Investor Insights: Cannabis Investments, SEO & More
We took a deep dive with Alexej Pikovsky, Co-Founder and CEO of Alphagreen, and were lucky to receive several golden tidbits for the newcomers and the players that we want to share with you. From expert market analysis to experience with cannabis investments, Alexej offers it all.
How long have you been involved in the Cannabis industry?
I started watching the space around 2017 when some friends of mine started talking to me about Cannabis stocks and the potential of legalisation of Cannabis in Canada. We believed it would be a big catalyst for Canadian stocks, but the rise in valuations and stock prices was much bigger than we expected, and we could not make sense of it. At the end of 2018, the market started crashing. While the legalisation happened, all of the financial forecasts of companies were massively overstating the true demand of cannabis in the retail market and with other parts of the regulation lacking behind, there was a lack of infrastructure to enable the retail market to flourish. The result was a huge surplus of cannabis flower, a huge fall in the price of the underlying commodity and therefore asset prices of companies had to be adjusted.
As with many other industries, if the whole market is going down, many of the best quality companies are also being sold off and start trading at a discount. That is the case even if they might benefit from lower raw material prices. Investors just sell off the whole sector.
Sometimes it is better to be a second mover than a first mover. The reset in the industry presented a big opportunity for me to become involved full-time and in summer 2019, I left the private equity industry to build something in the cannabis industry. While I initially wanted to start a cannabis investment fund, I realised the opportunity to build an end-to-end platform is bigger and launched a marketplace for consumers while providing brands with a range of services to help them scale.
What skills and expertise have been useful to you in moving from investment into the Cannabis space?
I started my career in investment banking and M&A, which means advising companies on potential takeovers. From this, you learn how to work under a lot of pressure and keeping a very high standard of analysis and work you produce. Covering the Natural Resources, Chemicals and Power sector, I got to learn a lot of the different industry dynamics. Having worked at a Hedge Fund, a Family Office covering Venture Capital and most recently in Private Equity, I would say the most relevant experience to building a business comes from my time at the family office where I was tasked to build the Venture Capital strategy and operation from scratch. By the time I left we had multiple successful tech investments completed and multiple fund investments with a sustainable strategy to grow the operations. Not having a big brand name and operating in a small team and still build a successful enterprise gave me the confidence to go out and do it with my own team this time.
What kind of strategies did you employ during your time at the family office?
What I did there is similar to what I’ve done with Alphagreen which was researching and analysing gaps in the market and trying to solve a specific problem. In 2015, the funding gap in the UK was around the Seed stage and therefore it was easier to build an investment operation in the early stage market rather than compete with established and bigger funds in the growth stage for example. With Cannabis and CBD, it was the realisation that there are more than 500 brands in Europe and more than 4,000 brands in the US, thus it makes sense to build a marketplace and also provide services to brands rather than launching your own brand.
We took the same approach whilst at the family office and focused on what the need is and what problem can we solve. With deal flow and Venture Capital, it comes down to talking to as many people as possible and finding good entrepreneurs. With the alternative health market, it’s also about running around and talking and vetting as many brands as possible. Sometimes less visible brands have a much better product and a core audience. At the same time, it is also about getting very popular brands on our marketplace and help them expand into other geographies.
There is usually a chicken and egg problem in the marketplace space, how do you get top brands without having traffic and how do you get traffic without brands. I was lucky and had two brands in my portfolio early without having any traffic whatsoever. From there, the process was the same. We looked which brands have a good following and great customer reviews and went after them, explaining the vision, the offering and convinced them to believe in the final product rather what was there at the time. With services, same story, but with many successful case studies it becomes easier the longer you play the game.
I built a level of resilience and an ability to swim in open waters. As an investor, you rarely learn this, because you have a nice platform with a lot of money where everybody comes to you. As an entrepreneur, nobody comes to you. You need to go to everybody.
What were your initial assumptions and expectations when you first entered the Cannabis industry? And what have you learned since then?
I realised quickly that I did not want to invest in just any “interesting” company because the valuations did not make any sense and there was more inventory of Cannabis than demand and therefore the valuations were expected to come down. There was also nobody who really differentiated themselves, so my expectations were low in terms of “unicorns” I would encounter or somebody being so dominant for me to not be able to compete with.
That is when I decided to launch a business with a strong tech team. I teamed up with my CTO to launch Alphagreen, a long-term friend and a very successful tech entrepreneur who built marketplaces in the past. Twelve months after launch, we are happy to say we are the leading marketplace in Europe and based on organic traffic we even have bigger numbers than most US marketplaces. Having no inventory and being a tech play, we also have more brands than any other marketplace out there, with more than 1,200 unique products now.
