#035 - Betting on Hemp Beverages with Mindset Capital's Aaron Edelheit

Discover the thrill and potential of the THC beverage market as we uncork the secrets behind a sparkling $10 million investment fund with Aaron Edelheit. Our spirited conversation with Aaron will not only pour you a glass of industry insights but will also reveal how he transitioned from trading small-cap stocks to betting big on cannabis-infused drinks. As we tour through cannabis culture at events like the Budist launch party and Hall of Flowers, you'll get a taste of how THC is blending with mainstream social gatherings, promising a heady mix of innovation and investment.

During our chat, Aaron elaborates on the disruptive power of legal hemp-derived THC products, especially within Minnesota's receptive market. We unravel the complex legalities and rapid growth within the sector, and why heavy hitters like Döhler are teaming up with market leaders like Vertosa to fortify their presence in the beverage ingredient space. Aaron's enthusiasm is infectious, and his insights are a must-listen for anyone eyeing the potential upheaval of the colossal alcohol industry. 

We wrap up the episode by dissecting the evolving dance between cannabis and alcohol distribution dynamics, where hemp beverages are making a splash and altering consumer habits. We'll share tales of alcohol distributors finding new rhythms in the hemp space, freed from traditional constraints, and how this is shaking up industry standards. Lastly, we toast to strategic partnerships and management adaptability in a market that remains as fluid as the products it creates. Join us for this candid and in-depth discussion that not only forecasts the future of cannabis but also celebrates the communal benefits of a responsibly expanding industry.

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Transcript

Ben Larson: 0:03

Hey everybody, welcome to episode 35 of High Spirits. I'm Ben Larson and, as always, with me is Aniray Grabstein. It is Thursday, march 14th, 2024, and we have another great show for you today, right up my alley. I'm super excited about it. We're talking about beverage investment THC beverages, low-dose hitting the mainstream marketplace, capital coming back into the space and a gentleman who was brave enough to go out with a thesis purely on THC beverages, and he just closed his $10 million fund. So we're super excited about that. But before we get there, I'm going to check in with my co-host, aniray. Good to see you again. We were just hanging out yesterday.

AnnaRae Grabstein: 0:51

We were just hanging out yesterday and the day before. It's been a really fun week in cannabis, with lots of great events and networking and also business to get done. You and I saw each other at the Buddist launch party at the Sunstone Winery down in Santa Ines in the southern wine country of California. It was just a beautiful event and it was really a who's who of the industry, which was fun.

Ben Larson: 1:23

It truly was that venue, sunstone Winery. Shout out to Teddy Cabucos in the fam. It really is like living in the future. They built this terrace where you can consume their cannabis seltzers Sunstone has their own cannabis seltzers. Then you just go down the stairs and you're in the normal winery. It's just like this is the integration of cannabis into the real mainstream world. I think they were doing it by the book. I know they had a local supervisor there speaking, and so it seems like they're doing things right in Santa Barbara.

AnnaRae Grabstein: 2:03

Yeah, they even had Kristen Nevidahl, who's a part of the leadership team at the DCC, there to help with the launch as well. It was really great. Not only was the space beautiful, but I think it's exciting to take these moments to celebrate launches of community-focused products.

Ben Larson: 2:22

I know that, jocelyn and Claudia.

AnnaRae Grabstein: 2:24

They came on the show. We know they've been working on getting Buddist out into everyone's hands in our phones for a while now. It was just fun to celebrate. Yeah, saw some old friends and also met some really great new people to come to the mix. Yeah, it had a great time.

Ben Larson: 2:42

It was kind of reminiscent of the old days, like 2015, 2016,. There was a launch party for a new company. People were talking about investment. Our guest was there. We'll get into that in a little bit, but yeah, it was just a great energy. Then we saw a lot of the old guard, like Hua from Meadow, joyce Sinali from Sonoma Hills Farm, mike Hardin yeah, I don't know it got to see the whole Meadow team, which I think some of them have now been there for like 10 years, which, wow, that makes us sound like a mature industry.

AnnaRae Grabstein: 3:18

Yeah, it also says a lot about the leadership there and that people are sticking around that long. Yeah, that was really cool. In the end, I think the party was mostly timed to be the night before Hall of Flowers, which is the premier brand focused event that happens in California but also elsewhere. It was happening the next day, so Wednesday, yesterday and then also today in Ventura, about an hour south of where the event was. I headed to that yesterday and then you headed a little further south to LA for a different event that you can share about.

AnnaRae Grabstein: 3:57

I went to Hall of Flowers and got to see the brands that decided to present and set up booths and got to spend some time with some of my favorite folks. I walked the floor with Heather Malloy of Speedwell, who is another investor Really starting to feel more optimism around investors showing up with curiosity and interest in what's happening. I got to high five my good friend Rusty from Old Pal, which was lovely, and some great happy hour events that followed that Just a lot of positive energy.

