You’re Thinking About Debt Wrong: The Secret to Smart Financing ft. Adam Stettner

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Bryan Fields: What's up, guys? Welcome back to another episode of The Dime. I'm Bryan Fields. With me, as always, is Kellen Finney. And this week we've got a very special guest, Adam Stettner, CEO of Fund Canna. Adam, thanks for taking the time. How are you doing today? Adam Stettner: I'm doing great. Thank you, Bryan and Kellen, for having me. Kellen Finney: Excited to have you here, Adam. How are you doing? Adam Stettner: Doing well. Really excited to talk to you both and dive into debt. Kellen Finney: How are you doing, Bryan? Bryan Fields: Yeah, I'm stoked. I think the first time we talked, this had kind of changed my perspective on debt. Originally I thought that was always a bad thing, and Adam kind of got me thinking about it differently, so hopefully we can get some of those pieces out today. Maybe I can challenge him a bit — I've got some new questions for him. Adam, before we get into all the fun stuff, can you give our listeners a quick background on yourself and how you found your way to the cannabis space? Adam Stettner: Sure, the quick and dirty version. I'm originally from New York City — I bring that up because I know you're New York-based. When I was in New York, I worked in apparel, all things women's apparel. I worked in it, I didn't wear it, but what I'll tell you is we financed everything we did there, and I was fascinated by the idea. The company was doing hundreds of millions of dollars in manufacturing and sales, and we never laid out a penny of our own money. That fascinated me. From there I worked on Wall Street for a bit as an analyst and a trader. Then I got into lending around the age of 30 — this is now dating myself, about 23 years ago. I got into consumer lending, student loans in particular. I ended up doing almost 15 billion in student loans on balance sheet, meaning the assets were held on my own balance sheet, which meant a lot of understanding about working with banks, working in highly regulated industries, working with the Department of Education. Then when the financial crisis hit in '08, I saw how banks were retreating from lending to large companies, even to lenders like me, and I got into small business lending. I started a company in '08 into '09 where we underwrote a million small businesses and funded three and a half billion to American small business. Then during the pandemic, I'm forced to close my office — I have 250 employees, everybody has to work from home. I had over 5,000 active small business clients, all of whom were forced to close. I'm sitting on my couch at home, the TV is on in the background, I'm doing work on the laptop, and a story comes on about cannabis being deemed essential. It cuts to a dispensary that was open. My thinking is: wait a second, federally illegal, deemed essential, even though I'm told it has no medical value, and traditional business is all forced to close. That just piqued my interest. I was a consumer user of cannabis but didn't know a ton about the industry. Seeing it deemed essential just flicked the lights on for me. I spent over a year researching cannabis supply chain, laws, financing, banking, visiting cultivation, manufacturers, dispensaries, trying to understand how the industry worked. In the summer of '21 I gave notice to my board and my private equity firm at that company and told them I'd be starting Fund Canna. We funded our first asset in January of '22. Bryan Fields: A few questions. Underwriting — let's explain what that means for people who aren't sure, because I think it's unique here in cannabis given what we've seen recently — things can change really fast. When you're underwriting something, there's probably a set of assumptions. Walk us through what that process is like. Adam Stettner: Sure. Well, first, no matter what you're doing, you want to understand the industry you're in, and this industry is very hard to understand. I say that as a student — I'll never be a teacher or professor teaching other people about this industry, I'll forever be a student looking to learn and absorb all I can. It's not that things typically come out of nowhere and sideswipe you. Like with what recently happened with hemp — we knew there was a lot of noise going on for quite some time. In 2018, when McConnell sponsored and passed the Farm Bill, right away there was a way to chemically alter hemp and make it intoxicating. People started making noise about it, some in a good way, some in a bad way. There was talk — I'll call it a loophole, in air quotes for those not on video. It's rare that you're completely surprised. Underwriting for the space, there are the traditional financial metrics of course — bank statements, tax returns where relevant, P&L, balance sheet, credit, credit files, ratios, all the stuff that most people find boring but that I find oddly exciting. But in addition, you've got compliance, licensing, geography, different verticals, timelines from cash outlay to revenue. We deal with a lot of delinquent AR in this industry, really high tax rates, things that change at municipal levels like LA increasing tax, Michigan increasing tax, and then lawsuits as people fight these things. There's a lot to navigate, but I don't think it's necessarily a surprise. It's a matter of keeping your ear to the ground, not thinking you're smart and know what's going on, but rather thinking you have a lot to learn, paying attention, asking a lot of questions, and being conservative — but conservative with logic