Hanway Associates First Wednesday’s Member Spotlight: Alexej Pikovsky

THE JUMP IN How I Ended Up In Cannabis I was very fortunate to spend a big portion of my career in venture capital and private equity, where I analysed two/three tech businesses daily. Parallel to my work I was investing in several cannabis companies on the stock market and was seeing how fast the sector was growing and the many opportunities. As I got more and more excited I started meeting with various entrepreneurs in London since I was looking for an angle on how to get into the sector, either by raising my own cannabis fund or by doing a start-up. But before deciding on that, I wanted to do my research. So in September 2019 I went to Canada and California and spoke to more than 50 companies in the cannabis sector, which helped me massively to understand the market.

While it is interesting to be an investor in this sector, the market was still overvalued and oversupplied with prices of the commodity to go down significantly causing pressure on asset prices and thus on valuations of many of the exciting companies. At the same time, there was (and still is) huge fragmentation in the market, several thousand brands, a lot of customer confusion, but yet a huge interest and acceptance in cannabis as an alternative healthcare product. I saw a very big tech opportunity by building an asset light marketplace without having any inventory or logistical risk. This triggered the idea to build a platform for legal cannabis derived products and that was basically the birth of Alphagreen. THE NOW What Alphagreen is all about First and foremost, we are a platform for CBD and alternative healthcare products, combining both B2C and B2B. Our large number of content writers and our strong tech team ensure that we provide a platform with a lot of organic traffic. As a result, our brands get a high order volume and brand awareness. Our B2B business focuses on shops. They often don't know what products to buy, so we offer them a streamlined solution where they see a dashboard with product discovery features. They can order directly from the brand via Alphagreen, cutting out distributors.

The second part of the platform builds on our B2C and B2B business. A lot of our brands don't know how to generate traffic. Everybody relies on Google and Facebook. But they don't allow paid advertising for cannabis which makes things really hard for CBD brands. Even if you could place an ad, your return on investment is terrible. To assist with that, we rolled out SEO as a service.

Additionally, we incorporate analytics for companies in the US and Canada who want to enter the European market. They need to know what price range their products should have. Or, for example, if the drinks market is more attractive than the gummies market. We collect lots of point of sale and consumer-specific data which can help them in that regard.

People often come for the marketplace, but they stay for the tools and services we offer. I would call it network effects, and I think it is the future of marketplaces. Historically marketplaces started with a demand-supply model, but if you look at companies like Amazon and Leaflink, they do a lot more than only the supply and demand matching. They provide additional value and services to their customers.  

In the cannabis sector you have the opportunity to create something from scratch The cannabis market is probably one of the next frontiers with high growth where you have the chance to create something from scratch. At the same time, you have none of the large well-funded players in the market. The regulations play a big part in that. They can be a pain, but also provide protection and high barriers to entry for many big companies as well. This, combined with the chance to build something with a purpose and help millions of people to solve their daily health issues, is extremely rewarding. With my background in finance, I always start with: Can this company actually make money rather than just be a nice thing for society? But with Alphagreen there is a rare chance to have both. Why the medical cannabis market in the UK is way behind  In terms of CBD, the UK is one of the most advanced markets, ahead of the US and Canada when it comes to innovation but way behind when it comes to medical cannabis. Nevertheless, compared to other European markets like Denmark, Italy or Germany, the UK is strongly behind.

The fact that the NHS and the pharma industry is so dominant in the UK makes it very difficult for public opinion to change and education to happen. If you take Germany, for example, healthcare and everything educational is driven by the government. But still, the medical cannabis market is growing a lot. That is because a lot of the doctors and states in Germany are independent and less centralized than in the UK. They can decide for themselves. Here all decisions are driven by London, and the NHS influences independent doctors more than in Germany, Denmark, Italy or Holland, where medical cannabis is much more advanced.

Luxembourg, for example, announced that they want to legalise recreational cannabis by 2021. They are a tiny and rich country and will be able to control legalisation much better than the UK. But you never know. With this pandemic and the need for the government to collect other revenue sources, legalisation might accelerate and the UK might open up quicker than we think. THE OUTLOOK The public acceptance of CBD, medical cannabis and recreational cannabis is going to increase, which will result in a lot of regulatory changes. The regulatory landscape is already becoming more positive, more transparent and clearer, which will make operating in this space easier for everyone. Combining forces

For the sector overall, I see a lot of consolidation in the future, especially between the CBD brands. There is no real need for 5,000 CBD brands globally. There are 1,500 alone in our European database. I would say if you cut this number by 60%, it will still be enough to have a nice diversity while improving the quality as well. In general, there are a lot of brands that solve the same problem and have similar brand identities too, so I don't see a reason why they shouldn't merge and combine forces for a bigger market share. FMCG moving into the market More and more consumer packaged goods or FMCG companies will enter the market and rather than build a brand themselves, acquire some of the existing players. Companies who use the next two/three years to build a sustainable and big business will be in a position to defend themselves from the new entrants and become a big player themselves.

