Toronto , Canada - 23 May 2019; Narbe Alexandrian, President, Canopy Rivers, on Venture Stage during day three of Collision 2019 at Enercare Center in Toronto, Canada. (Photo By Vaughn Ridley/Sportsfile via Getty Images)

Members of the deal team at Canopy Rivers Inc. (RIV.V) look at about seven investment opportunities a day, getting to know cannabis entrepreneurs eager for financial backing in a sector where the stigma of illegal drugs lingers.

The Toronto-based venture-capital arm of Canopy Growth Corp. (WEED.TO)(CGC) reviewed 1,523 pitches in the last 365 days, according to chief executive officer Narbe Alexandrian. His discerning Shark Tank judge-like investment scouts have inducted only 18 companies into the company’s current diversified portfolio.

“We have a database of every company that we’ve interacted with,” Alexandrian told Yahoo Finance Canada. “That whole process and system comes from the Silicon Valley world of investing, which I ported when I came from OMERS Ventures.”

His tenure at the prominent technology venture-capital fund made him a natural choice for an outfit created in part by former Canopy Growth co-chief executive Bruce Linton, himself a convert to cannabis from the tech sector.

Canopy Rivers was founded in April 2017 with the goal of investing in companies the Smiths Falls, Ont.-based cannabis giant couldn’t swallow. Today, it’s leveraging those talks with entrepreneurs to suss out global opportunities and think beyond dried flower.

Venture-capital investment in Canada soared to a record high of $2.15 billion in the first half of 2019, according to the Canadian Venture Capital and Private Equity Association’s (CVCA) latest report. Cannabis has been no exception.

“We’re seeing a doubling in both the amount of money going in, but also in the number of deals taking place,” Alexandrian said.

“As investors are coming in, they are going after more established companies rather than the brand new startups. That generally shows that you are getting closer to maturation. You’re still far away from it, but you are seeing the maturing of the market taking place right in front of you.”

For Canopy Rivers in its fiscal first quarter, that meant deploying $18.8 million into a trio of new investments in step with the firm’s vision of what lies ahead for the sector. Three “areas where the puck is headed,” or the three Alexandrian is willing to discuss publicly, are biosynthetics, plant science and brands.

Biosynthetic cannabinoid production eliminates the need for greenhouses and cultivation. The potentially disruptive technology involves using living cells like bacteria, algae or yeast to generate cannabinoids.

Alexandrian believes lab-created cannabinoids will be the future of the pharma industry, given the technology’s ability to produce a consistent active pharmaceutical ingredient. The technology is being closely studied by Organigram Inc. (OGI.TO)(OGI) and Cronos Group Inc. (CRON.TO)(CRON). Canopy Rivers is still looking at investment options.

On the plant science front, the firm recently bet on ZeaKal Inc., a California-based company with research and development ties to Corteva Inc. (CTVA), an agriscience division spun-out from DowDuPont. Canopy Rivers announced a US$10 million investment in the company in June for an 8.7 per cent ownership stake, calling the move a “game changer” given ZeaKal’s proprietary technology to improve plant yield by increasing photosynthesis.

When it comes to brands, Alexandrian said he looks for companies that “don’t treat cannabis like a Sears catalogue,” meaning they tell a story to the target consumer, rather than simply exist on a shelf or in an online store.

Canopy Rivers invested US$2.5 million in California-based High Beauty Inc., a brand producing non-psychoactive products aimed at consumers looking for natural and organic offerings.

Alexandrian is also eyeing opportunities to import successful U.S. brands north of the border.

“We do see a large arbitrage opportunity for bringing U.S. brands to Canada. Seeing that they are able to freely market and the internet doesn’t have any borders, you can bring the brand here, put it on shelves and leverage off the branding in the U.S. without the two companies touching each other,” he said.

Big changes are underway in cannabis investing that mirror the technology sector in the early 2000s, he said, including a shift away from vertically integrated companies taking cannabis from seeds to retail.

“Our thesis has been and will be for the next little while that vertical integration doesn’t work unless you have $4 billion in cash like Canopy Growth,” he said. “Right now, a lot of companies are doing everything themselves because they can’t trust partners around them. Slowly that is going to horizontal integration, which is let’s do one thing and one thing very well.”

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