Exclusive Interview with Phyto Partners Managing Partner Larry Schnurmacher
Phyto Partners, a venture capital firm focused solely on the cannabis industry, has invested in approximately 30 companies over the past four-and-a-half years. The firm’s portfolio touches nearly every vertical in the cannabis supply chain, but it largely focuses on the ancillary companies that support licensed operators. Managing Partner Larry Schnurmacher spoke with New Cannabis Ventures about the Phyto Partners investment approach, synergistic opportunities between portfolio companies, and the launch of a third fund. The audio of the entire conversation is available at the end of this written summary.
Prior to starting Phyto Partners, Schnurmacher was a financial advisor at Morgan Stanley. He researched the growing cannabis industry and left Wall Street to be a part of it.
Investment Approach
The Phyto Partners team includes Schnurmacher, his founding partner, and a group of analysts. The firm also has a strong advisory board with experience in healthcare, venture capital, and private equity.
When vetting potential opportunities, Phyto Partners uses an exhaustive due diligence checklist. The firm also speaks to customers, competitors, and other investors in the company before moving forward. After agreeing on an opportunity at an investment committee meeting, Phyto Partners has a monitoring period of at least three to six months. During this time, the firm evaluates a company’s ability to execute.
The majority of the company’s investments have been in the form of convertible notes or Series A rounds. Phyto Partners also likes to keep track of how management teams are spending their investment.
The Phyto Partners Portfolio
The firm has invested $20 million in approximately 30 different companies. Many of the firm’s portfolio companies are related to data and technology. Phyto Partner’s investment ecosystem also includes human resources management, staffing solution, and agricultural testing companies.
The platform’s investor base is largely made up of family offices and high-net-worth individuals. Schnurmacher also has his own capital in the fund.
Schnurmacher highlighted LeafLink and Flowhub, two of the firm’s technology-focused investments. LeafLink is an ecommerce platform that connects vendors and retailers. The company has grown significantly over the two years since Phyto Partners’ investment. LeafLink has gone from roughly 100 vendors and a few hundred retailers to more than 1,000 vendors and more than 3,500 retailers, according to Schnurmacher.
Compliance technology platform Flowhub has also grown significantly, going from less than 100 clients to nearly 500. Schnurmacher points out that the data harvested from technology companies like Flowhub and LeafLink can be used as another source of revenue.
The Phyto Partners investment platform has facilitated collaboration between portfolio companies. A number of the firm’s companies have merged or are in the process of doing so, while others have found ways to partner. For example, telemedicine platform Heally and Florida physician network Marijuana Doctor are working together to provide physician services in more states.
The Investment Landscape
Industry-wide, cannabis companies are experiencing a capital crunch. Those without cash in the bank and a strong balance sheet are in a difficult position, according to Schnurmacher. Phyto Partners has one or two companies in this position, but the firm reserves capital to support its portfolio investments.
Continued federal illegality and the attendant banking issues are significant challenges but ones that Schnurmacher anticipates could be solved next year. He also points to the 280E tax burden as another obstacle to overcome.
The vaping crisis is another prominent issue, which Schnurmacher views as an opportunity for the industry to establish higher manufacturing and safety standards. He sees value in investing in companies that help support greater transparency and consumer trust. While the industry has to weather these challenges, Phyto Partners is still looking at future opportunities. The firm is targeting ancillary companies, consumer packaged goods, and branded products.
Traditional metrics like revenue and market share are useful, but evaluating investment opportunities in the cannabis space takes some creativity, according to Schnurmacher. Investors need an eye for the future and a feel for a management team’s ability to execute in this highly regulated, competitive, and rapidly changing industry.
What’s Next
The firm is planning on launching a third fund next year. Phyto Partners has a robust pipeline of opportunities that it has been monitoring over the past couple of years, according to Schnurmacher. He sees the firm in a good position to put capital to work for companies that are likely to survive over the long-term.
To learn more, visit the Phyto Partners website. Listen to the entire interview:
