A craft cannabis grower startup in Franklin Park is a virtual unicorn in Illinois.
While most of the 88 licensed craft growers in the state have been unable to attract enough capital to open, Cannect Wellness announced Tuesday that it has raised $7.5 million to begin operations this summer.
Cannect did it by selling shares of ownership, or equity, which craft growers are allowed to do.
Cannabis retail stores, on the other hand, are prohibited from selling shares of ownership until they become operational. That restriction was meant to prevent minority owners from selling out to wealthy white investors.
Equity fundraising was key to getting Cannect started, co-founder and COO David Michaud said.
“It preserves cash,” Michaud said. “It provided us with liquidity and to not have immediate debt.”
How they did it, he hopes, will help fellow startups.
Cannect Wellness had an advantage in that its founders had business experience and money. Michaud is a corporate attorney, and co-founder and CEO Gabe Singal worked in health care technology business development. They had previously formed a company to invest in medical office buildings. They teamed up with Danual Berkley, an African American Springfield firefighter, U.S. Army veteran and children’s author, who qualified for licensing advantages as a social equity licensee.
The state’s social equity efforts are aimed at people who either live in an area with high poverty or high cannabis arrest rates, or who have a past low-level marijuana arrest or conviction.
The founders got bank financing to buy a former warehouse, hired consultants to generate financial projections and created a presentation to woo investors, known as a pitch deck.
The money they raised will help complete phase one of the creation of a state-of-the-art cultivation and processing facility. While craft growers initially are limited by law to 5,000 square feet of plants, the warehouse covers 62,000 square feet, enough to make edibles, vaping cartridges and other products, with room to grow, which also attracts investors.
They plan to focus on high-end artisanal products including full spectrum live resin and solventless extracts. The head of cultivation is Jake Heller, who teaches cannabis production at Oakton Community College in Des Plaines.
“Our team is committed to producing the purest and highest quality products you can find,” Singal said. “We utilize sustainable, organic cultivation practices that not only produce top-quality flower but are also environmentally friendly.”
Cannect Wellness is one of the few craft growers to get going since Star Buds opened the first craft grow in Rockford last year. Star Buds has since opened a dispensary in Burbank, and officials say they are doing well selling their first batch of Kaviar brand pre-rolls.
Twelve craft growers have received construction approval from the state, while state records show that Helios Labs LLC in Broadview and Illinois Collective LLC in Cary are the only other craft growers that have gotten permits to operate.
Helios Labs, a minority- and veteran-owned company, just started operating this week. It’s buying distillate to make Bloom vape pens and Lobo Cannagar hemp-wrapped blunts with a glass tip, which should show up on dispensary shelves in a couple of weeks, CEO and President Ambrose Jackson said.
Helios had to raise funds from a variety of sources, Jackson said: $800,000 from family and friends, $4 million from private equity investors, a $1 million cannabis loan from the Illinois Department of Commerce and Economic Opportunity and $500,000 from a new state forgivable loan program.
The company had to scale back its plan into phases to get up and running and generating revenue.
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“We’ve got a bit of a hole to dig ourselves out of working so many years and paying rent for two and a half years without any revenue,” Jackson said. “We’re very excited and optimistic about being able to get to this point and participate in this industry. But the focus needs to be on what needs to be done for the majority of license holders. It shouldn’t be this hard to get to this point.”
Among other fixes that lawmakers have failed to enact for craft growers are allowing them to share facilities and increase size limits. Craft growers now are limited by state law to only 5,000 square feet of plants, while existing cultivators can go up to a massive 210,000 square feet.
In light of the delays in openings following the COVID pandemic and litigation over licensing, the Illinois Department of Agriculture recently extended its March 1 deadline for craft growers to become operational to February 2024.
But most other craft growers remain stuck seeking funding, said Scott Redman, president of the Illinois Independent Craft Growers Association. One bright spot, he said, is that the state has started arranging for $500,000 forgivable loans to cannabis startups.
While he is part of a team named Drecisco Farms LLC that plans to open a craft grow in far northwest suburban Marengo by fall, he said most cannabis companies starting up in Illinois now rely on millionaire investors.
“Some groups have capital or found a source to move forward,” Redman said, “but the vast majority are still idling.”
