, you know, was it cultivation? Was it a vertically integrated, you know, how'd that one come to be? Cause that, that probably got you started on this path.

Joseph Lustberg: Yeah. Um, so I worked at a company called BizFi. They were one of the largest unsecured direct lenders in the country. I was their top sales rep. Everybody on the sales floor knew I love d cannabis and had a passion for it. Uh, so they got the weed deal in and, uh, when they got the deal in, I was the first guy to get it, you know? And, um, at that time, the company, the largest unsecured financing deal that they did was like 750, 000. And that cannabis deal was a dispensary. They had six stores at the time. We helped them grow to like 21 dispensaries, did all types of deals for them. You know, equipment, financing, unsecured financing. Um, that deal just really opened my mind to the cannabis industry, um, and their ability to take on, you know, expensive capital, use the money wisely and grow their business. So that's why we started up wise was just to kind of focus on the niche of cannabis, but also being able to offer all types of traditional financing product to other businesses as well.

Ed Keating: Cool. Now you touched on industry is just, you know, sort of in learning about your firm, it looks like you do cover a number of industries like auto repair, construction, cannabis, healthcare, retail, restaurants, trucking, like, what's the mix like? like , is cannabis, you know, 25 percent or more or less? Like, you know, how does all that come together?

Joseph Lustberg: Yes. It used to be a really big focus, right? Cannabis was 70 percent of our business back in 2022. Um, very big year for us that we deploy about 151 million cannabis operators. And then, you know, 2023 cannabis took a big dive, a big hit. A lot of debt capital is, uh, you know, lenders are tighter. Interest rates went up, right? So borrowers are taking loans.

Ed Keating: Price of weed went down

Joseph Lustberg: Exactly. So it's just tougher. So now I would say cannabis is about 30 percent of our business. Yeah. Um, and then traditional finance is the other 70%. Um, but me, myself, personally, Craig, who runs my cannabis division, you know, it's 99 percent of what we do every day.

Ed Keating: Got it. And in terms of the kind of loan types, you touched on this as well, sort of like, you know, equipment financing and things like that. The reason why I'm intrigued by that is when we started Cannabiz Media 10 years ago, I started looking at the uniform commercial code filings in the state of Connecticut, like, well, there's only four growers here. Who, what kind of financing do they have? And I learned that all three of them had taken a note from Water's Corp to buy their big extraction stuff. So like, is that still a thing? Like, is, is there still that kind of financing going on in the space for equipment?

Joseph Lustberg: Yeah. So we work with many vendors, right? So we work directly with the manufacturer and then we also work directly with the borrower. So we do leasing agreements all the time. Uh, we even equipment financing for startups. Um, there a re some manufacturers who are starting to finan c e their own equipment as well. Um, but really w here we see our advantage, just our experience, Not only help them get better pricing, we'll work with the manufacturers to make sure everything's being shipped at the right time. And then we work with companies on the rebate side to help, help them get rebates back, um, to make sure that they're, you know, really taking advantage of everything that their local municipality offers or the utility company offers.

Ed Keating: Oh, yeah, it's because the utilities because we have some customers who focus it on that. Now for some of those loans, like if you're going to those companies, you know, what are people using as collateral? Like, I know we work with banking software companies, and they work with financial institutions, who You know, sometimes I think worn against a license may not be the strongest collateral to use, but like, what kind of stuff do people put up besides maybe their house or something?

Joseph Lustberg: Everything. But, uh, you know, so it depends on the type of deal, right? You have unsecured financing that has no collateral. It's just UCC one on the business, right? So their collateral is the business operations, the cashflow that's coming in. And any account receivables or, you know, things like that, then equipment financing, it's usually just UCC on the equipment, UCC on the operating business. Um, you know, because we do a lot of construction financing that requires first lien position on the property and a lien position or first mortgage on the real estate entity, And then they also want the operating entity to be a guarantor of the loan. And they will also take security interest in the license as well on the construction loan. You know, really the main purpose of doing that is just to make sure that in the event of a foreclosure that the property, the license doesn't move from that property.

Ed Keating: Got it.

Joseph Lustberg: If they're lending on a cannabis valuation or lending to do a build out where there's You know, a lot of cap ex and equipment that's needed, you know, they're lending a lot higher than the traditional real estate value is of that property, you know, so they have to take the operating entity, the real estate entity and the cannabis license to make sure that in the event of a foreclosure, They can put another operator into that, you know, business who can successfully operate and pay the lease.