about what you've learned. Some people apply a blanket approach to everything, and here there's so much nuance that you'll either get destroyed or be so restrictive that you're not really a good partner to the industry. For example, the timeline from cash outlay to revenue is a big one. Everything is either COD or net-30 in terms of payment. If you're a manufacturer buying biomass — raw materials you're going to manufacture into distillate, gummies, pre-rolls, you name it — you have to pay for that between zero and 30 days, but you won't derive revenue for four or five months. If you don't think about that disparity when underwriting, you're either going to overlever your client because you're giving them money they have to start paying back before they have revenue, or you're going to overextend yourself and not match the need — and you're going to hurt your client or hurt yourself. So in cannabis you have to look at all facets, including pending legislation, and work almost in reverse — what will help the client, and what is a comfortable, small, frequent payment they can afford as they're deriving revenue. Kellen Finney: That balance, I think, just isn't understood in terms of how complicated it is. From a scenario standpoint, think about a cultivation facility that gets spun up in a newer state with massive growth potential, and everyone's saying, "Adam, we've got to go big and go fast." That works in the early market dynamics, but as the market matures, all that volume might lead to heavier inventory, meaning they don't have the cash to pay it back. So you're having to detail out the market dynamics of individual placements, recognizing where they are in their state, then the sizing, then the capital constraint — a lot of variables coming down to a single number, which is probably adaptive given their constraints, since you're kind of in a partnership together. Adam Stettner: I love that you said that, because that's exactly how I view this. It's not a tagline — it sounds like one, but I always say this to everybody who works here: if it doesn't work for the client, it doesn't work for us. We have to think about them first, because if it works for them, it'll ultimately work for us. If we demonstrate that, they'll come back and use us again. Client satisfaction and repeat business matter — it's no different just because our product is money. Customer service is still in play; we're the same as every other business, our product is just capital, and it's how we package that capital and how it gets repaid. If that's a burden for the client, the experience is going to be lousy. So we have to look at everything the way you outlined and ask: will this work for the client? If it does, and it works for us, we press forward. If it won't work for the client, we either revise the offer or tell the client, "Here's the offer, but here are our areas of concern." We have those conversations all the time. The good news is we try to right-size the offer regardless of the ask, and explain why the offer looks the way it does, rather than being one of these black-box, algorithmic funding companies. Knowledge is power — you share that knowledge and you're not only building a relationship, you're empowering your client. This industry needs more of that. Sharing makes a difference. Bryan Fields: The sharing of information — I can see why people would be hesitant, and I can also see the massive benefit. If someone's coming to you for a million over, say, 20 years, and you tell them, "We only think 600 is the max," they'll ask why. But in actuality you're saying, we think the market's going to condense faster, we don't think it can handle these prices, we think compression is coming and the payment cycles are going to be a problem, so we think it's better to tighten them up. So how do you condense all those variables into a single concept to feel comfortable, given all the risks you're weighing simultaneously on top of the regulatory unknowns? If someone's coming to you looking for an answer quickly, your team probably doesn't have 30 analysts modeling out every scenario. How do you condense all those variables into a single answer quickly enough? Adam Stettner: I appreciate you saying that, because that's what we live with every day. First, we're trading on 20-plus years of experience underwriting millions of clients. Cannabis is a much smaller universe — even including hemp, call it roughly 60 billion, but across maybe 50,000 total clients. We've underwritten 5,000 transactions. We automate a lot of the intake, a lot of the calculations we do to create our ratios, which makes things easier, but we still have human interaction and automated flags on every file. Our turn time below a million dollars is within 24 hours; above a million dollars, three to four days max. As soon as we have a decision, we can fund right away. It's a lot of work and infrastructure-building, trading on a couple decades of experience, but that experience becomes an addendum to the handbook because cannabis is so unique we had to write a new manual. We put six months into building infrastructure and studying financials before we ever funded our first deal, and a year before that studying supply chain and talking to operators. We screwed up plenty when we started — we're far from perfect — but I think we've done a pretty good job. At this stage we've approved almost $500 million and deployed roughly half of that. The performance of the portfolio is great, and it's proven to work for clients — our average client comes back for another 220% of what we initially gave