The difference between the European and US/Canadian markets In Europe, every country has its individual regulations and languages. A company can’t easily distribute products between countries. So it's more challenging to build a huge consumer brand in Germany or France versus the US, which has a huge English speaking market. These brands can then bring their products into the UK, and with their built up brand awareness, they just need to translate it into German, and voila, you have the German market open up as well. That's a significant difference. 

The second difference is the path dependence. Some of the big players in the US come from come from the recreational cannabis market, that's their DNA. They cannot all of a sudden move into skincare. European brands, on the other hand, are much more based on wellness and self-care. So you have a very different mix of brands when you look at the European versus the US market.

The third difference is the way people get funding. Canadian brands raised their first round of financing with angel investors and on the second round became a public company. Being a public company when you are still in your development stage has many challenges. If you want to raise additional cash, you actually have to issue equity on the public markets which will not allow you to issue equity at a premium, but instead you have to dilute your shareholders by issuing at a discount, causing downward pressure on your share price. Whereas if you raise money privately, the way 95% of the European companies did, you rely on patient capital and can decide more freely at what price you would like to raise the additional capital. This gives you time to build out a business model which actually works before you go public, before you get acquired or before you acquire somebody else to become bigger.

This dynamic led me to the conclusion that in the current market it is possible for European players to become more dominant and actually take away a lot of global market share from the Canadian and US players. North American players have been funded by short term public market capital with big piles of debt, making it very difficult for them to keep their strong position. Moving into new areas There are exciting ideas in the cannabis sector right now. An interesting company is Daye, a CBD-infused tampon brand. They raised 5.5 million dollars, which is a lot for a pre-product stage company. And I can see more companies moving into areas that CBD is not yet part of. A lot of entrepreneurs still look at cannabis as a very isolated sector. But ultimately it's an ingredient, and it can be a healthcare or consumer product. Therefore, you should look at the best drinks companies, the best sweets companies, the best pharma companies and at the best tech companies and then use this whitespace of cannabis to replicate or implement these models in this industry. People have crazy revenue assumptions A mistake I often see in this industry is that people don't realise how long it takes to build organic traffic, which is creating a significant effect on their revenue forecasts. The fact that you are in Tesco or Harrods doesn't mean that you will generate sales. There are five or ten other brands next to yours, and your product has no brand awareness whatsoever. The same applies to companies that go online. Once you have your website, nobody will visit it – how should they know about you? So how do potential customers find out about your website? 

You have to create a lot of content like we did at Alphagreen. You have to work with influencers. You have to work with people like Hanway Associates. And then, over time, you will get traffic, and you will get revenue. And that's what people don't realize. They have these very high expectations and wrong assumptions which you can argue many startups have in general when building a business plan, but I would say it is even more common in the cannabis world given the “green rush” and hype.

Misconceptions about the industry A lot of people still think CBD is illegal. It took me ten meetings with different German banks to open an account because some banks thought the business was illegal. So there are a lot of misconceptions in the financial industry, and that creates a lot of barriers.

Additionally, there is this myth that cannabis is a small market. But it's not. It's a huge market. But I see it as a positive thing for us because we can build our businesses under the radar and then turn out to be big companies. So some misconceptions play to the advantage of this industry as well.

The importance of connecting First Wednesday launched exactly when I was in my ideation phase, thinking about what to do in cannabis. I think it is great for existing and future entrepreneurs because you can catch up with a lot of the industry players there. You are able to pass on your learnings and your insights to other people who are keen to get to know the industry the same way I was really eager to learn about it.

Right now, we are looking to meet some of the leading academics in the FW network to understand what problems we can help with, especially related to data. I think we will see a lot of new ways to work with data to help the regulators open up the market and provide a safe and efficient way for people to consume cannabis. I am also reaching out to some logistics and tech businesses to hear their insights, take their learnings and apply them to cannabis.

Success is about timing and resilience  I think it's essential to stay persistent and resilient. Ultimately, when you look at successes in entrepreneurship in any sector and not just cannabis, it is about timing and resilience. And a crisis is a big opportunity. A lot of the big players have to fight fires at the moment. They're not going to be looking to innovate. So there is a big chance for new people to come into space for the next two/three years.