The booming cannabis industry has given rise to a number of private equity funds dedicated to the sector.Mitchell Baruchowitz, the managing partner of Merida Capital, discussed his investment thesis and what makes cannabis such a unique industry.Baruchowitz and his firm build intricate behavioral profiles of companies they're evaluating.The booming cannabis industry has given rise to a number of funds solely focused on investing in the sector.New York-based Merida Capital, a private equity fund led by former corporate attorney Mitchell Baruchowitz, is one of those funds.Investing in cannabis has some unique challengesnamely, it's not legal in all 50 statesso Baruchowitz and his team have come up with a dedicated, sector-specific approach to choosing which companies to back.Building a personality profile for potential investments"We use certain cross reference data and information to build a profile of each company," Baruchowitz said. "I would say that we do a very deep...personality profile."Baruchowitz said a company's personality profile extends to their "pervasive" corporate behaviornot just external statements, but how they treat customers, capitalize on feedback, and interact with investors."We're hypersensitive to those elements," Baruchowitz said.Once that behavioral profile is assessed, Merida's team goes through a due diligence process, peeking under the hood of companies to look at more boilerplate stuff: revenue metrics, executive compensation, and market strategy."We're building a behavioral taxonomy and then we're then slowly bringing a normal diligence process that has looked at everything under the sun," Baruchowitz said.It's companies at the nexus of the right behavioral and business profile that Merida finds interesting.Building the scaffolding of a "normal" businessThe firm is on its second fund and crossed over $50 million in assets under management earlier this year. Looking at the companies in its portfolio, a few clear patterns emerge, Baruchowitz said."We obviously love data," Baruchowitz said. Cannabis companies employ all types of data to keep track of their product and identify and retain customers. It's what helps them operate within tightly-regulated state markets, and a number of tech startups dedicated to serving the sector have risen to meet that demand."We tend to be really attracted to the scaffolds that are going to help cannabis become a 'normal' business," Baruchowitz said."So our investment thesis is one that is much more geared towards that scaffolding." Like other funds that invest in cannabis, Merida deals primarily with ancillary businesses, like software, data, and packaging, rather than businesses like cultivators or dispensaries that deal directly with the plant itself.One of those portfolio companies, Simplifya, is a software service that helps cannabis dispensaries comply with byzantine operating regulations, which tend to differ state-by-state, and even county-by-county in some instances.That's a key component of what makes the cannabis industry a challenging opportunity for investors and entrepreneurs, Baruchowitz said. Companies that don't operate in full compliance with the law risk federal interventionsince Attorney General Jeff Sessions removed Obama-era guardrails that allowed state-legal cannabis businesses to operateand also risk serious reputational damage.There are few, if any, sectors besides cannabis that are forced to operate with an "illegality" component, where you can't cross a state border, Baruchowitz said, and that's what makes corporate behavior so central to Merida's investment thesis."Most companies succeed actually because of the small tactical decisions they make on a daily basis, especially in this industry," Baruchowitz said. He added that companies with strong governance and mature leadership that "understand[s] the importance of putting fiduciary duty first" tend to perform better over the long term.Though these companies may move slower because they have a rigorous decision-making processinvolving the board, investors, and other formal stepsBaruchowitz said it's actually a positive in space that's rapidly evolving.How companies receive feedback is a critical piece of the puzzleBaruchowitz said the ability to receive and act on feedback is crucial for any company, in the cannabis sector or not."Most of our portfolio companies look at feedback as a chance for them to refine the process by which they make important decisions," Baruchowitz said.One of those portfolio companies isKush Bottles,which develops packaging for cannabis brands and dispensaries. Baruchowitz said he's in "constant communication" with Kush Bottles' CEO Nick Kovacevich (they sat on a panel together earlier this month), and the feedback works in both directions.It's part of Merida's active approach to helping portfolio companies grow."I'm really a boring man," Baruchowitz said. "After I do an investor meeting I go back and grind away on our companies and see how we can help them. That's what excites methe tinkering in the companies and interacting with all the entrepreneurs."Read more cannabis industry coverage:The rising stars of marijuana's investment scene that everyone from Wall Street to Silicon Valley should knowThe highest-valued marijuana companies of 2017 reveal 2 key insights about the booming industryThe CEO of a Peter Thiel-backed cannabis private equity firm reveals his 3-pronged strategy for choosing investmentsThis investment bank is quietly dominating the booming marijuana industrybut big banks are starting to muscle their way inA $22 billion investment firm led one of the largest ever funding rounds for a cannabis tech companyhere's why it's a big deal for the industryInside Shopify's strategy for dominating the booming cannabis industrySEE ALSO:One of the hedge funders behind 'The Big Short' says betting on marijuana is the 'big long'Join the conversation about this storyNOW WATCH: The best dog breeds for apartment living
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