In 2013, the Canadian government created the first conditions for a commercial medical cannabis industry — and Brett Chang and Taylor Scollon were finishing up their degrees at U of T. Over five years later, the country finds itself on the precipice of legalizing the drug for recreational use, and the pair find themselves embedded deep in the world of Canadian cannabis startups.
Leaf Forward touts itself as “Canada’s first and leading cannabis business accelerator.” The company has raised $1.2 million in investment capital so far and will pour its first $250,000 into five early-stage cannabis startups next month, hoping to ride the second wave of major growth in the sector.
Leaf Forward is part venture capital fund and part business accelerator, founded in 2017 by Chang, Scollon, and Alex Blumenstein. Eager to get involved in the cannabis industry around the time of Justin Trudeau’s election, Leaf Forward began by hosting monthly meetups that brought the likes of Aphria (TSE:APH) CEO Vic Neufield together with people interested in getting more involved in the evolving world of Canadian cannabis. “We built a community around that,” Chang said, “and through that we got to know entrepreneurs in the space and industry leaders in the space, and we just connected the dots.”
Alongside hosting meetups — there have been 21 so far across five Canadian cities — Leaf Forward also offers four-day intensive ‘bootcamps’ marketed to equip entrepreneurs with skills to propel their cannabis startups. Forty-five cannabis companies have completed the bootcamp program, but the main thrust of Leaf Forward is its highly competitive business accelerator driven by venture capital.
The accelerator program involves both a big boost of seed funding as well as participation in an intensive, three-month program. Companies in the accelerator have access to Leaf Forward’s wide industry network, including outlets for future funding rounds and licensed spaces for research and development. The accelerator program also grants access to Leaf Forward’s industry partners, which include law and accounting firms on hand to help startups solidify their plans for expansion and ensure stable long-term growth.
Five companies will start off the first accelerator cohort in November, followed by another eight to 10 businesses in March and 10 to 12 more later in the spring. The goal is to have 20 to 25 companies with a capital base of $3 million — of which $1 million will be used for initial investment and $2 million reserved for follow-on funding.
Funding early-stage startups
The companies in the first cohort include businesses focused on alternative consumption — edible forms of cannabis to be regulated within the next year — as well as a company using a cannabis extract, cannabidiol, in sports beverages, and another startup focused on creating a superior filtration system to minimize odours for licensed producers.
Licensed producers, such as Canopy Growth (TSE:WEED) and Aurora Cannabis (TSE:ACB), enjoyed extremely high growth within the last year that many analysts say will plateau. Whereas cannabis itself will be treated as a commodity post-legalization, the brands and technology that take advantage of it are poised for growth in a new, emerging sector. Making an analogy to the beer industry, Chang said that “you don’t make money off the hops for beer — you make money off of the brand.”
Leaf Forward uses a ‘2 and 20’ private equity fee structure, whereby two per cent of the capital it raises goes towards its own operational costs — the fund management fee — and it keeps 20 per cent of the carried interest as a performance fee — with a twist. “The fund size that we’re raising is so small that that cannot fund all the different expenses associated with what an accelerator needs,” Chang said. Leaf Forward will invest $50,000 for every startup in its accelerator program, of which $35,000 will go directly to the company as seed funding and $15,000 will be kept as a service fee to offset the cost of the program itself. This model is common amongst business accelerators.
The fund term is 10 years, with a minimum investment of $50,000. The majority of Leaf Forward’s clients are high net worth individuals and family offices in Toronto. The Canadian cannabis venture capital fund, Green Acre Capital, has invested $500,000 in the accelerator.
As a private equity fund, Leaf Forward generates returns from liquidity events — the acquisition of the startup by another company or an initial public offering. In an industry poised for consolidation, the acquisition of startups by large licensed producers is a very real possibility.
“But that doesn’t mean there is any less opportunity for entrepreneurs,” Chang says. “Trends will appear that weren’t expected by the big players but were taken advantage of by smaller companies and entrepreneurs, and that’s the cycle of the market.”
From U of T to the cannabis industry
Canada’s progress towards cannabis legalization has been slow but marching for years. The path that brought Chang from U of T to Leaf Forward — with stops in politics and tech along the way, including a public affairs gig at Uber he left two months ago — has been more winding. “I think my entire career has been very difficult to predict,” Chang said. “My parents wanted me to go to law school.”
The decision to dive into the industry was a clear one for Chang, who calls the chance to get involved in an emerging market that was previously an illegal one “a once in a lifetime opportunity” akin to being involved in the alcohol industry after Prohibition.
Chang studied history and political science while at U of T, and, along with co-founder Scollon, was heavily involved in student politics.
“We were running campaigns against the UTSU or the administration at that time, and we were always looking for new and innovative ways to get our message out,” Chang said. “When you’re starting a political campaign it’s no different than starting a business in many ways. There were a lot of transferable skills we developed at U of T.”
After university, Chang worked briefly in politics before moving to a sales job in tech. After that, he and Scollon co-founded a digital public affairs firm with a third partner before they launched a private bus service that allowed citizens to serve transit-starved areas of Toronto. The venture, Line Six, got them on The Globe and Mail’s list of “Ten Torontonians who got things done in 2014,” and helped Chang into a job with Uber.
Scollon previously worked in digital marketing for both Justin Trudeau and Kathleen Wynne’s campaigns. Blumenstein, Leaf Forward’s CEO and the third co-founder, worked in regulated industry, including a stint with a licensed cannabis producer, before the move to Leaf Forward. All three of them are full time at the company now.
On the whole, October 17 doesn’t materially mean much to Leaf Forward and its startups, which are focused solely on ancillary products and alternative consumption. Though mere days before legalization, the eager anticipation of what will come for Canadian cannabis is palpable in people like Chang, who thinks that people generally underestimate the macroeconomic impact the industry will have, including “thousands and thousands” of potential jobs.
“What wine is for France,” Chang said, “cannabis will be for Canada.”