What surprised me is how difficult it is to get some simple services set up incl. banking and payment processing. Operating in the CBD space makes you straight away a high-risk business, no matter where you are in the value chain. There are financial institutions and payment processing companies who are helpful, however it is not easy to find them and there can be issues on the way.
When we launched the marketplace, we knew it will be difficult to make use of Performance Marketing and in particular Google and Facebook ads. This is the reason why we focused so much on SEO (Search Engine Optimisation) for the last 12 months. We have written more than 4 million words and more than 500 unique and super strong domains linking back to us. This is how we got organically on page 1 with Google.
These learnings have been so rewarding that we started offering SEO as a Service to several brands and are seeing our tool kit also working with many of the brands we want to support.
While organic traffic is much more sustainable and it is key for everybody in the CBD and Cannabis space, to get quick results and reach big numbers, it is also important to figure out Performance Marketing and work with Influencers. This is something we have now started doing as well and will be able to roll out as a service in the near future, alongside Display Ads, Fulfilment as a Service and Creative Services.
With the amount of information out there right now, what is the basis that you use for your research?
I always try to find good analysts in the industry that cover it from a research perspective. If you are trying to get up to speed quickly, try to get access to equity research reports from investment banks or also free reports from Prohibition Partners or Hanway Associates.
Beyond reading these, much more important to me is having a network of trusted people I know who look through the junk out there as well as having a sounding board.
We are currently launching a think tank as well. This is where we bring together certain psychology and medical professionals and have them meet once a quarter and see how it all plays out. From that, we also draw information that we write up and send it to all the brands as well. Luckily, I am in a position where I have a lot of visibility on the market, mostly still as an investor, but also as a player in the industry. We are planning to do a lot more of that kind of thought leadership.
Is there anything else you are planning for 2020 or next year?
We have several brands on 6–12 months contracts outsourcing SEO and Fulfilment to us and having launched Display Ads and Email marketing just last week, we already have three brands subscribing to that service too. There are many more services which DTC (Direct to Consumer) brands could outsource to us. Creative Services and Influencer Marketing are the two services we are working on launching and finally we are just finalizing an Insights & Analytics product, as well as testing out PPC (Pay Per Click) strategies which is something this industry really needs, but is extremely hard to get it to work. Finally, we have recruited the former VP Revenue at Herb.co — the leading cannabis media and tech platform in North America. With Connor being our Head of Business Development, we are really looking forward to achieving the same dominant position in the US as we did in Europe. 2021 will be very exciting indeed!
Do you have any advice to give to someone thinking of entering the industry?
My biggest advice would be to really do your due diligence on the brand or company you want to join. We are in such a young industry, and with every young industry, there are a lot of cowboys and unsustainable businesses which do not last in the space for long.
Make sure that the company you want to enter has the resources to survive as a business, to at least know that if you do your job properly, you will have a job for two years at least. So, for new candidates, I urge them to talk to people, talk to investors and be open about the companies’ funding, ROI, how much cash there is in the bank and to then decide to join.
Where do you see the industry moving to?
I believe that given Brexit, the UK is going in the direction of Canada and the US where they treat Cannabis as a normal food and not treat it as a narcotic, therefore enabling innovation to happen.
While there is a lot of noise with the EU Commission and the potential reclassification of CBD to narcotic status, it is really a guessing game, and nobody knows what will happen. If you look at Canada and the US, the volatility and back and forth between different laws and acts is something which is a big part of this industry and one needs to just get used to it.
You will have more types of players enter the CBD market, from a cosmetics perspective and food. I know of several who are looking into that kind of project and so making the space even more competitive. But it will also mean that with bigger names coming into the industry, and with that comes more growth as well from innovation, execution or demand perspective.
It will be great for customers because they will have better access to better quality products out there. They might see their favorite brands also having CBD products.
There is also the recreational side of the industry and I believe that Luxembourg will most likely delay the 2021 legislation around recreational cannabis because of the Coronavirus pandemic. Of course, this is not the highest priority if you have a lot of people suffering. On the other hand, New Jersey is looking to go recreational and NY is to follow.
Europe had a late start, but now has this kind of protection because of the pandemic to some extent, because Americans and Canadians can’t really travel towards Europe right now. They also have funding issues, so they can’t just buy out companies all the time and that gives European companies a big opportunity to keep building up the space. It is a great time to build a big business in CBD and Cannabis in Europe right now and go global to compete with some of the bigger players in the US.
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