When I was 16 years old, I was a freshman at Carnegie-Mellon University in Pittsburgh, PA, where I largely grew up. In December I got deathly ill, ended up in the hospital, and was told by my doctor, who was also my uncle, that if I had another drink, I would die.
Naturally, I didn't believe him, and when my liver got functional enough to exit the hospital and my skin moved back from yellow toward its normal color, I went out and had a beer. If you have ever chugged a beer on an empty stomach, you probably got that initial buzz for a few seconds or maybe a minute or two. I had that buzz for a week.
At that point I came to believe that alcohol was out for me. So naturally, when a girl I was greatly enamored with asked me in for an evening on a holiday, I was amenable to trying something new. She introduced me to marijuana, and I was most grateful to her for that at the time. I will leave out the following 8 years, at least for now.
Somewhere around 1981, I abandoned substances outside the bounds of the then-current legal norm, again relating to an encounter with another girl I was enamored with, and started to pay very focused attention to my remaining education.
One of the things about the illicit (read illegal) drug trade is that it is most clearly not about the buzz, but about the buzz-i-ness. Drug dealers went from growing at home and providing to themselves and their friends; to buying in larger quantity from farmer friends and selling to small independents who basically fund their own habits; to importers of hundreds of pounds selling to those larger quantity folks, to large-scale import/export businesses, to growers associations, and on to cartels.
Over the short number of years I participated, I was never personally involved in large-scale selling and buying, but I ended up meeting, discussing with, and observing a wide range of people and saw their methods close-up. And it occurred to me, that the drug trade is like any other business, except that it is illegal, and for that reason, far more violent, dangerous, and profitable than legitimate (read legal) businesses.
Other than the euphemisms, the buzz-i-ness is the same as any line of business, but exaggerated in various ways. Most business people don't end up shooting at their rivals, but the same is true of most drug dealers. Every business has its risks and rewards, and as the risks go up, so should the rewards. The big business problem comes when there is an imbalance between risk and reward or when there aren't enough tries available for the law of large numbers to come into play.
The law of large numbers is essentially that statistics applies as the number of instances of a phenomena increases. Individual outcomes become less important than the overall balance of risk and reward as the number of instances increases.
Life on the farm
At or about mile market 100 on I70 outside of Columbus, OH, near the Thornville exit, was Bill and Rachael's Farm. They didn't grow illicit crops, but they did end up as part of the parking lot for rock concerts, and as a result, ended up harvesting quite a bit of those crops in cleaning up after the attendees. They grew vegetables for their own consumption, hay for animal consumption, and cows.
I ended up spending a fair amount of time on the farm. It's where I learned to shoot (better), where I almost took out grandpa Powell and did take out part of the porch learning that the brake on a tractor is OK at keeping it stopped but of no use at all in stopping it, and that apple jack is about the smoothest beverage of its kind anywhere.
But more than anything, I learned that farming is a low-margin, long-hour, constant care, life and death business. Mistakes can kill you, you have to know a heck of a lot about a lot of different things at a very practical level, and you have to adapt to conditions, which are largely out of your control.
Smaller farms get eaten by larger farms just as small fish get eaten by big fish. How this happens is very similar to how rich people eventually get their way in politics. Of course corruption has its role... but it's not corruption that wins at the end of the day. It's persistence.
The big fish eat the little fish
More resources mean the ability to sustain more failures. That means being able to take more and larger risks for more and larger reward. Just as the first big hand winner has an advantage in poker because they have more resources and can push around the smaller pots and force things when they are advantageous, so the big farm has the advantage of time over the small farmer because they can sustain more local variations and compensate with global capacity, and the rich person trying to affect laws can afford staff to keep trying until their opponents are exhausted, taking advantage as soon as they make a mistake or fail to act.
The true nature of things is sequential, and that means that they follow the law of small numbers. The law of small numbers is in fact a logical fallacy. It is the effect of generalizing from a very small sample set, typically leading to the wrong answer. It's something like "I tried it twice and it worked both times, so it must be right." But the sequential nature of things means that even the wrong approach could win and end up putting you in the position where you win despite a poor strategy. That's because you get such an early advantage that even with a poor strategy, you still win, at least for quite a long time.
Suppose we both start with $100 and can make as many $100 bets as we have money in each "round".
Suppose my strategy (10) gains me 10% on each bet, while yours (20) gains 20% on each bet. You should win over time (rapidly) as we bet in successive rounds.
Suppose also that every 100 times, regardless of the strategy, the winner gets $10,000. Let's see the effect of sequences.
Suppose on the first bet, I get $10,000, bringing me to $10,100 and you go from $100 to $120.
You now get 1 bet of $100 bringing you to $140, or 1 in 100 times depending on the sequence, with $10,120.
I now get 101 bets of $100 guaranteeing that I now have at least $10,100+$1010 and very likely (>99%) I now have $21,110.