Ben Larson: 4:32

Yeah, same. Here I'm in Anaheim for Expo West, which is broadly known as the Super Bowl of Food, a very big mainstream event 80,000 to 100,000 people, I believe. They just filled the entire convention center in Anaheim with food. You can never go hungry here. It is exciting. People are talking about THC and there's a lot of questions and a lot of excitement. I think the mainstream is ready to adopt our category. It's really starting to feel like that.

AnnaRae Grabstein: 5:07

Well, that seems like a perfect segue, in that you have a bit of an exciting announcement that came out this morning on the PR Newswire. Would you like to share with our audience what that was?

Ben Larson: 5:17

Sure, we'll keep it quick so we can get to Aaron. We Vertosa received an investment from Dollar. Dollar is a multi-billion dollar beverage ingredient company based out of Germany. In line with the investment, we're also developing an R&D partnership where we get to leverage their resources their 1,000-person R&D team to really accelerate our innovation in the space and really learn more about our ingredients and their applications and do more, innovate, better ingredients or ingredients for the future and look maybe even beyond cannabis.

AnnaRae Grabstein: 5:57

Amazing. That's so positive and perfect to also segue into our discussion today. Congratulations to you and the whole Vertosa team. Thank you. It is not an easy feat to close a deal like that. It's really meaningful, I think, to everyone who's watching to that rising tide. Should we jump in?

Ben Larson: 6:20

and give a conversation. Let's do it. I'm so excited for this conversation. This is going to be great.

AnnaRae Grabstein: 6:26

You and I ran into Aaron Edelhight in Miami, a Canada con. I think that we were both smiling ear to ear from our conversation about how enthusiastic he talks about.

Ben Larson: 6:40

THC beverage. He puts me to shame. I'm like I thought I love cannabis beverage. This guy loves cannabis beverage.

AnnaRae Grabstein: 6:49

Absolutely. He was like a giddy kid just getting so excited talking about it. I'll queue him up and I'll tell you a little bit about his background and then we're going to bring him on and talk about him. Aaron is the CEO and founder of Mindset Capital. He is a longtime entrepreneur and currently an investor. He has a proven track record across many sectors. I crossed paths with Aaron, first because of previous investments that he's made in cannabis. The new splashy headline and the thing that we're excited to celebrate is that he has closed a $10 million THC beverage focused fund, which, as far as I know, is the first THC beverage focused fund that there is. Prove me wrong on that one. He has done a ton of really cool stuff in his career, but I think today we're going to focus on his passion and work in the cannabis and THC space. Very excited to have you on today, aaron, and to celebrate and learn more about what you are doing with this fund. Welcome.

Aaron Edelheit: 7:56

Thank you for having me on. I just big congratulations, Ben, to your news. I know it's really really hard to raise money in cannabis, but it's a credit when you have a company, a well-established company, coming in and investing in your company. So hats off. It was great to see you at the Sunstone event. I just said I missed you, NRA.

AnnaRae Grabstein: 8:24

I know it's crazy that you were there and I didn't see you. That just shows how many people there were there. It was a big party. Many hundreds of people showed up there, Apparently people like drinking alcohol and they like consuming cannabis.

Aaron Edelheit: 8:38

Who knew In a beautiful setting crazy.

AnnaRae Grabstein: 8:42

Also, tell us about the fund and how this all happened. What led to you developing a hypothesis around THC beverages and ultimately deciding to raise a fund focused solely on investing in them?

Aaron Edelheit: 8:58

Sure, so you have to back up, and I, you know I'm an investor in cannabis. I am more alcoholic, I'm driven in ways that I don't fully understand, and sometimes that manifests itself in insomnia. So a low dose gummy can be life altering for me. With three small kids and just now, knowing that it's in the cabinet, it kind of got me interested in cannabis, and the more I peeled back the layers, the more I loved it.

Aaron Edelheit: 9:27

My background is really in investing in small and microcap stocks.

Aaron Edelheit: 9:33

I was involved, you know, I had my real estate where I started buying foreclosed homes, fixing them up and renting them out during the foreclosure crisis, and so I like things that are illiquid or that other people look at you and they're like wait, what are you doing? And so the more I peeled back the layer on cannabis, the more because of the federal illegality, because of just the problems with cannabis, you just don't have from an investor perspective, you just don't have a lot of competition. And so I do deep dive research and I launched a cannabis fund at the end, a dedicated cannabis fund at the end of 21, beginning of 22. And just doing deep dive research, you just realized that what's really missing in cannabis was just a lot of focus and for a lot of actually good reasons, companies were forced to do a bunch of different businesses and it's just a very complex business already regulatory-wise and so, anyway, so I am an investor, my largest investment which we're- not here to talk about is Grown Rogue, and I have a small position in goodness growth.

Aaron Edelheit: 10:47

They're in a partnership. Grown Rogue is just as cultivation, and they're helping goodness growth with their cultivation in Minnesota. So long story. So I'm one of the weird people that pays attention to what happens in Minnesota, and so in October I read an article that said 10% of liquor store sales in the state of Minnesota were THC beverages, and my first thought was that can't be right. That's a ridiculous number. And so I do what I do. I'm a curious person and I'm not like a day trader I'm not good at it at all and so I just started calling, doing research, do diligence, talk to the largest liquor store chain, talk to breweries, I talk to distributors, I talk to companies actually selling, and I just went down to Rabbit Hall where I just couldn't believe what was going on in Minnesota. And just for those that don't know, when Minnesota legalized cannabis at the end of 22, they looked at the hemp laws and they said you know. Just so you know.

