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Here's how medical marijuana gets to your dispensary

Crain's Chicago Business

Wednesday, October 10, 2018  |  Article  |  Brigid Sweeney

Medical Marijuana

Its founders may prefer the term “cannabis,” but it’s safe to say that Cresco Labs, one of three major Illinois marijuana companies, is growing like a weed.

The River North-based startup has just closed a $100 million round of Series D funding, bringing total investment to $185 million. The round is believed to be the second-largest private funding raise in U.S. marijuana history, behind a $119 million round announced in July by Acreage Holdings, a New York company.

Three-year-old Cresco has also announced its intent to execute a reverse takeover of a public Canadian company, a move that would allow it to go public without the time and expense associated with launching an initial public offering. Taken in conjunction with similar recent moves by Chicago’s Green Thumb Industries, Cresco’s growth and decision to go public indicates that after moving slowly for years, Chicago’s marijuana business is rapidly picking up speed. (Oct. 10 update: Cresco announced this morning that it entered into a binding agreement with Randsburg International Gold that will result in a reverse takeover of Randsburg by Cresco's security holders.)

Why now?

Cresco founders Charlie Bachtell and Joe Caltabiano attribute part of their recent expansion to Gov. Bruce Rauner’s August decision to legalize medical cannabis as a substitute for opioids and other prescription painkillers. Before that, Illinois residents needed doctor certification that they suffered from at least one of 41 qualifying medical conditions, including cancer, AIDS and post-traumatic stress disorder—but not pain.

Bachtell, 40, and Caltabiano, 41, met in 2007 as colleagues at Chicago’s Guaranteed Rate, then a 220-person mortgage company. As the tumult of the housing crash took effect, Guaranteed Rate decided to embrace the newly stringent industry regulations and mushroomed to 3,500 employees who originated $18 billion in loan volume when Bachtell quit in 2015.

“We left what we thought was the most regulated industry in the world to what we now know is the new most regulated industry,” says Caltabiano, once one of Guaranteed Rate’s top brokers. “We’re not guys who backed away from regulation.” (Though he helped Bachtell launch Cresco, Caltabiano stayed on as a vice president at Guaranteed Rate through the end of 2017, when he left to join rival BeMortgage, a startup launched by Bridgeview Bank. Today he is full time at Cresco.)

“You’re not talking to traditional cannabis guys,” says Bachtell, an attorney who was Guaranteed Rate’s general counsel. “We saw in Illinois a relatively unregulated industry going regulated very quickly, and we felt like we’d read this book before. We knew how to scale a business in that kind of environment.”

Bachtell and Caltabiano decided to start the company in October 2013, two months after former Gov. Pat Quinn signed legislation that made Illinois the 20th state to legalize medical marijuana. They gathered three friends and put in $3.5 million of their own money and hired Colorado’s Denver Relief Consulting, handing over 6 percent of equity in exchange for a crash course in everything they didn’t know about the operational side of growing and selling marijuana.

By fall 2014, they were ready to submit licensing applications. Illinois had just divided itself into 21 dispensing districts that followed its state police districts and was accepting applications for each one. Bachtell and Caltabiano decided to submit three, assuming they’d win one or two, tops. They skipped Chicago and went for Joliet, Kankakee and Lincoln instead. They won all three. By the end of 2015, all three sites were up and running.

Now it was time to master the product and make sure they could appeal to a wide audience of people who wouldn’t be caught dead buying a baggie of bud stamped with a Jamaican flag.

‘NORMALIZED’

The partners spent six months refining the message. “We recognized earlier than others that branding was how this industry was going to become normalized,” Bachtell says. “We thought of this as (a consumer packaged good) from the start. This is like Tylenol, Budweiser, Coca-Cola.”

That meant creating four distinct brands: Cresco, a combustible (i.e. smokable) or vapable product that they describe as “elevated” cannabis for veteran consumers; Reserve, a premium line that comes from plants specially bred for years; Remedi, products for customers consuming cannabis for medical reasons that come in tinctures, capsules, sublingual oils and transdermal patches; and Mindy’s edibles, a line of high-end chocolates and gummies created by local culinary star Mindy Segal.

“Cresco realized bringing cannabis into the Midwest was going to require taking extra measures to normalize the subject matter,” says David Wenger, a New York attorney who recently left a 12-year legal career to begin advising investors on the U.S. marijuana industry. He’s a personal investor in Cresco, too. “They established consistent, powerful messaging that helps consumers, regulators and the medical community feel more comfortable.”

Along with creating high-end, professional-looking brands, Bach­tell and Caltabiano got serious about hiring similarly high-end, professional-looking résumés. The company now employs 300 people, up from 100 at the beginning of 2018, and is straining its River North headquarters, its leaders say. In addition to executives from Abbott, AbbVie and McDermott Will & Emery, Cresco employs Matt Rowbotham, a former sous chef at Next—Grant Achatz’s themed tasting-menu restaurant—and named Dr. Charles Bush-Joseph, a prominent orthopedic surgeon affiliated with Rush University Medical Center, to its medical advisory board. (Bush-Joseph received stock options from Cresco and cannot certify his own patients for medical marijuana.)

Today, Cresco operates in six states—Illinois, Pennsylvania, Ohio, Nevada, Arizona and California—and says it will be in three more this month. Bachtell and Caltabiano decline to identify those states but say they’re focusing on the eastern half of the country and have applied to Michigan and New Jersey. They say the company is cash-flow-positive and has been for some time, though they decline to give revenue numbers.

“It’s all about changing the perception” of marijuana, says John Downs, director of business development at Arcview, a research firm in Oakland, Calif., that tracks the industry. “As the stigma melts away, the opportunity is great.” He adds that Bachtell and Caltabiano are “smart operators who came in understanding the importance of establishing best practices. They’re very attractive to investors.”

Their end goal, Bachtell and Caltabiano say, is changing as rapidly as the industry. Three years ago, they hoped to build a company that could be acquired by a giant like Molson Coors or Coca-Cola, both of which have recently dipped a toe into the waters of cannabis-infused drinks. Now they say they’ve moved beyond that.  “Today we ultimately think we could partner with some of those (packaged-goods giants) rather than being a takeover,” Caltabiano says. “If we’ve learned anything, it’s how dramatically the landscape can change in a very short period of time.”