Ed Keating: So with that kind of, with that kind of complexity, Joe, does that lead you to operate in certain states and ignore others? Like, I think back to the, the interesting story that Oklahoma was where, you know, they were, Buying all sorts of equipment. And I remember hearing one of the lighting guys saying, all the stuff that I'm selling to these people is going to be on eBay in a year. And you know, the, the, the market has collapsed regulatorily as well as others. So once again, are there certain markets that, you know, you're really attracted to, or it's really based on the individual license holder?

Joseph Lustberg: I mean, listen, we land in California, we still land in Oklahoma, right? We still land in Washington, you know, and those deals are definitely tougher to get done. You know, obviously, most lenders prefer limited license states, you know, for us, you know, we're one of the only capital providers that does startup and will do construction financing or equipment financing for startups. that have not $1 of generated revenue yet. Right. So we really see a lot of success in emerging markets, you know, like New York, New Jersey, Illinois, still a big market for us. Missouri is a good market for us, Ohio. Um, but we do deals everywhere. Um, so. You know, if somebody has a, you know, a property that's a cannabis facility in Oklahoma, you know, the lender may not lend above cannabis value, but, you know, we still have lenders that can do it.

Ed Keating: Yeah, that makes sense. So, yeah, I guess if you're working with, you know, People where, you know, they've got a PowerPoint and a dream and, you know, you're, you're helping get them off the ground as a, as a startup, that, that must really affect your sense of the market is like, I'm assuming that you're probably not doing much work with MSOs, but maybe more of the mom and pops in the, in a lot of these States.

Joseph Lustberg: Correct. Yeah. We're definitely working with. more, you know, I wouldn't say just mom and pops, you know, definitely some bigger businesses that have raised a lot of equity and debt as well. But, you know, smaller businesses, um, that are growing in emerging market, you know, most of our startup deals, it's owner operators, right? Where yeah, right. They own the real estate, and they're the operator as well. And we're helping them to get the construction financing and everything built out for them to get operational. But, you know, we see so many deals with just the license dream and a deck and, uh, you know, There's nothing we can do with that, right? Yeah, you need to have sufficient borrowers. You need to have good guarantors. You need to have somebody with cannabis experience on the team who can actually execute the business plan. Um, and then you need, you need that service coverage, right? So most of the times when we do an equipment financing deal for a startup, it requires them to come in with some sort of cross corporate guarantor. So a construction company or an accounting company or a real estate company that is going to be the cross corporate guarantor that's going to service the lease payment. And then that also helps on our, with our traditional side where if we get a startup borrower and we're like, Hey, do you own any other businesses? And he's like, yeah, I own a big construction company. I'm like, Oh, let's just finance your construction company. You'll get a lot cheaper cost of capital and it's easier.

Ed Keating: Oh, yeah,

Joseph Lustberg: we think outside the box and kind of pivot in certain instances, which, uh, is a big differentiator for us.

Ed Keating: Well, just like you did with the PPP loans back in 2020. I mean, that makes good sense for doing that. I mean, the construction angle is interesting because as you know, we look at these licenses as they're coming through and the applicants and you're so right. A lot of these people are in that side of the business. And as some smart person said, Within, you know, a couple months ago, I read this cannabis is really a real estate business. Once you get down to it, like it really comes down to, you know, have you made it through all the zoning? Do you have access to land or building or property or lease? Because without that, nothing really happens.

Joseph Lustberg: Yeah. I mean, it's look at all the MSOs, right? For them, it's, uh, grabbing real estate, planting their flags and keep expanding, expanding, expanding, you know, and if you,

Ed Keating: Until that didn't work anymore.

Joseph Lustberg: Exactly, until it didn't work in certain states. Right so,

Ed Keating: Well, for them, it's a pivot too. I think, you know, look at, uh, you know, Columbia Care saying they want to get out of Florida cause they're losing more money than they're making. And they said somebody else can do it better than we can. So it's being humble, I guess, but, uh, they're just trying to live to fight another day. So, um, no, uh, what about ancillaries? Joe, are they part of the mix at all? Like, you know, did, did they come? Yeah. Yeah.

Joseph Lustberg: Definitely, We do a lot of ancillary because, you know, like, you know, um, paper manufacturer, dispensary builders, uh, you know, all types of different cannabis associated companies, you know, uh, that need financing. And unfortunately when a hundred percent of your income comes from cannabis companies, You're then labeled cannabis, right? So it's very difficult for them to find financing as well, right? So we, we work with a lot of companies like in that sector. Um, we do hemp, CBD, a mix of everything.