Aaron Edelheit: 12:02

The difference between THC and hemp is if it's grown on a USDA certified farm and it's 0.3% THC or less by weight, it's a very important phrase. When it's harvested, any cannabinoid derived from that is not on the controlled substances act and it's federally legal. And so, like many people in the cannabis industry, I just thought, oh, there's this loophole. I just didn't pay attention to him, frankly, and you know the weird synthetic stuff I was like, oh, that's just some kind of and until I started diving in I'm like, oh my, and then the other thing I realized is there's a federally legal way to consume THC, and as an investor I'm not involved, and this is crazy. And so it just started, you know, moving very, very quickly, which involved me going to the Wine Spirits wholesale association, the liquor store, and things are moving basically really fast. And basically Minnesota looked at the hemp laws and said, well, hemp is federally legal, hemp drinks can be served anywhere bars, restaurants, liquor stores, even grocery stores and fast forward to today. Not only is it 10% of, not only was the 10% figure correct, but now I believe it's 15% in climbing. And it's now.

Aaron Edelheit: 13:34

I like to say, what happens in Minnesota doesn't stay in Minnesota, so it's spreading to Tennessee, texas, just the number of states now that it's spreading. And so I, when I'm either in or I'm not in, that's how I work. I'm very passionate and I do a lot of research. I think that this is hemp low dose beverages and my interest in hemp is really low dose beverages. Right, I think this is one of the greatest things ever to happen to cannabis regulated cannabis. I think it is alcohol replacement. It is not cannabis replacement, it is massive, total, addressable market expansion. Let's get into some specifics around that, like how big are we talking?

Ben Larson: 14:31

I'll get into that I felt compelled.

Aaron Edelheit: 14:35

I was like how am I gonna invest? It's no real publicly traded companies. There's no real, unfortunately yet, and so I created a fund that I wanted to invest in, which is a portfolio approach to investing in brands. I think this is gonna be not 15%, but 20% of the $260 billion market. That's what alcohol sales are. So I believe this is $50 billion just in the US, and if you look at beverage companies, they're not just about the same amount of money, but you look at beverage companies. Beverages are some of the best investments of all time, and it's possible that this could create $250 billion plus of market value. So, anyways, so that's why I created my fund. We can get into all the specifics, but that's it.

Ben Larson: 15:26

I like that number. I think my friends at Doller like that number too, I'm sure they do.

Aaron Edelheit: 15:31

They see it. The alcohol companies. We can get into the details. The alcohol companies can see it. The alcohol distributors can see it. Everybody can see it.

AnnaRae Grabstein: 15:41

It's very. What do you think is the prime horizon for that growth? How fast does this happen? That I don't know.

Aaron Edelheit: 15:46

I can't. It really depends on the state by state. There's a lot of stuff that's I'm looking at the end goal. What I'm trying to do is like I'm happy to take the risk on timing, but I don't want to take risk on if that's again you know, a poorly run company or unethical people or you know I could be wrong on timing, that's okay. But as long as I'm not wrong on the opportunity and it's also really helpful that you have massive growth as a tailwind, I just can't predict the exacts. I think that that's a game of precision that does serve me. And it's so massive related to where we are now and how few investors I think this is.

Aaron Edelheit: 16:33

I think what's going on in hemp beverages and alcohol in general is probably one of the most underreported stories in all of this In society. The younger generation is not drinking like our generation and our generation is like, hey, this is really unhealthy and I don't feel really well as I get older doing this. What alternatives are out there? And so the Wall Street Journal has had like an article on athletic brewing and you know there's all this non-alcoholic beverages. But in general people are using alcohol for a reason to relax at the end of the day, to take some stress off. And when you're unfortunately when you're consuming a non-alcoholic beverage, it's just, it tastes great, it's not really doing anything to you.

Aaron Edelheit: 17:33

Enter hemp beverages, and so the biggest thing this is the ultimate, real quick for the consumer. What does the consumer get from a hemp beverage, a load of hemp beverage? The way I consider a load of hemp beverages is two, five and ten. You know, I, you know, once you go past ten, it's like you know you're different. But imagine a drink that relaxes you, alters your, you know, gives you a slight buzz. Food is more pleasurable, music is more enjoyable, it can serve as an aphrodisiac. You'll sleep great at night and then you'll wake up with no hangover. If I offered you that menu, you would go. That doesn't exist, but it actually does. And this is one of the reasons why it's flying off the shelves. What alcohol? Distributors are starting to trip over the cells and the retailers are now tripping over themselves. While beer and wine sales go down, consumers are like oh my God, and the whole ecosystem is like.