them, basically a 220% repeat rate. You could sell anyone on anything one time, but if it's not good or the experience is lousy, they won't come back. So the validity is: does it help them grow, and do they come back — and from my side, does the asset perform. Those are the benchmarks for whether the product is working. Kellen Finney: How much do you subcategorize the industry in terms of varying models? You can't treat a cultivation company the same as a manufacturer versus a dispensary. Where do you draw the lines, especially since a lot of operators are vertically integrated too? Adam Stettner: Yes to everything you just said, including vertical integration — that's one of our categories and the highest concentration of our book, for obvious reasons. We break out the entire supply chain from cultivator through dispensary and everything in between — manufacturing, lab testing, distribution, you name it — and then ancillary: non-plant-touching businesses like lighting, nutrients, armored transport, packaging. We segment all of that and track it from initial contact through repeat performance, delinquency, write-off, and that data helps us evolve credit policy. We do the same by geography — every state behaves a little differently, like an open, licensed state such as Oklahoma versus a very restrictive state like Florida. With an MSO, in a "normal" business you get efficiency of scale from a larger operation, but in cannabis you have a New Jersey operation and an Ohio operation — you're not really getting the ability to share or truck goods across state lines. You're building from the ground up in each state. So whether it's a single-state sole prop or a large MSO, you have to look at these things differently. Kellen Finney: It's super complicated. I think what Kellen and I are trying to understand is how you feel comfortable and confident making these decisions with so many weighted variables — reducing this percentage for that state because they operate differently, and so on. It's endless variables to consider. Adam Stettner: If you think about a state like Washington, to the south you've got cannabis, but to the east you don't — and then the Dakotas, where there are also very few people. So you want to think about population density, municipalities, especially in retail. We map things — it's wild what we're doing, searching licensing databases. On top of that, because it's not federally legal, we also have a bunch of compliance to deal with around money movement, who you bank with and how. But we don't want the client to worry about any of that — that's our issue to have done the work, built the infrastructure, plugged into the databases, and built the formulas and risk tolerance so that within 24 hours, whether you're a cultivator in Colorado or a retailer in New Mexico, I'm able to underwrite both of you seamlessly, in a way that's compliant so the banks are comfortable that money is being handled the right way. I feel good about what we've built, but I'm naturally a very anxious person — outside of cannabis lending too. That anxiety doesn't halt my progress; instead it forces me to scrutinize my own actions more so I don't screw up. I think all too often operators contend with confirmation bias — we all want to believe we're on the right track, so we look for clues that confirm that desire. Because I'm anxious, I have a tendency to look instead for the things I could be doing wrong. It doesn't help me sleep at night, but it helps me do a better job. Bryan Fields: I brought up those elements because I'd imagine there are listeners who think, "I don't think I'm a fit for Fund Canna, because once Adam gets into it, he's going to realize I'm not a fit." What you've described is an understanding of the industry's complexity such that operators wouldn't surprise you during underwriting — that's part of what makes you unique for this process, and it's an opportunity to partner that people might not realize exists. Adam Stettner: There are two sides to this. No one should worry about what Fund Canna thinks, or what any lender thinks. What's more important is conveying honestly where your business is, what you're trying to achieve, and how you believe the money might help. If you're honest and transparent first with yourself and then with a funding source, you want it to work, but just tell us what you're trying to do. It won't be the first time we've heard the story, but that doesn't mean your story isn't unique to you. Whether it's buildout, buying equipment, or, "Hey, I just made a tax payment and reloaded inventory and it's a three-payroll month" — fine. It's not about us judging, it's about us understanding: can we help you without being a burden? Can we fuel growth? Can we get you to the other side of whatever you're trying to bridge? Our approval rate is 69.7%. That may or may not sound high or low, but in a funding environment with no secrets, that's a respectable approval rate — banks approve non-cannabis businesses at a rate of 20-25%, and we're approving cannabis at 70%. I think it's two things: banks are one-size-fits-all with a credit model — you either fit the box or you don't — and they don't understand restaurants, retail, or construction and specialty trade either. What we tried to do was build a credit box first, understand the industry, and then build the financial product and credit box that met the industry where it needed us to be. Bryan Fields: What about an example for an operator who says, "Adam, I want to invest in a tool I think can help improve my operational efficiencies. It's an expensive purchase — I