As a hedge fund manager in New York, Tim Rotolo was used to looking for undervalued assets and inefficient capital structures. In the nascent legal cannabis industry, he thinks he’s found both. In early 2017, Rotolo teamed up with Antony Radbod, and David Kivitz to create an investment and holding company Archytas Ventures. Their first venture has been to lease cannabis extraction equipment to companies in the loan-starved industry.
“Equipment is the guts of the cannabis growing and processing business,” said Rotolo. And it’s expensive. Extraction machinery, lighting, irrigation systems, grow tables and other equipment can easily run into the hundreds of thousands of dollars or more. Because marijuana is still federally illegal, banks will not make loans to companies in the industry for fear of losing their federal charter. That makes it hard to fund equipment purchases.
The trio of founders had begun by looking for the safest return for the risk in the industry, and considered investing in real estate. The land though was illiquid – it couldn’t be moved if the operator went out of business for example. Direct investment in cannabis was also constrained in many ways, including physically, by state lines. Equipment and machinery however, could move between producers, across state lines, and would be easier to find loans for.
The entrepreneurs decided they would offer extractor machinery to cannabis processing companies and charge by the month based on the company’s production. The machine takes cannabis plant material and extracts the oil inside. The oil is used to make edibles, the filling for vape cartridges, and other forms of consumable cannabis like wax and shatter.
“We think the sales of these kinds of products are going to grow very rapidly,” said co-founder Antony Radbod.
There are additional benefits to the partnership. Essentially “renting” the equipment can be a way to make sure it is right for the business, according to Laura A. Bianchi, director of Rose Law Group’s Cannabis Practice in Scottsdale, Arizona. “If you don’t have experience or a solid production process you are comfortable with, this may allow you to experiment with different production processes,” she said.
To start their equipment leasing venture, the founders invested five million dollars, raised from investors and the founders, into an equipment manufacturer called Xtraction Services, based in Mascott Florida.
The Xtraction machine was designed from the ground up specifically to process hemp and cannabis and can handle those plants’ woody stalks in a way that processors built to extract essential oils from flowers, can not said Radbod .“The machine reduces waste and improves yields” over extractors not specifically designed for these plants, he said.
Companies can pay for a range of services to accompany the equipment. “We can do whatever they want from setting the machine up and leaving, to servicing it, monitoring it over the internet, or staying onsite to run the machine and becoming the extraction team,” said Rotolo.
Radbod says that eventually Archytas will offer more services to the processors like adding flavors to the oil or packaging it.
The founders believe they are offering a valuable service to an industry where traditional financing is scarce. When a business can’t get a bank loan and needs money, the owners will sometimes sell a piece of the company, to get that cash influx. Selling equity reduces the owner’s control of the company, and there is a finite amount of it to sell. Renting equipment instead of owning it not only relieves the company of the burden of raising a large amount of cash, it reduces its risk overall, because if the business doesn’t work out, the owners aren’t stuck selling a piece of expensive specialized equipment.
Companies do need to delve into the details of the offer Bianchi said. How easy is it to change machines? How do you scale production? How do the leasing terms compare to purchase if that is a possibility?
The founders also see their proposition as smart arbitrage between the cannabis and non-cannabis markets. They can get financing from a bank for a piece of equipment, and then rent the equipment out to a company that couldn’t get a loan for it.
Archytas plans to expand its business model to help cannabis with growers use technology, equipment and automation to help them scale their businesses. The founders also hope to expand outside the United States.