Ben Larson: 18:44

Turning to this category, so we're big fans of the beverage. I spent a little bit of time on the other side of the table and I know we have Patrick Rea from Poseidon in the audience, so I want to get into the mechanics of the fund a little bit. Right, you talked about your comfortability with illiquid opportunities, early stage venture investing. A lot of times we say seven to 10 year horizon. You had to go out and raise money to close this fund. Are your LPs bought into this kind of indefinite timeframe? But the vision that the opportunity is there, and then the follow-up question to that is what is going to be the trigger for that opportunity to start happening and who are the acquirers going to be?

Aaron Edelheit: 19:31

So even in cannabis, what I was telling people is like and I invested in publicly trading companies and don't give me money if you need it anytime soon. I hope you're really excited about volatility and shifting regulatory patterns and part of raising the money is not only just saying like hey, there's this opportunity and it's really exciting, but also like you're only as good as your investors. They're your partners, and so just telling them like, hey, this is not like investing in, even though they're illiquid, publicly trading companies that are generating cash flow. These are much smaller, much earlier stage. There's a lot more risk, and so it's just kind of balancing that.

Aaron Edelheit: 20:26

Luckily, I had very good year last year with my funds continuing this year, and I think that I write a lot and I just share my thoughts and, I think, sharing my research and just how every single company I'm investing in is growing at triple digits right now. They're having trouble keeping their in stock right. They're managing like working capital and it's like, and so it's like part of it is balancing that risk and that time with just the opportunity and that no one. You know I'm a small fit, I'm a no one. I raise a $10 million fund in cannabis or hemp beverages and I'm like a king, I'm a shock right, and part of it is like it's not, like I'm doing anything smart like any other industry Like, could you imagine any?

Aaron Edelheit: 21:27

I mean, ben, you know you're talking to all these companies, you see what they're doing. Did you imagine if we were like you just took away hemp and you just said AI, I wouldn't be able to invest there. I wouldn't have access to any deals or any company that would want that would be available for me to invest. I wouldn't be able to invest. So, in terms of answering your question on the timeline, I believe we have this window where you have some uncertainty around the far pit and you have states. You just, you have clarity in some states and other states are allowing it, but it's not. It's not exactly clear and from my talks with companies that are in the alcohol industry, what they need to see is they want clarity on the farm and they want to see more states in that guidelines before you see the national players come in. And then there's some concern from just the TTV or from the state regulatory body is like, hey, if I get into this, what does this affect?

Aaron Edelheit: 22:38

my liquor license. I mean, they were talking about this at Sunstone, right? It's like you just need a little more clarity as to the guidelines, and so my own view and this is the thing that there's a there is an echo chamber in the cannabis industry where the cannabis industry, someone will say something and then everyone will just repeat it. One of them is this is a loophole. If you read the law, it's actually quite clear. Now, some of the synthetic stuff yes, I understand the other one is like oh, they're going to close this loophole in the farm. I think that they're just not thinking very clearly that in a presidential election year, the idea that this Congress, which can agree on nothing, is going to hurt the end market demand for hemp farmers is preposterous to me. Not only that, it's not the right vehicle. The whole farm bill is massive bill. There's one page related to hemp.

Ben Larson: 23:58

It's not even a priority to they can't even keep the government open. They don't even care.

Aaron Edelheit: 24:02

Not only that, not only are they not talking about closing it, they're talking about increasing the limit from 0.3 percent to 1 percent. This is hard as a hemp farmer. The whole goal of the farm bill is to help farmers. You needed some other additional congressional law. You need some congressional guidance to the FDA.

AnnaRae Grabstein: 24:30

This is just but to me it's like a but I want to go into one other point.

Aaron Edelheit: 24:36

I think you're going to get the farm bill where maybe not much will change. I actually want them to tighten things. I think you should have synthetic stuff. I think it should be naturally derived, delta 9. But I think it really should be regulated from the states. That's, who regulates alcohol and then. But I actually think tighter regulation, like when you just saw in Florida.

Ben Larson: 25:05

I'm going to jump in really quick. I want to push back on the synthetic thing a little bit, just because I think the word synthetic gets broadly applied across all sorts of different ways to develop cannabinoids. I mean people of whether it's chemical conversions or chemically created or biosynthesis. I think we need to get more nuanced in the synthetic conversation, so I just want to pause that. We'll do another episode on that You're positive. Sure.

Aaron Edelheit: 25:39

I'm just taking a look at critics. So for all the companies that I'm investing in, it's naturally derived Delta 9.

AnnaRae Grabstein: 25:47

So it's like I want to take it back to the business fundamentals and tap in on something you said, erin. You talked about the companies that you've made investments in growing double tripling. Growth is amazing and we're definitely in a growth phase, but you also are someone that I know does a ton of research into these opportunities and you know that it isn't only about growth, and when we're looking at product-focused companies, there's all different types of metrics that really matter. Margin is one profitability kind of. What are the metrics that you're looking for when you're looking at companies that you think mean that they're winning today, or that they're on a path to winning, or where they need to be going? Like, if it's all about growth, is that okay right now? Are you looking for profitability in these companies, like product level margin? I mean, give me some metrics that really matter to you.