Ed Keating: Good. Well, yeah, I was actually gonna ask you, uh, uh, about hemp because I, I've been to a lot of conferences in the last 90 days and it's all about hemp, all about hemp beverages and, you know, the size of the hemp market. Somebody, uh, uh. well Known in the industry said that, you know, the hemp beverage market is like almost as big as a legal cannabis market. I think this is like 20 billion and a lot less regulation. We've seen Curaleaf saying, Hey, you know, we're standing up our, our hemp business even more than we did in the past. So, you know, how do you think that's going to impact the industry, Joe, in terms of impact? Cause you know, obviously that's going to bring in a lot of cash and capital. So, you know, good for these companies, I would assume.

Joseph Lustberg: Yeah, I think. You know, the beverage industry is probably the easiest way for, you know, normal society to adopt cannabis, right? Like I always say that my mother and aunt or grandmother would never, you know, smoke a joint, like you're never going to catch them smoking a joint. But if you had a THC infused beverage that tastes like lemonade, they would probably drink it, right? So, I really do think that's the way to getting into the mass market. Um, you know, you've seen a lot of hemp creams and all this stuff come out. Um, and I think there's a lot of medical benefits to hemp as well, but, um, it's a tough industry just like cannabis is, you know, a lot of people get into cannabis and hemp and they think it's, uh, you know, that green rush, right? It's a very compliant, very complex industry with a lot of barriers for entry. And, uh, you know, that's what makes it so difficult. And then, you know, on top of it, you know, the inability to raise capital and be able to get that capital at a, you know, normalized rates is just makes it even more complicated to try and run a profitable business. So it's a definite struggle, but, um, I'm optimistic on both cannabis and hemp, but, Now that cannabis is here in New York and, you know, starting to really get some traction, you know, we're very optimistic here in the East coast for cannabis.

Ed Keating: Yeah, absolutely. I'm in Connecticut. I'm not too far away from you. And, uh, you're definitely seeing these, these markets come on board. What's been interesting is, is just the challenges of having the state by state, um, set up where prices are different. So we live not too far from a dispensary. My son looked at it, saw what he wanted to get. Yeah. And then he looked across the border in Massachusetts and the same, uh, box of goods was 100 less for the same stuff. And so he drove up to Massachusetts as a, as a young person would, but you know, it makes sense. Obviously some of that's going to change over time, but, uh, you know, I guess I'll charge the high rates in Connecticut as long as they can. But, um.

Joseph Lustberg: Exactly. That's like every market, right? Like same in New York, it's 3, 000 a pound now, you know, you look at Massachusetts, you know, four or five years ago, it was 3, 000 a pound, right? 1, 250, 1, 500, something like that.

Ed Keating: Well, it's the same stuff that happened years ago with uh, Casinos, like everybody drive to Connecticut back in the day and then suddenly, Oh, now they're in New Jersey. Now they're everywhere. So that only lasts for so long. But, uh, but definitely a compliance, um, regulatory challenge, I think, is the states trying to figure out what their what their neighbors are going to do. I mean, I think that's what's pushing Pennsylvania to try and move along as Ohio is standing up their program way earlier and is kicking out licenses or at least preliminary licenses like crazy. I think another 40 or 50 were announced today. So, um, so that's gonna, you know, keep us all busy, which is good, which is good. Um, one of the questions I obviously want to ask Joe is how does a team like yours utilize Cannabiz Media in your go to market efforts? Cause you know, we have all that license data and I'm presuming you're trying to find some of these license holders.

Joseph Lustberg: Yeah. I mean, we use it all the time. It's great for us really, for just finding out information on the, the borrowers, right, looking them up, looking where the decision makers are in the company. You know, uh, I love the violation tool. You can see if somebody has a violation, you know, I always used to say that, you know, we went through like three and a half months of due diligence on a real estate deal just to find out that the guy had a violation and they were going to kill it. If I had Cannabiz Media back then, it would have saved us so much time and energy. You know, that's probably where the lender saw it, to be honest. But...

Ed Keating: yeah, no, we were working with some of those banking software companies and they are always on us to stay on top of the negative news because what we've learned in the last 10 years is that a lot of states unfortunately don't make it available. Like, you know, in New York, we have to wait. 10 12 14 months to get a response. We're looking for violations, whereas others like in Washington, they actually publish it. So we have to file a lot of requests, and they often charge us for it, too. But we know how important it is when you're doing due diligence, like you need to know this stuff. And if the regulators are going to hide it, you know, we're gonna do our best to shine some sunshine on it. So

Joseph Lustberg: yeah. And then also the active license updates. I love that feature.

