Can’t argue with chronic success
In 1926, the great Harold Adams Innis asked a question: What are the very long-run factors in the integration of the Canadian nation? His answer was a most original contribution to political economy: the staple thesis. Innis argued that the exploitation of certain products — fish, fur, timber, and wheat — had set the pace and direction of our economic growth and created a nation that was oriented on an east-west axis. Canada “emerged not in spite of geography but because of it,” he famously claimed.
While the economy is much more complex and diversified than it was in Innis’s time, staple products continue to make a significant contribution to our GDP, and recently a new cash crop has appeared on the scene. Indeed, marijuana may well be the fish, fur, timber, or wheat of the future. Certainly, Canada has several comparative advantages when it comes to pot: vast tracts of arable land, favourable government policies, a culture of tolerance. There’s also a fourth advantage, as Billion Dollar Start‑Up makes clear: a generation of young capitalists who are ambitious beyond belief. This is the tale of how two enterprising millennials created a global contender in just five years.
In June 2013, a twenty-nine-year-old entrepreneur, Sébastien St‑Louis, attended a cottage party at Val-des-Monts, Quebec, along with his long-time friend Max Cyr, a civil servant with Health Canada. While the other partygoers drank beer and sang around the campfire, St‑Louis and Cyr sat in the kitchen and talked about recent policy changes regarding medical marijuana. The tough-on-crime government of Stephen Harper had implemented new regulations that aimed to protect the health, safety, and security of Canadian communities by eliminating in‑home production. Now marijuana could be grown and distributed only by a licensed provider, or LP.
With an MBA to his name, St‑Louis had worked as a regional manager at Export Development Canada and as a senior account manager at Business Development Canada before becoming the chief financial officer of a manufacturing firm. As he crunched the numbers into the night, St‑Louis calculated that it would take about $250,000 to get into the new weed industry. He then pitched the idea to his brother-in-law, Adam Miron, another twenty-nine-year-old entrepreneur and one with Liberal Party connections. (Miron co-founded iPolitics, the website that Torstar acquired in 2018.)
Having married into the same family, St‑Louis and Miron shared a relationship based on respect and trust. St‑Louis was a man fixated on the bottom line, while Miron was a people person who wanted to produce top-quality goods and services. Miron was initially skeptical, but St‑Louis won him over with the prediction that theirs could be a $20-million family-owned firm in just two decades.
The brothers-in-law knew little about the industry and even less about growing and distributing weed, but they had several things going for them: a network they could tap for investment capital and an in-with-both-feet attitude. They also weren’t afraid to take risks, an attribute that the historian Michael Bliss once argued was essential to creating “wealth in the sprawling, thinly populated half of the North American continent.” That fearlessness, along with self-confidence in spades, would prove essential for what was to come.
In building their company, St‑Louis and Miron did not hesitate to take chances, but they did have a “fail fast” philosophy: make mistakes, quickly recognize them as such, learn, and move on. After they attended the Amsterdam Cannabis Cup in 2013, they realized that “neither knew enough about the cannabis culture to participate in it.” They also had too much respect for those early pioneers who’d created that way of life to “even try to mimic” them. Instead, they resolved to remove the stigma associated with stoners and figure out a way to sell marijuana to people who were more in the mainstream. In other words, they wanted to sell grass to the moneyed class.
Miron, in particular, was determined to fashion a luxury brand — something on par with Grey Goose Vodka. But first they needed a name. At a time when craft brewers and distillers were gaining market share by appealing to more sophisticated tastes, St‑Louis and Miron wanted something with an artisanal flair. As they tossed around ideas, one word kept coming up: “apothecary,” from the ancient Greek word for storehouse. After all, hadn’t Greek allusions worked for Nike? But “apothecary” alone wasn’t enough, so they added “hydro”— from hydroponics, a process for growing plants — to create Hydropothecary.
Almost as soon as they started their business outside of Ottawa, St‑Louis and Miron realized they had underestimated their expenses. Undaunted, they called on virtually all their friends and family members. Some were less enthusiastic than others. When St‑Louis informed his mother-in-law that he was getting into the pot business, she broke down in tears: “I wanted you and Adam to be as close as brothers, but I never saw it like this!” For St‑Louis and Miron, as she would come to understand, there was nothing immoral about the production and consumption of cannabis. Like many merchants of vice, they were not governed by the social norms. Like it or not, people were going to light up — it was just a matter of where they would get their weed. As 2013 came to a close, the partners had secured $1.13 million, mostly in $10,000 and $15,000 increments. If they failed now, their credibility and perhaps even their friendships would go up in smoke.
At the time, a licence to provide medical marijuana did not allow a provider to grow weed for patients. That required another licence altogether — one that Hydropothecary did not have. To make matters worse, the flowering firm had yet to secure a supply source. Looking to solve both problems at once, St‑Louis — almost always the shrewdest person in the room — arranged a meeting with Louis Gagnon, a licensed producer and master grower with a 7,000-square-foot greenhouse. Gagnon had been harvesting weed on his sixty-eight-acre farm in nearby Masson-Angers for years. And in March 2014, St‑Louis acquired it all — the house, the buildings, the land, and the licence — in exchange for $800,000 and 650,000 shares in Hydropothecary.