Aaron Edelheit: 26:39

So let's back up for just a second, because there's another thing I want to mention is that nothing of what I'm saying about the attractiveness of beverages is new, or cannabis beverages right. The only thing that's different is we have a federally legal path, and this goes into our margin discussion or metric discussion Previously with cannabis beverages, you there were almost no distributors there were no co-backers.

Aaron Edelheit: 27:11

It's all federally legal. None of these people wanted to touch it. And then you had to sell into dispensaries which have no storage, limited refrigeration and an employee base that's openly hostile through the concept of either a beverage or a low-dose product. I don't know if you've ever talked to a bartender, but they're interested in a very different experience. This partly, is how I think that the industry is going to develop, is you're going to have a low-dose kind of mass market and then anyone who wants a prescription strength or anything really strong full-flower effect etc. Will go to the dispensaries. And one of the other reasons why I think we're so exciting is I think this is massive, total, addressable market expansion, for the brands are telling me none of these people go into dispensary Once they need that prescription strength or want some different experience behind just the basic low-dose beverage. They're going to have a comfort level. They're going to go into dispensary.

Aaron Edelheit: 28:17

These are all future customers and it's also the battering ram that destroys the stigma of THC. But if you go back to this dispensary model and you buy companies and we're like, oh my God, I'm trying to go dispensary by dispensary, all of a sudden, the way I describe it is imagine you're playing baseball. You're going up against the best pitcher of baseball, you have one line tied by your back and one arm tied by your back and you're trying to hit that. That's cannabis beverages in the regulated space.

Aaron Edelheit: 28:46

And then, all of a sudden, with hemp they say oh, they untie your leg and your other arm and then they set up a tee and they have. You hit it and no one's in the feet, but you can suddenly have brands that are selling online. Everyone can order via credit card. I have a subscription we're going to send to my house in two days.

Aaron Edelheit: 29:11

And then you're not turning on one store. Some of these distributors are turning out hundreds of stores or a superstore at one time and then you can plug into the entire not entire, but mostly existing co-packers breweries who are a co-packer you can start dealing with the state alcohol distributors. So what that means is that companies who are in the hemp space can focus on recipe, they can focus on the quality of their product, they can focus on brand, they can focus on R&D in terms of just the, and then they can focus on sales and marketing. So a lot of these companies have very few employees and are growing very fast because there is no massive infrastructure that you might have to build or do in the regulated space, because you're tapping into this massive beverage market. That's how you have a company like Red Bull.

Aaron Edelheit: 30:22

There's a great podcast called Founder's Podcast Talks about founder of Red Bull Before he died, his 50% stake in Red Bull, which has no infrastructure. Right, red Bull is a sales and marketing machine. His dividends were $900 million a year, and so you look at a company like Celsius it's up like 5,000% in the past five years. Look at liquid debt that's raised money. These people don't have infrastructure. This is a brand, and so the way that I look at it is that one. You have to be capital efficient, right. I don't want you to be like blowing money and all of that, but I don't want you to be profitable, because you should be turning whatever profits you would be earning and pouring that right back in the sales of marketing already to just to grow, because what's going on right now is like the equivalent of the Oklahoma land rush, and the whole goal is to get your wagon to where you want to get without the wagon coming apart, right, and so you need scrapping this. You need people who have some level of experience or have shown some level of success, and these beverage companies are some of the monster.

Aaron Edelheit: 31:51

Beverage is up like I don't know 41,000% the last 30 years is top performing stock In beverage. There is, especially with new categories, there is a first mover advantage, and so I want to see things that are just a little different Now. I do want to see gross margins at a certain level and into the retailer network. I want to see like 40% or more Some of the companies that I'm talking to, or gross margins are near 60% online and so, but really I want to see efficiency. I want to also see the unit level economics. Where is your product like price wise, and is that sustainable? And how are you driving down the cost? And some of these beverages are at a very great price that probably won't sustain, and so you want to get to scale. You want to. How are you going to get there? And it's like quality of management and those are.

Ben Larson: 32:59

So you're kind of changing the script that a lot of the cannabis operators have adopted over the last couple of years, or it's like a lot of focus on sustainability, getting profitable, just really focusing on business fundamentals and getting away from kind of that growth. I don't want to say growth mindset, but that idea that you can 2X, 3x, year over year growth and really push that. But for this particular category you're saying like the runway is open, the opportunity is there and these companies actually have the opportunity to grow.

Aaron Edelheit: 33:35

Yeah, but it's different. So I want to touch on this because it's actually really important. One of the things I want to mention is that the cannabis industry, because it's had to invest so heavily in infrastructure and because a lot of them have been forced into vertical integration and essentially running like five or seven different businesses in multiple different states, it's just like managing chaos, right. And then, when the capital markets went away and the delays and the reform, we have been operating in this kind of scarcity mindset in cannabis and you can see that level of kind of what I would say almost like trauma, right, because it's like everybody's not everybody, but a lot of companies are retrenching because they just they went crazy, they're managing chaos and they really don't generate cash. Most of these companies don't there's some exceptions, obviously, and so when there's no capital, you're not generating cash, and the thing that I see that is and we talked about this before, I won't, I just I'm not gonna put it in it's totally insane.