You now (likely) get 1 bet of $100 bringing you to $160, or 1 in 100 times depending on the sequence, with $10,140.
I now get 202 bets of $100 guaranteeing that I now have at least $21,110 + $2,111 and very likely (>99%) I now have $43,221 (> 200 bets means I likely got two $10,000 payoffs).
Not only do I outstrip your ability to catch up, but I also get more bets, which means I am more likely to get the rare big winner than you are, and over time, I become more and more likely to get big wins because I get more tries.
NOTE: The worse strategy wins!
Why do the rich get richer?
It is incredibly obvious that the legal marijuana (now going by cannabis) business will create many wealthy individuals in the next few years. As legality increases, so will the people coming out of the woodwork to partake. As the product has increased in quality and is now being infused into foods and beverages, it will be as popular or more so as alcohol, and just like the end of prohibition, the end of illegality for pot will be the beginning of an enormous industry.
Last month, for $100,000 I could have been in an early round of one of the best and largest producers in California, and likely I would have gotten a 10x return in 12 months after recreational use becomes legal in California, and 100x in 2 years. It's not the first deal I have turned down that was almost certainly a huge winner.
So now we have a high profit crop with lower risk than many cash crops, that can grow on land largely fallow, or can be grown in hydroponic or aquaponic farms that are ecologically advantageous, with little danger to the farmer, and all of these things will get better quickly - for about a year.
A year or so from now, as the illegal pot growers of Northern California lose their business, the cartels that back them will, if they are sensible, put the money into legitimate businesses or go back to cocaine. The criminal sorts who shoot people to defend their illegal farms will go away and become criminals for other entities, or perhaps move into other states for state-to-state illegal transport and sale. As this grows out over the following years, the margin will shrink as the sale price goes down with competition, quality and product consistency will increase, and volumes will increase.
The opportunity is now and in a few years it will be largely gone. The farmers will be back to lower margins, the industry will be normalized, the startups will be bought out by larger entities or fail, and the investors who are in now will make a nifty profit in a short time - if they get out while the getting is good in 1-3 years from now.
Why not make a nearly certain bet?
It's not the legality of it that stopped me, and it's not a matter of cash flow or risks, and it's not that I think pot is a bad thing or more dangerous than other substances that people use. It's something else. And I don't fully know what it is.
And this goes to the most fundamental aspect of angel investment. Like most buying, angel investment has a rational and irrational side to it.
I have also turned down "alcohol in ice cream" in the last year and a few other outstanding opportunities of similar sort in the drug trade. And just last week I saw a new high tech low frequency high dynamic range high volume sound system which is supposed to revolutionize gaming and high fidelity sound. They apparently didn't realize the enormous potential for high-tech pornography for the new generation of controllable vibrators they are starting to produce. Now at least they are aware.
Do I have an ethical / moral streak based on some religious upbringing? It's not that, I am quite certain. It's really a combination of things.
There are no sure bets!
Of course each of these has significant risk, and the deeper you look, the more risky they each become. While the overall pot trade will almost certainly prosper, each individual bet might go well or poorly. The majority of shareholders might decide hold out too long, they could be dishonest even if they have been apparently honest for the previous 50+ years of their lives, legal or political winds could change, a drug cartel could decide to bomb them for some perceived offense, key personnel could get sick or die in a car crash, the list goes on and on.
And the sequential nature of things makes a huge difference. By being at the right place at the right time, they could win big, and by not being there, they could lose big. First mover sometimes loses because they educate the market with the money and time that others then dominate later on. Resources help win races, but that doesn't guarantee the win, particularly when the race is to monetization through a buy-out.
The Buzz-i-ness business
For me, I think it came down to one thing at the end of the day. I want to spend the rest of my life investing in things that help people. And I am not convinced that large-scale alcohol in ice cream, cannabis in candy, or high-tech vibrators do any such thing.
Regardless of the fact that each of these businesses have very good chances of success, it's a matter of where I want the world to go and the bets I am willing and able to make to help it get there. And even though by investing in them I might make enough money to have an even greater effect on the rest of the things in the world, I think there are other and better opportunities out there that have the things I am looking for.
I figure I will eventually eat some ice cream with alcohol, use a high tech vibrator on my or someone else's shoulders and back (or elsewhere as appropriate to the situation), and use cannabis candy to relieve the joint pain I am getting with age. But I will be buying it with the proceeds from an investment in blue-green technology, or the coffee company I am talking to (it has anti-oxidants), or any of the other ventures I am invested in. The buzz-i-ness business is not for me.
Having just said that, I note that I am a member of a diversified angel fund, and as I recall they are invested in some of these companies even though I voted against it. I guess I will make money in buzz-i-ness despite myself.
Copyright(c) Fred Cohen, 2016 - All Rights Reserved