can do monthly payments over a year, or pay it up front and see immediate gains." Is that an area your team can help with? Adam Stettner: Typically our funding is almost all short duration — two years or less. We're not a good source for real estate; there are good sources for that elsewhere, and we have friendly relationships with a lot of them. I'm better for operating a business, inventory, equipment, bridge financing, and purchasing raw materials and inputs for manufacturing so that as revenue is derived, you pay down and start over again. When someone buys a piece of equipment, even if paying upfront, why tie up all the capital? If it will pay for itself in short order, you can draw and borrow against it, make small payments, and pay it off any time, paying only for the time used. Unlike banks with small business loans that have prepayment penalties, we have a prepayment discount — use the money, and when you want to pay it off, pay off and pay only for the time used, then draw again if you want. That happens all the time with cultivators bringing on new rooms — buying tables, lighting, expanding HVAC and plumbing for nutrient delivery. We'll often lay out the capital, and it takes them three to five months to realize their first harvest. Then they can pay us off or let it keep going and get a few turns out of the new rooms before paying off. It'd be silly to lock them in — that's not servicing the industry the way it needs, it's maximizing my own yield. Bryan Fields: Going back to that example, do you underwrite the technology the team is going to buy, or is it up to the team to ensure it's utilized correctly? Whose responsibility is that — are they overpaying? Is that where your team comes in? Adam Stettner: We don't, and I'll tell you why. Imagine you're an operator moving from non-LED to LED lighting, or you found a better spectrum and tested it and are getting better yield — who am I to tell you how to run your business? The last thing an operator wants to hear is that some guy who isn't grinding it out with them knows better. I don't know better, so why would I pretend to? Now if someone says, "I want to borrow to buy out my partner," we're looking at the financials — we know whether the business is working and can afford to repay us. That's a financial equation. I'm not going to tell you whether it's a good move; I'm just going to assess whether the math works, and if it does, I support it. Bryan Fields: I'm thinking through that in real time — the technology aspect is interesting when it comes to efficiencies. If you know the metrics of an extraction business and this technology increases yields, you might say, in the current state we'd be tight, but if it increases 1-2-3%, we feel good, and 5-10%, they'll pay back really fast. Adam Stettner: But here's the thing — do I want to put the business in a position where, say, the extraction equipment fails? On paper the plan was amazing, but if the machine breaks and the part takes six weeks to fix, now we're two months into repayment and I've put them in a position where they're overlevered because my team told them it'll be okay. I don't want to be in that place. I don't extract distillate well, I don't grow cannabis very well — I eat gummies like a champ, but I don't know how to make them — so I don't want to pretend I know better. This industry has a higher proportion of smart, experienced, savvy operators who find a way to do more with less than any other industry I've seen, and I've underwritten a million non-cannabis businesses over 14 years at my last company. So the question is: do today's financials support repayment? If you end up being right, the ratios get even better. If you end up not being right, we're okay where we were. As you prove correct, we can upsize your facility, but I never want to upsize based on a story — only on financial metrics. Bryan Fields: What about teams that are already constrained, with a lot of debt, maybe higher than they'd like? Is that an area where, if you evaluated the business and saw they were getting hurt, you could make a difference? Adam Stettner: It really depends on whether we can structure something that puts them in a better place than they're already in. If the answer is no, it's foolish for me to take that deal on. Sometimes there's no choice but to take on leverage, and sometimes that leverage makes sense — you're highly levered, but there's a strategy and it aligns and gets the business where it needs to go. Other times it just wasn't a logical business move, and I don't want to jump on top of that. For larger companies, we often end up being bridge capital to a larger facility. For example, a very large company was closing a hundred-plus-million-dollar facility with a bank — way out of my wheelhouse — but they were managing inventory with a quarter close coming, about two and a half months from closing. We gave them a few million dollars, and when they closed on the large facility, they paid us back. We still fund their clients through wholesale, but haven't given them money directly since. We have another example — a vape manufacturer and brand — we funded them 42 times, the dollars getting bigger and bigger as they grew and scaled, and he outgrew us and got bank financing. I love that story too — I want my clients to outgrow me at some point, because it's proof of concept. If you're bankable, you should always use bank money, but a single-digit percentage of this industry is bankable, and even then you need hard assets. Most people are buying raw inputs and inventory and turning the money in months, not