Aaron Edelheit: 34:53

And total insanity that the top companies in cannabis regulated cannabis are not specifically seeing the opportunity in low-dose hemp averages. It is it almost to me as an investor is such a negative. How could I invest in your company when you do not see the strategic opportunity here to partner, invest, get involved? This is not and I think it comes from the scarcity mindset and the trauma that has happened over the last two years where they're like well, this isn't fair. How dare they Instead of like. And then you have active companies who are fighting this. There is a legal way to consent to AC that's socially acceptable when the customer is not your customer. If you talk to these companies, they are not dispensary customers, they are alcohol customers. This is alcohol replacement. This is massive, total, addressable expansion. These are all your future customers. How are you not involved? How are you not supporting it? But, even worse, how are you fighting it? Now, look, I can get the edible side.

AnnaRae Grabstein: 36:22

I can get that. I hear you that lots of these big companies in cannabis are not looking at this opportunity. But on the flip side, I do believe that the big companies in Bev Alk are yes, and they're seeing erosion in some of their historically most important and substantive categories. And you said just a minute ago about how MSOs were sort of forced into vertical integration and that that was inefficient in lots of ways. On the flip side, looking at alcohol, there have been laws and regulations that have prevented alcohol companies from vertical integration for a really long time. But we are this interesting moment with hemp beverage.

Ben Larson: 37:06

Give your benefit.

AnnaRae Grabstein: 37:07

Yeah, Lots of folks. What's happening now is we've got distributors that are in the alcohol and beverage space that are getting into hemp beverage distribution, but they do not yet have any prohibition against vertical integration with these hemp companies. And I wonder and this kind of goes back to that question about acquiring and strategy like are these alcohol companies thinking about vertical integration with hemp beverages?

Aaron Edelheit: 37:38

Well, let me just tell you a story, and I'm actually going to write it. I'm about to post a post on this. Just one of the other things has really hurt cannabis because there's no real natural political ally to push the ball over the line and get a touchdown. Get reform and what you have going on in alcohol is declining consumption, literally. Vineyards are ripping up vines because there's not enough demand for wine Retailers seeing falling sales and falling sales. It's even more important is that they're turning to non-alcoholic doesn't have the same margin as alcohol and you have alcohol distributors that are running and they're seeing falling volumes. And if you analyze businesses or understand, you have fixed cost businesses where your revenue falls it has an outsized impact on profits. So I'll give you an anecdote.

Aaron Edelheit: 38:44

I'm a small investor in a convenience store in Atlanta. It's an up-and-coming place in Atlanta and it's been like 15 years. It's been one of the best investments. I made a small investment, some people ran it and it has a large beer and wine selection and just the convenience of having been to Atlanta has really bad traffic. Just pop in. They have a deli, they have food, they have basic items. It's a really cool store. I've received my investment multiple times over. My stake is still worth more than I invested. I'm very happy with it. On Sunday we had our annual meeting and I don't really pay. I have running in a million directions like through small kids.

Aaron Edelheit: 39:31

And that investment's kind of on autopilot. And they gave an update the first time, if you exclude COVID, which was some weird disruptions. For the first time in 15 years our sales fell. Deli sales went up, boot sales went up, coffee sales went up, non-alcoholic beverage sales went up, alcohol sales down, total revenue down 7%, profits down 15. Why? Alcohol carries margins. Guess what company is now interested in carrying beverages or markets, find them up.

Aaron Edelheit: 40:10

And this is everywhere, all the retail why Total Wine is now in offering hemp beverages in Minnesota, connecticut, tennessee, texas, and within the next 30 days is gonna launch in Southern California. This is why I went to the liquor store giant, the liquor distributor's giant convention, the WSWA, and I was wondering, like, why are they so positive on cannabis? They wanna get in, they wanna get involved and I think that to your question, I think this is a roundabout way. I think they're interested in investing. I don't know if they're interested in an acquiring, but I think they see, one of the cool things is because of the three tiered system. If I'm an alcohol distributor, I can't invest in an alcohol producer. I can't even own one share. Right Restrictions do not apply to hemp beverages. So you're starting to see the wheels turn where they're like.

AnnaRae Grabstein: 41:12

Wait a minute.

Aaron Edelheit: 41:13

I'm gonna turn on either these big, massive stores or I'm gonna turn on 50 or 100 of my stores. Maybe I should get a little piece of this company, and so to me it actually broadens the number of interested parties that could be involved in hemp beverages, but we're in the very early stages.

Ben Larson: 41:38

Do you say Southern California?

Aaron Edelheit: 41:39

Yes.

Ben Larson: 41:40

Interesting.

Aaron Edelheit: 41:41

There was just a comment that Total Wine is selling in Louisiana.