Ed Keating: Oh, good.

Joseph Lustberg: I have emails every day coming to me just saying, Oh, new active license. You know, we do payment processing for dispensaries. So, um, you know, every time a new dispensary opens, you know, we're reaching out and trying to help out where we can, especially in New York.

Ed Keating: Oh, yeah. Well, right. I mean, New York's been very interesting as, as, uh, they've really cracked down. At least as much as they can on some of these unlicensed operators. And to see some of these anecdotes where the license stores say that they are seeing an increase in business is positive. I think, I mean, we'll, we'll see if it can continue, but the long arm of the law is having an impact, I think.

Joseph Lustberg: Yeah, it's definitely the truth. I was in the Lower East Side yesterday at a client of mine's dispensary. He said two stores on the same block got shut down recently and people came in saying, oh I used to go there Now we're coming to you so it's great when uh, You know, they're actually doing what they should have done two years ago, right?

Ed Keating: Right indeed indeed and we started to track that as well. Like if you go into the Uh app now we do track unlicensed businesses when we can find them from law enforcement and other sources. I mean We've also factored in um You smoke and vape licenses too, which are fascinating because here in Connecticut, they're the ones who sell a lot of weed. And they're getting shut down for it, but, uh, they're not necessarily losing that vape license, they're getting a fine or whatnot, so, um, I think last time I checked, Joe, we found 160, 000 smoking vape licenses nationwide. That's a hell of a lot more than the 35, 40 active, uh, cannabis licenses we have nationwide. So, it's, it's, to some people it's simply a substitute. Like in Texas,

Joseph Lustberg: crazy.

Ed Keating: Yeah, yeah, absolutely. Absolutely. Now thinking, you know, beyond, you know, company and markets and a little bit more big picture, there's been a lot of talk this spring about rescheduling and moving cannabis to schedule three. You know, what does that mean? If suddenly 280 goes away and there's more free cashflow that people are able to get out of their business, you know, how will that impact? And I guess, how will you pivot? because obviously...

Joseph Lustberg: You know, it's super helpful because now a lot of our borrowers qualify for better capital. And, you know, we, we do a lot of term loans where, you know, it's a three year term, traditional APR, you know, good rates in the teens. And to qualify, you have to be even a positive and you have to meet a minimum debt service of a 1. 25. Right. So there's so many instances where their profitability doesn't meet that, that service coverage ratio. Right. And they were like very close. And then they try and show in a pro forma, how. They're going to meet the debt service, right? Because they're rolling or something, you know, but with that adjustment, you know, now rescheduling, it'll bring up their profitability. And a lot of them will qualify for better loans. So I just think it'll help us to get deals done, right? I don't know whether or not they'll be able to go back retroactively and amend their tax returns or whatever, but, you know, however it shakes out, you know, if they're able to take off traditional deductions like other businesses, you know, it's definitely beneficial for the whole industry.

Ed Keating: Yeah. Yeah, no, I, I agree. And that's helpful to know. I hadn't thought about the fact that they would still benefit from using Upwise, just that they'd have. The availability of a broader suite of products, uh, uh, to meet their needs, which is, which is

Joseph Lustberg: I do think more capital will end up coming into the market, right? I don't think overnight you're going to see, you know, all the hundreds and thousands of banks in that went to traditional businesses start to enter into traditional finance, right? Uh, you know, we still have a very big traditional side of our business and You know, those businesses can go to traditional banks. And the reason they come to us is because we're faster and it's a more streamlined process, you know, so using technology to expedite the long process has always been. You know, a big part of our business. And, uh, you know, that's kind of our edge over everybody else.

Ed Keating: And also you've got the subject matter expertise of, of understanding the cannabis space for a decade. I mean, that goes a long way. I think when you're talking to people who are operators and they, I think they want to get somebody who, who gets them as opposed to people who, you know, don't understand the industry at all.

