Early Investing

Mailbag: Beyond Meat Rewards Early Investors; Marijuana Local Control Laws

Mailbag: Beyond Meat Rewards Early Investors; Marijuana Local Control Laws

Q: Beyond Meat just IPO’d, and its price has been going up. So why is it doing a secondary share offering?

A: The “official” reason is to raise $40 million to expand manufacturing so that the company can meet growing demand. But the real reason is…

To reward its investors.

This might make little sense at first glance. After all, when shares hit an all-time high of $208 last week, IPO-day investors made 720% gains on their $25 per share purchase price. Pre-IPO investors were up even more. Where’s the need to reward investors in this sunny scenario?

But there’s a catch (there’s always a catch). It’s called a “lockup period.” It lasts six months and applies to all investors who put in money before the IPO.

You may not think six months is a long time. But you’re not the one drooling over mouth-watering gains you can see and smell but can’t touch. It’s frustrating. But there’s more to this secondary offering than just that.

Beyond Meat is priced as if it will be the next huge food brand, like a Kellogg. Its price-to-sales multiple is a crazy 66. How long can that last for a company that has negative margins, negative cash flow and negative EBITDA (earnings before interest, taxes, depreciation and amortization)?

Looking down the road a bit, there’s further cause for concern. Its biggest rival, Impossible Foods, is about to move into its space, delivering burgers to grocery stores starting in September. It already has partnerships with chains like Canada’s Tim Hortons and Burger King (they share a common owner, Restaurant Brands International).

Impossible Foods is rumored to be planning its own IPO soon. A lot of the excitement surrounding Beyond Meat could be siphoned off to its startup rival, accompanied by a possible dip in price… or maybe much worse than just a dip.

And then you have a little-talked-about X-factor: the oldest and biggest fake meat brand in the country, Morningstar Farms, which is part of the aforementioned Kellogg family. If Kellogg actually bothers to put a little effort into marketing its under-the-radar brand, then Beyond Meat would be facing not just another startup but a much larger company – with formidable resources at its beck and call.

This is Beyond Meat’s honeymoon phase. Prices are skyrocketing. The buzz is deafening.

The one sure thing about all of this?

It’s not going to last. Beyond Meat’s pre-IPO institutional investors understand this only too well. And they want to cash out now while the going is good.

Beyond Meat is selling 3.25 million shares, with 3 million coming from investors. They don’t call these guys “the smart money” for nothing.

+ Early Investing Co-Founder Andy Gordon

Q: Why do states legalize marijuana and then let individual cities make marijuana sales illegal? It makes no sense.

A: It doesn’t make commercial or economic sense. But it does make political sense. And when it comes to marijuana, politics means as much, if not more, than economics. After all, if you can’t legalize marijuana, you can’t sell it.

So let’s dive into the politics of marijuana. Most states have legalized marijuana through ballot initiatives.

In some ways, voter initiatives are easier to pass than legislation. Our political system, by design, was created to make legislation difficult to pass. Even when one party controls the governor’s mansion and the legislature (like New Jersey), different factions emerge, making any sort of bill tough to pass. Personal agendas can also get in the way of getting things done. As can generational rifts and a whole host of other issues. There’s a reason only two legislatures have legalized recreational marijuana. Last year, Vermont legalized possession. And this year, Illinois legalized the sale of recreational weed.

Voter initiatives don’t have to deal with any of those issues. They do have to be crafted in such a way that they appeal to millions of voters. They have to be relatively easy to understand because voters don’t want to spend hours deciding if they’re going to support an initiative. And they have to, at worst, keep people from voting against it. A vote not cast is better than a “no” vote.

So how do you craft a marijuana proposal with the broadest appeal? You give people the power to have it both ways. Intellectually, people know legalizing marijuana is the right thing to do.

But NIMBY (not in my backyard) is the driving emotion in politics.

People want to be able to gamble in casinos. But they don’t want the casino built in their town.

People like wind power. But they don’t want wind turbines in their town.

In expensive real estate markets like San Francisco, people know that building more houses and apartments is important. But most voters don’t want any new construction in their town.

And many people want marijuana. They just don’t want it sold in their town.

So ballot initiatives are written to legalize marijuana statewide. They include language that gives cities and towns control over whether marijuana sales will be allowed. It maximizes voter appeal even though it limits the size of the industry (and the tax revenue it generates).

It’s not the best solution. But it is the fastest and safest path to legalizing marijuana.

+ Early Investing Senior Managing Editor Vin Narayanan

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