Aaron Edelheit: 41:44

Yeah yeah, and the speed, by the way, the speed at which this is happening is breathtaking because you have complete alignment in the ecosystem. So when I first started researching, I was like 10%, that can't be right. And then in January it's like 15%, I get on 15%. And then I was like, oh, there's this bump from dry January. Well, every committee I'm talking to was hitting daily sales records at the end of February. And just on an anecdotal basis, I'm talking to friends who are like I used to have a glass of wine every night. Now I might have one once a week because I have a substitute with a hemp beverage and you're having a habit change. But, more importantly, the retailers and the distributors are calling these things the golden cases.

Ben Larson: 42:38

And can we talk about this dynamic a little bit Absent the three tier system? I think people have historically be like if we can get this without the three tier system, it would be more open and opportunity for direct to consumer, all that kind of stuff. A conversation that popped up recently with another brand in the space was that they aren't feeling too keen on retailers taking that opportunity and taking inequities, taking companies to kind of help them with distribution. But I mean, that is kind of an open and free market. If you're a kingmaker maybe you should get paid your tax, right. What's your position on that? How would you coach your portfolio companies to kind of think about these dynamics with distributors, with retailers, when they aren't bound by the three tier system?

Aaron Edelheit: 43:29

Is it collaborative, is it a win-win for both parties, or is one company which I've heard is one distributor trying to take advantage? I mean, I just think that that you don't want to go into partnership with somebody who's going to take advantage of you.

Ben Larson: 43:46

I think what happens in beverage distribution often is like people get locked up and then the relationship won't be as supportive and good as they had hoped and then they're kind of they have their hands tied.

Aaron Edelheit: 43:56

I hear that happening a lot in the that's a risk of any kind of business, right? It's like you just kind of try to make the best decisions and the companies I'm invested in and talking to are being very, very thoughtful. The distributors they're signing up and most of them are being approaching this in a methodical manner to not you know. Again, if you sign a district I think we're going to get into the details if you sign a distribution, they have termination fees at the end of these signings and some of these companies are, you know, especially inexperienced. This is why you want inexperienced management are signing up to deals where they have bonds at the end.

Aaron Edelheit: 44:39

So equivalent in cannabis of sale these packs where you know, just to get out of this contract, maybe worth more than you're at all, the deals you sign, maybe worth more than your company, which means you have created no equity value and you're trapped, and so there's a lot of nuance there. That's why the kind of companies that I'm investing in are experienced. They show sign of success and, most importantly, most of the companies started in the regulated space and were beating their head against the wall. You know if you were selling in California and this is a thesis that I have in my cannabis fund as well if you're competing in California and you're showing any kind of success, or in Oregon, what happens when you go East? Or you know if you were competing in the regulated space and going dispensary to dispensary and suddenly you can sell online and in liquor stores and especially, you know the messiness of California, or just cannabis. The regulations have nothing on it.

AnnaRae Grabstein: 45:48

I'm with you. I often think that some of the most compelling businesses are in the more mature cannabis markets, and if you can make it in those markets, you can kind of make it anywhere. That's exactly. We don't have a ton of time left, but I wanted to make sure that we got to talk a little bit about the investments that you've already made out of the fund and what you are hoping to do with the new companies that you're bringing in. You've shared in our conversations that you've already invested in five companies. Do you want to tell our audience about who those companies are and also what you're looking for in the next one?

Aaron Edelheit: 46:19

Yeah, so I've invested in CAN, I've invested in HAPI with an I. I've invested in CanTrip Flyers and Uncle Arnie's.

Ben Larson: 46:31

Some great companies in there.

AnnaRae Grabstein: 46:32

Thank you and you said a minute ago that you're looking at companies that are established. So it's true these are not brand new startups.

Ben Larson: 46:39

It's exactly right.

AnnaRae Grabstein: 46:41

All of these are in market.

Aaron Edelheit: 46:43

I know, look, I've been talking to a lot of companies that are launching or have a new product or and some of them, you know, taste great. One of the most fun part is just due diligence. It's really great, especially my analyst is now telling me my tolerance is like really high, but I want to see evidence of success. Where I have gotten into trouble as an investor before Is like oh man, you've got great team, they got a great product or great technology. And what if X, y and Z happens? Oh my God.

Aaron Edelheit: 47:21

That's where I have personally failed and made mistakes, and instead what I want to look for is companies that are executing and showing signs of success, and especially if you've been in the regulated space and you now have the opportunity of help.

Aaron Edelheit: 47:41

One of the most impressive things is watching these companies pivot, how they've pivoted, and the past is important to just understand, like how did you get to where you are? But like there's some amazing stories and technology of like companies that pivoted and just created enormous amounts of value, and I love that you have some scars, I love that you have some experience and you know that the world is up and to the right. That's a really positive thing, and so I just I love some of these. That's where my real interests in what gets me very excited, and I also really am looking for companies that like know who their customers they're, like this is their brand, this is what we're trying to sell to and if you just think of, if you know Uncle Arne's, it's kind of like this hippie vibe, it's like fun that is a different consumer than it can or you may have to say but they're going to pull out an Uncle Arnie's or a can for a very different occasion.