years, then redrawing again. Bryan Fields: No, you're making sense. I think what would help is explaining how teams can use debt to accelerate growth clearly. Adam Stettner: Imagine you're sitting with $100,000 in your business bank account, and you're a manufacturer who gets an order for $80,000. Your raw inputs for that are $40K, and it takes four months from cash outlay to revenue. You pay the $40K, then three weeks later another order comes in for another $40K — now $80K of your $100K is out the door, plus payroll and other expenses. If your margins are 60-70%, when the revenue comes, you get your money back plus 50-60 grand on top — but in the interim you're cash-light. What happens when a third order comes in? You can't fill it unless you can get terms that match your four-month cycle. I'll use a hemp manufacturer as an example — his first draw from us was 20 grand. He placed a small order, came back almost right away for another 20 grand, then another. In aggregate he borrowed just under two million from us, but he was rotating the money — never more than $380,000 out at any given time — and his business grew 890%. He ended up selling the business. He was turning the money every three to six months, and we worked with him for just under three years. That's the ultimate way to use someone else's money — as long as your margins support it. If our cost of capital over a manufacturing cycle is, say, 10-15%, and your margin is 50%, you can make 35% and not lay out a penny of your own, or you can make 50% limited by your own cash on hand. If you have the ability to grow, why not use our capital? You make 35% margin on someone else's capital, net. That's the right use of revolving debt — as long as you can make more than it costs. It only becomes bad when your margin is thinner than your cost. And people make the mistake of annualizing it — don't annualize it. If it's a four-month manufacturing cycle, you can turn that money three times, so 35% three times is 105% on someone else's money in a year. That's how the clients who grow the most or have the greatest success use it — from companies doing a million a year to companies doing hundreds of millions a year. Everybody uses debt — even Apple and Google, sitting on piles of cash, still borrow. Bryan Fields: I'm thinking through the numbers to make sure I regurgitate this correctly — if your margins are 50% and you can get the cash for 15%, then cash in the growth phase shouldn't be the limiting factor. If you're short on operating cash, you can use debt as a tool to accelerate growth. Adam Stettner: That's right. Our average client since inception has grown just over 70% topline. Bryan Fields: Do you think people don't think like that because debt just has a natural negative connotation? Adam Stettner: We're all taught to be scared of debt, taught that debt is bad — all of us. I'm not disputing what we're taught, I'm just saying it's wrong. I went and took very targeted business and finance and accounting classes at Columbia Business School, so I could speak the language of CFOs, bankers, and securitization guys I was dealing with. One of the first things the professor asked was, "How many of you think debt is bad?" We all raised our hands, thinking we were walking into a trap, and the professor said, "You all fail. Debt, when used properly, is one of the most powerful tools for business. There is no business on earth that should only use their own capital. Debt compounds your growth." But it needs to be used responsibly. My head of credit tells a story from years ago at my prior company — a small business owner borrowed $35,000 from us and immediately took their family on a Disney cruise. Terrible use of debt. Bryan Fields: You don't say. I'm going to clip that for my wife. Adam Stettner: That's not good use of business debt, and it's not good use of personal debt either — that Disney cruise, if it costs $10,000, ends up costing $18,000 and hampers the business. But if you're buying inventory, raw materials, packaging, vape carts from China, and you know your margin on those carts, and we're covering the dead time through customs and delivery — why wouldn't you borrow that? That's what I really believe, and it's what I do myself. It's how Phil Knight built Nike, as in Shoe Dog — that's how every successful business has been built, and how every successful business continues to scale. Even data centers being built for AI right now aren't built with cash off the balance sheet alone — it's about what the margin is. If you can make more than the money costs you, it's a wise use of capital; if it costs you more than you make, it's not. Sometimes you have no choice — it's just a bridge from where you are to where you need to go, and that's okay too, as long as there's a strategy and you understand it. Bryan Fields: I think that's a perfect way to leave it. Adam, if listeners want to get in touch and explore using debt as a tool, where can they find you? Adam Stettner: Fundcanna.com, F-U-N-D-C-A-N-N-A dot com, is the easiest place, or 844-420-FUND if they want to call in. We want the relationship whether you work with us or not — we don't charge anything to have a conversation, and unlike other funding sources, we don't even charge to underwrite and tell you what you're eligible for. Check us out online, read about us, do your research. We'll also be at MJBiz — come see us, we'll be at the hub on the floor and around the show. We always welcome the conversation and the relationship. Bryan Fields: Thanks for taking the time. This was a lot of fun. Adam Stettner: Thank you for having me.