Investing in OpenNest Labs: Cannabis as a Force for Positive Change
Image courtesy of OpenNest Labs
At M13, the heart of our investment thesis is investing in founding teams who will help shape consumer behavior over the next decade. We’re excited to announce our investment in OpenNest Labs, a fellow venture studio (who flattered us by saying that they took some inspiration from the M13 org structure and playbook) focused on building a diversified portfolio of cannabis products, media and technology businesses, founded by Tyler Wakstein, Kris Bjornerud, Max Goldstein, and Michael Kamins. We sat down with Tyler who gave us an overview on the business, his vision for the future, and what he’s most excited about accomplishing in the months to come.
The OpenNest founding team.
Tell us about OpenNest Labs and what opportunities you are looking for.
Tyler: We’re a cannabis venture studio focused on building a diversified portfolio of consumer products, media and technology businesses. We believe in cannabis as a force for positive change. We have three business units: Incubator, Accelerator and Advisory Services.
Through our Incubator, we identify white spaces and launch new brands that are either 1) wholly owned by OpenNest, or 2) a JV between OpenNest and a strategic partner. We then invest the initial capital to build a team and kickstart operations. Our first incubated brand, Union Electric, launched in March and is currently in 20+ dispensaries. We have two other hemp brands in development that we expect to launch this summer.
The goal of our Accelerator is to bring our domain expertise and relationships to cannabis brands that range from pre-seed to Series A. This is not your typical 3 month accelerator program. We plan to choose a handful of companies to work with over the next couple of years and get very hands-on in supporting them. We invest anywhere from $50-250K for a meaningful equity stake which is determined by a variety of factors. We want to roll up our sleeves and act as an extension of the executive team to help founders build and grow their brands, so our investment usually includes some combination of performance based warrant coverage or advisor shares for the work we put in. We’ve been overwhelmed with the volume of opportunities for our accelerator, which is a great problem to have. So, we’re being very selective in our diligence process and ensuring there is a strong cultural fit and aligned expectations before bringing a new company on board.
Finally, we offer Advisory Services to help both cannabis brands as well as non-cannabis brands looking to enter the industry with supply chain operations, research and science, growth marketing and fundraising strategy. In addition to the four founding partners of OpenNest, we have a team of brand experts, marketers, CTOs and operators who work with our clients. Our advisory deals are done in exchange for cash, equity, royalties, or some combination of each.
What areas of the cannabis industry are most promising and fitting for OpenNest’s talents and experience?
Tyler: We’re best at identifying white space, partnering with the right people, and telling a brand story that resonates and builds trust with consumers. The areas of the industry where we believe well really thrive are by:
- Bringing more trust and transparency to the industry through research and science
- Bringing a better experience offline and online through technology and data
- Building community and leadership through Trailblazers (where I’m a co-founder and partner)
- Culture marketing through our team’s experience (e.g. Summit Series, Google, TikTok)
- Building strong partnerships with our investors like you at M13 and others (e.g. Scooter Braun, Coran Capshaw and key executives at CAA, Warner Music, Snap Inc, Spotify, TikTok)
- Building mission-driven brands that each make a tangible impact by partnering with 501(c)3s and organizations who have boots on the ground and domain expertise in:
- Sustainability, environmental stewardship, social & criminal justice, & research and science
Tell us how COVID-19 has impacted cannabis as an investment opportunity and startup opportunity.
Tyler: Right out of the gate when the lockdown started, cannabis was quickly deemed an essential service (after some back and forth) in many states and sales skyrocketed. People use cannabis to cope with stress and rely on it for their medical conditions. While sales have recently slowed down (because many stocked up when the pandemic hit), sales overall are still up YoY.
I believe now is a great time for investors to get in the space as the industry was already trading as a distressed asset from a public market stand point. In two years, the industry went from illegal to being deemed an essential service.