Twelve years ago, Ian Layfield, a wide-eyed grower with a small mail-order operation, walked onto the set of the CBC’s Dragons’ Den. He was there to pitch a 10 percent stake in a medical marijuana store, for $250,000. “I’m a little confused,” admitted Robert Herjavec, one of the Dragons. “Is what you’re doing — growing marijuana — illegal?” To which Layfield responded: “Working with Health Canada? No.” Herjavec then asked, “Is people who are registered to buy from you illegal?” Layfield explained that he was their “designated grower.”
Herjavec had some sympathy for Layfield’s idea, but some of the other Dragons lectured him on the immorality of his business. “At the end of the day,” said Jim Treliving, the former RCMP officer who became chair of Boston Pizza, “I used to chase guys like you.” Kevin O’Leary pointed out that “we are not debating the morality or legality of this,” but Arlene Dickinson disagreed. “Your money may not have a moral fibre,” she maintained, “but mine does.” Ultimately, all of the Dragons said nope to dope.
Five years later, when St‑Louis and Miron travelled to Toronto’s financial district in search of investment capital, they encountered similarly cold shoulders. Having set their sights on a $20-million infusion of cash, the partners returned home with just $3 million from a financier they called the Bulldog of Bay Street. They were able to pay off Gagnon and start construction on a 36,000-square-foot greenhouse.
By the end of 2015, St‑Louis had struck out at business-to-business conferences in Toronto and Chicago, and Hydropothecary was running on fumes. When a $25-million acquisition by Canadian Cannabis Corporation fell through, the company was unable to make payroll. St‑Louis and Miron turned once more to family and friends, while their CFO remortgaged his cottage and house. To stretch that money as far as possible, some employees and contractors were asked to accept half pay for the time being.
Then luck intervened. Few predicted that Justin Trudeau’s Liberals would win the 2015 election, let alone secure a majority. While campaigning, Trudeau had told Canadians that “the Liberal Party is committed to legalizing and regulating marijuana” and that legalization could happen in anywhere from a month to “a year or two” into a Liberal government. His words helped spark a “green rush.” Cannabis stocks soared and fortunes were staked, made, doubled, and tripled in an atmosphere reminiscent of the 1990s dot‑com boom. The Cannabis Act would come into effect on October 17, 2018.
Even before Bill C‑45 passed its second reading, things started to change at Hydropothecary. For one thing, St‑Louis determined it was time to take the company public, and on March 22, 2017, Hydropothecary began trading on the TSX Venture Exchange — with nearly 3.6 million shares changing hands among once-hesitant investors. Three months later, St‑Louis raised $30 million in a single day, by selling 30,000 convertible debenture units at $1,000 a pop.
St‑Louis and Miron used some of the new-found capital to build a state-of-the-art, million-square-foot greenhouse at “the farm,” on Chemin de la Rive. They now had the capacity to produce 108,000 kilograms of dried cannabis a year. At the end of 2017, Hydropothecary’s “Quebec first” strategy paid off, when it was awarded the contract to supply the provincial cannabis retailer, SQDC, with more than 200,000 kilograms of product over five years, with the expectation that their products would gradually move away from dried flower and toward value-added products like oils, edibles, and THC mists. The deal was worth $1 billion.
For generations, many executives outside of natural resources were hesitant to look beyond Canada for growth. Instead of taking on the global competition, they too often chose to cater to local markets and to diversify into related and unrelated areas of domestic production. Molson and Labatt, for example, failed to conquer markets elsewhere because they were defensive and derivative. It took them too long to “go global,” and when they finally did, they couldn’t secure the necessary distribution channels. Only a handful of companies, like Roots and Canada Goose, have had the courage to strike a distinctively Canadian pose abroad.
But the two millennials who founded Hydropothecary show no sign of this nagging inferiority complex. From the start, St‑Louis has understood the value of strategic alliances, and with larger aspirations in mind, he rebranded the company as Hexo Corp in August 2018. “Canadian cannabis has five years to build these international brands,” he told his leadership team that fall, “and to do that, we need great distribution.” St‑Louis also knew it would take billions of dollars to establish a global distribution network, and Hexo didn’t have that kind of money. So the company partnered with the American brewing giant Molson Coors to create a new consumer packaged-goods company — Truss — that would produce everything from cannabis cosmetics to vapes. It also partnered with the Greek company Qannabos to establish a eurozone processing, production, and distribution centre.
Structured almost like a diary, Billion Dollar Start‑Up ends with Miron’s departure from the firm in 2019 (he remains on the board, as does CEO St‑Louis). Since then, the cannabis industry has experienced a number of setbacks, and it will take a while for a new market equilibrium to be established and for new social norms to emerge. It will also take some time for the industry to sort out its teething problems. But as this self-promoting but nevertheless fascinating book makes clear, Canada does have a first-mover advantage with an emerging staple product. It also has an emerging generation of business leaders who see the world as their oyster.