Joseph Lustberg: Yeah. I always say we're, we're not in the suit and tie type of capital guys. You know, we get out there in the trenches with our borrowers, you know, we love to go to the farms. It's our favorite part of our job. Yes. So we're, uh, you know, definitely involved with our borrowers. We bring value in many ways, whether it's, you know, recommending somebody else, recommending an attorney, insurance provider or consulting of some sort. And then the biggest thing I think is just, we're honest, right? In cannabis, you run into so many people who are not honest, give out fake term sheets and just trying to get over on people. And we're, we're not in it for that. We're in this for the long relationships. Good partnerships and you know to grow with our customers And I always say if I can get you a bank call and i'll try and I will Yeah, we do have 38 banks that lend to cannabis company, but you have to be profitable and you have to have real estate

Ed Keating: Yeah, right. Yeah. Well, hey, I mean Those are good business rules to kind of live by now You know one question that I sadly have been asking for the last, you know Year and a half two years on the podcast is has the industry hit bottom yet? Because you know, we've seen a lot of our customers either Leave the industry, run out of money, or just, you know, shut down their, their cannabis, uh, spaces. And since you're at a different part of the cannabis value chain than we are, I mean, you know, we track licenses. That's a lagging indicator. You were a marketing expense to, to, to companies, usually ancillaries. So, you know, if their license holder business declines. It's going to hit us eventually as they're like, yeah, we're, we're pulling out of cannabis. What are you guys seeing? And do you think, you know, we're seeing some green shoots or, you know, Are we still crawling through the bottom of the valley?

Joseph Lustberg: I think we're back on an upswing, you know, like the ball rolled down the hill and then it's coming back up now um You know, like I always say it's state by state game. It always has been always will be Until federal legalization comes it's always going to be a state by state game You know, so you really have to ride the wave of what's hot at the time. Right. Right now, the East Coast is just starting out, right? Yeah. Cannabis industry on the East Coast is still in its infancy stage. You know, so for me, I'm very bullish on cannabis still. Um, I've taken a much more focused look at cannabis and, you know, stepped back our efforts a little bit more and, and, you know, really just trying to do what we're good at. Right. You know, focus on quick financing and, you know, emerging markets is really where, you know, we specialize and, uh, you know, we're still putting a lot of time and energy into cannabis and, uh, still believe in the market and still believe, you know, especially here in New York, New York is, uh, you know, going to be a big, big market for us.

Ed Keating: Absolutely. Well, um, and, and also with sort of these emerging markets, you know, we just added in. I think a couple thousand of the, uh, micro applicants in Missouri. We see that Minnesota has gotten a lot of applications coming in. Delaware is going to start their process. So there's definitely a lot more markets that are coming on board, which is kind of exciting. So sort of on that note for you, Joe, looking forward, what trends are you seeing or, or things that we should be looking out for, we've talked a little bit about hemp, we've talked about rescheduling. Anything else out there that you think is interesting or worthwhile to keep an eye on as we try and figure out what the hell's going to happen for the rest of 2024 and into 2025?

Joseph Lustberg: I mean, I just really want to figure out what's going to happen here with rescheduling and you know, when that's going to, how long that's going to take actually, you know, nobody knows. Um, I think that's really, you know, the big one and then, you know, say banking, there's federal legalization, you know, two big ones in our industry. You know, here in New York, the regulation is changing always. So,

Ed Keating: and the regulator,

Joseph Lustberg: exactly. So you just really have to stay on top of it. Um, you know, day by day, you know, that's why we use softwares like yours, right. Is to just make sure that we're staying ahead of the curve and we're, you know, making sure that we're getting to the customers and make sure the customers know who we are. So when they do need capital to grow their business. You know, we're here to help at that time.

Ed Keating: Well, you know, we're talking about sort of the regulars changing it. You know, as I think around just the region here, you know, the Massachusetts regulator is, you know, a mess that they're almost like, you know, like an internal receivership. Connecticut social equity council has been sort of like internally audited and New York has gone through all this change. So there's still sort of this weird regulatory, um, volatility that makes it hard to know what's going to happen on a state by state basis. It's not sort of this, uh, locked and loaded steady, uh, progression. So yeah, definitely a lot of things, uh, in motion, but yeah, I couldn't agree more that the rescheduling discussion debate and impact is probably the most profound thing our industry is going to have to deal with going forward.

Joseph Lustberg: Yeah, without a doubt, you know, it'll change this industry. But I mean, it's just game changing for every single cannabis business, you know. The fact that we were not, cannabis businesses were not able to take advantage of traditional Rite of Expire is really just, uh, you know, crazy.

Ed Keating: Indeed. Well, that's, that's a good, good note to end on. And it'll be fascinating, Joe, to watch as you guys pivot as all these changes come through as you've pivoted in the past. So thanks so much for joining us today. It was a real pleasure talking to you and learning more about Upwise.

Joseph Lustberg: Yeah. Thanks for having me on, I appreciate it.

Ed Keating: Absolutely!