Meet The Man Revolutionizing Marijuana Investing – Forbes

Posted: February 27, 2020 at 7:42 pm


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Seke Ballard

On January 1, 2020, Illinois joined 11 other states and DC to legalize recreational marijuana. Personally, Ive never been a huge fan of weed, except for the occasional brownie or gummy. Yet on Friday, January 3, I waited for four hours to get my first sample of legal weed. I would have done it sooner, but for the first two days, I didnt get there in time; the dispensarys staff had already cut the line off.

My main thought while waiting? How much money are these people making anyway? The people shepherding us through the line dropped the stat that Illinois made over $5M in revenue in the first two days alone (and nearly $11M over the course of the first five days). The cannabis industry is expected to grow from $40 billion in 2020 to $80 billion in 2030.

Some of my clients have raised the idea of getting into the business whether through a dispensary, farming or consulting. Everyone wants to be a part of The Green Rush, but theres still a lot of uncertainty and confusion on just how to do that.

Enter Seke Ballard. Seke is the Founder & CEO of Good Tree Capital, a financial technology firm that grants loans to vetted, licensed cannabis companies. It also allows people to invest in these loans as a way of using their funds to help out entrepreneurs and earn interest in the process. By using an innovative approach to evaluating credit risk, this Harvard Business School grad and his company are revolutionizing the way we all can invest in marijuana.

Bridging the Gap

Seke is passionate about the role of capital in the creation of wealth and economic development. I was taught by my father from an early age that the way to true wealth was creating my own business, he said. He was also fascinated by the history of black-owned banks and how discrimination in capital distribution has led to an extraordinary Racial Wealth Gap. He recently got lost in a nerd rabbit hole after reading an Atlantic article about the serious decline of black-owned banks after the great recession.

The book The Color of Money: Black Banks and the Racial Wealth Gap by Mehrsa Baradaran, takes an even deeper dive. Its dire statistics demonstrate that the hand that drives black poverty is not a natural and invisible one, but rather the coercive hand of the state that has consistently excluded blacks from full participation in American capitalism. If you have not read it, get to a bookstore or Amazon right away. Heres a few of the stats youll find:

After doing the research, Seke realized that many of the remaining black banks were on the brink of failure because of the health of their loan portfolios. This industry is ripe for disruption, he said. My motivation is to build a better mousetrap.

A new way of lending

Seke aimed to build a model that moved capital more efficiently. It could take four to six months for an SBA loan applicant to fill out paper forms, gather supporting documents, submit the information and get a response from a loan officer. The trailing 10-year default rate on those loans is 17.6%, which adds to the costs of servicing and collecting on them. And the process is heavily biased. All things being equal, people of color are 2.7x more likely to get denied for a loan and pay higher interest rates, he said. Our lending model avoids this sort of bias by evaluating applicants based exclusively on their financial and operating data.

Seke got to work building an algorithm that could accurately make lending decisions, relying on the most relevant factors in loan defaults. The only way to avoid bias, he said, is to build the technology with intentionality. He built his technology based on analyzing some 1.2 million loans and pulling out the most important factors. From that, he created rules-based software that incorporated observable, objective metrics in making loan decisions. When he fed the loan data back through his new algorithm, the technology got the decision to approve or deny financing right 98.2% of the time.

It felt like we struck gold, Seke said. We built technology that can do what human loan officers are doing, only much better. Not only is the technology more accurate and efficient, it doesnt contain the subconscious human bias that comes with regular lending. Equally important, lower default rates generate more profit for the investors and lower costs for processing the loans.

Seke Ballard

How it works

Armed with this new technology, Seke quit his high-paying job at Amazon to start Good Tree Capital. He wanted to open up economic opportunities for people interested in the cannabis industry. He focused on the cannabis industry because the people affected most by the criminalization of marijuana (African Americans and Latinos) werent reaping the profits from the now legal sales. There was no overlap in that Venn diagram, he said. I wanted to change that. The American Civil Liberties Union found that between 2001 and 2010, black people were nearly four times more likely to be arrested for marijuana use than whites, despite similar use. Yet recent surveys have shown more the vast majority of legal cannabis companies are owned by white men.

In order to change that, Seke worked very hard in helping craft the Illinois law to make sure people who were most affected by the criminalization got preferences when it came to recreational licenses. These social equity applicants include people who have been arrested or convicted of a cannabis-related offense as well as their families, and people with strong ties to poorer communities disproportionately impacted by cannabis law enforcement. In addition to helping social equity applicants get preference, he has held seminars to help ensure people submit quality applications.

Seke is now focusing on helping people fund their new ventures. Running these ventures is not cheap. The costs associated with the application for a dispensary in Illinois are:

There are also some extra fees associated with the operation of the dispensary:

Seke originally marketed his technology to big banks, but they were not interested given the high risk of investing in the marijuana industry. (It is still illegal on the federal level.) So instead, the company gave loans from its own balance sheet. He has started by offering $250,000 in loans each to 100 social equity applicants hoping to win licenses in Illinois. There are currently 55 licensed cannabis dispensaries in the state. Illinois will issue up to 75 new recreational licenses in May 2020.

To help defray the costs, Seke has covered the loan application fee and provided a letter of intent that the applicants could take to help their application process. Additionally, instead of the loan approval process taking four to six months, hes gotten it down to a week. People apply through the website and they know whether they are rejected or preliminarily approved within minutes. If preliminarily approved, they ask for additional documentation to verify the self-disclosed information.

The results of Sekes technology and hard work have been astounding. Of the Illinois social equity applicants approved through Sekes technology 56% were African American, 14% were Hispanic, 14% were other, 9% were white and 7% were Asian. Additionally, 45% were women.

Hes not done yet. Theres a mountain of unmet demand, Seke said. Hes currently considering taking on more funding from bigger investors to meet this demand. Most investors so far have been happy to invest in a way that aligns with their values and also see a return they wouldnt have gotten otherwise.

Originally posted here:
Meet The Man Revolutionizing Marijuana Investing - Forbes

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February 27th, 2020 at 7:42 pm

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