The cannabis industry is largely made up of small businesses cut off from institutional capital, so any major disruptions happening in the macro economy are going to create a lot of pressure. COVID-19 will likely accelerate industry consolidation and vertical integration, but we expect a number of strong companies to emerge from this crisis. We also believe that while cannabis more broadly is recession-proof, the brands and companies that adapt quickest to the new economic and cultural paradigm will survive. Legacy retail and smaller outdoor farms dating back to the 1990s will struggle to keep up with digitally native brands and technology-enabled cultivation operations as the political and regulatory environment improves.
What are lingering misperceptions about cannabis and the industry that need to be articulated and amplified?
Tyler: One thing our partner and advisor Dr. Jeff Chen points out often is the myth that more THC = a better/higher quality product. Saying more THC is better is like saying drinking Everclear is better, and I don’t know anyone who drinks Everclear. Dispensary buyers and heavy consumers are obsessed with having >20% and now having >30% THC. But the cannabis used for thousands of years was under 10% THC and there are over 120 minor cannabinoids and naturally occurring terpenes that all impact the sensations and the ‘high’ that a cannabis strain can create. The sooner the industry and consumers shift to evaluating the quality of cannabis based on freshness, the efficacy of the agricultural practices and the broader wellness effects created by the entire plant, and away from high THC yields, the quicker the market will mature and new consumers will feel comfortable exploring new products in the same way they will try a new bottle of wine.
What leads to a lot of misperceptions is the lack of research. Like I mentioned, we just went from illegal to essential in two years, so we have a lot of catch up to do as an industry when it comes to research. This is why we’re invested so much time and energy into working with UCLA and Dr. Jeff Chen, and serving as a board member of the Wholistic Research and Education Foundation. Extensive research needs to be conducted; data-driven information needs to be in the public domain; and the conversation with the FDA, DEA, and health officials needs to be elevated.
Right now, there simply hasn’t been enough research to assess and make claims about the safety and efficacy of cannabis across health conditions. The National Institute for Health (NIH) and other institutions have primarily focused their research efforts on the plant’s addictive qualities or negative health effects on vulnerable people like pregnant women and adolescents. The little data we have around the potential health benefits of cannabis are either pre-clinical or based on animal models – which is why the FDA, NIH or other organizations haven’t recommended / approved therapeutic use (with very few exceptions).
It’s our responsibility to support studies that assess not only cannabis safety and tolerability, but also a scientific basis for the benefits of the plant for so many conditions. We also aim to understand why cannabis appears to work for some people but not for others. This is the kind of evidence-based data that will help alleviate the lingering the misperceptions about the plant and the industry.
How is OpenNest addressing the prevailing social justice issues in the cannabis industry?
Tyler: This is a big one for us. It’s not a nice-to-have; it’s a must-have. We recognize the inherent injustice of the industry and the privilege from which we operate. It’s absolutely not ok that black and brown people have been criminalized, marginalized, and treated as second class citizens for cannabis-related offenses and are now excluded from a legal cannabis industry characterized by mostly white men (us included). With OpenNest, we made a decision: let’s build a strong brand and business driven by social justice, diverse talent, and the right partners, so that we can aspire to be a model for others in the industry.
We’ve partnered with Root & Rebound (R&R), an Oakland-based nonprofit and home to responsive mobile lawyers working to restore power and resources to the families and communities most harmed by mass incarceration through legal advocacy, public education, policy reform and litigation. We’ll be working with R&R on Fair Chance Hiring in the cannabis industry; joint campaigns and communications to drive resources and awareness to R&R’s critical work; and using the Trailblazers network and platform to further amplify their message.
This past March, just before the lockdown, we brought two staff from R&R out to Trailblazers. They were set to host a workshop on How Cannabis Companies Can Help Organizations Serving System-Impacted People. Unfortunately the programming was canceled due to the virus, but we were still able to have a conversation on the topic and plan to launch this as a more formal offering in the industry. We’ve also started publishing content around critical social justice issues specific to COVID-19 through our portfolio company, Union Electric, including the urgent need to release and protect vulnerable inmates. We aim to work with strategic partners on this ongoing decarceration effort. (You can read some examples of this content here, here and here.)