Aaron Edelheit: 48:50

So I think that that also but again having that experience under your belt, trying to define who your customer is and what your brand represents, is actually it's very helpful.

AnnaRae Grabstein: 49:05

Knowing your customer. A big part of that also has to do with where you find them. We're seeing two main channels, which is traditional distribution, like we've been talking about, and then Ecom and companies doing direct to consumer, sending their product through the mail. Do you have a preference? Do you think that the companies that are leaning in to Ecom is their sole focus, that that's something that will last, or they need to move into retail? How do you see that To be?

Aaron Edelheit: 49:38

honest, I'm not entirely sure.

Aaron Edelheit: 49:42

I think that I see the argument on both sides. I want to make it very clear. In my past, especially my single-family rental company, I built from four owns to 2,500. I learned I'm not an operator. I know what one looks like. It worked out fine. I was good. I understand that you have to make decisions. There may be two different paths. There may be a hybrid path. My goal as an investor is not necessarily to tell these companies how to run, but more of how can I support you, how can I be a sounding board and understanding what investors are looking for? Capital markets, big picture strategy and not hemming yourself. I like a management team that is just open and flexible and curious and they will knows how the regulations will exactly shift. But I can see a Ecom only strategy working. I can see a retail only strategy. I can see a hybrid. That's why there is uncertainty of how exactly this will all develop. One of the reasons I'm taking a portfolio approach is because there are some things I'm just not exactly sure.

AnnaRae Grabstein: 51:09

I have so many more questions, erin. As you continue on this journey and bring more companies into the fund and see growth and success with the ones that you've chosen so far, please keep in touch and share stories. I think that we've had a really great amount of engagement from live audience today, and people showed up, and so they're clearly excited and curious and want to learn. We'll keep that conversation going On. The last call this is your opportunity to really end the show with your last words, whatever you like them to be. So, erin, what is your last?

Aaron Edelheit: 51:49

call One. I just want to say thank you for having me. Two is sometimes I'm wrong. I don't think I'm wrong here, and that's why I've been moving so quickly and I'm so passionate. I'm a big believer in cannabis properly regulated and being legalized. I'm an investor in both the regulated space and hemp. And the last thing I want to say is to the cannabis industry the idea that you have a cannabis side that is fighting a legal way to consume THC seems crazy to me and that at the same time, you're advocating to be legalized. In that, if you just step back and look just solely at beverages and low-dose beverages, this is your best friend and I think as investors and as participants.

Aaron Edelheit: 52:51

Hemp beverages is massive, total, addressable market expansion and there should be no one in the regulated space that is fighting that, because it is a win for consumers. If you think about it, 140,000 Americans die from alcohol directly every year and you imagine that you put in someone's hand a low-dose hemp beverage instead of alcohol. How many people would be alive? How much less drunk driving? And we have the stats that auto insurance premiums go down wherever cannabis is legalized. Think about the opioid epidemic. This is massive, total, addressable market expansion. It should be regulated, it should be controlled. We shouldn't have crazy stuff going on that we've all kind of read about, and kids should be protected. This is fantastic for cannabis.

Ben Larson: 53:48

I couldn't have said it better myself.

Aaron Edelheit: 53:51

And for society.

Ben Larson: 53:53

Yeah, I think we started talking in Miami about this opportunity for the legalized effort and how beverage has this just unique pathway into the mainstream, and it's just. I think we should do another show on it. I've been working on an article that I'm posting. If we stop trying to staple other form factors and other allowances alongside low-dose beverage, I think we can get that incremental step towards legalization for the broader cannabis community. But we have to allow it to be beverage first. But we could talk about that for hours. Aaron, thank you so much. I hope our audience learned a lot about just the mechanics of the fund and what your outlook is. I hope they're a little bit more inspired about beverage. We keep seeding it in there. I think people are starting to listen. But yeah, thank you so much. It's been great to see you this week.

Aaron Edelheit: 55:00

And thank you for having me All right.

Ben Larson: 55:03

Anna Rae, another beverage episode. Thank you so much.

AnnaRae Grabstein: 55:07

Also an investment episode, and I think that there's a real optimism to hear about money coming into the space. So I want to make sure that we keep highlighting that when that happens, as we're celebrating and creating hope for all those fighting the trenches out there. That's right, that's right.

Ben Larson: 55:24

As we wrap up, remember that the dialogue doesn't have to end here. We invite you to continue these conversations and we'd love to hear your thoughts. Who would you like to see on the show? What topics would you like us to cover? We're immensely grateful for you, our audience. Also, thank you to the Vertosa team and Wolf Meyer for supporting us in these conversations in our journey, the all-around support and encouragement that we're receiving, really excited about things to come. Next week we have Hirsh Jane coming on. We'll be talking about all the policy, what's going on in the red states, a lot of progress we're seeing on the regulated side as well. Don't forget to subscribe like do all the things help us really continue this momentum. We're excited. I'm going to say it one more time. We got a rebrand coming up. Don't freak out when you see a new imagery. It's going to be great. Remember folks. Stay curious, stay informed and, most importantly, keep your spirits high. Until next time. That's the show.