On Cloud Nine

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How Cloud CO Farms’ 25-year-old owner ditched Wall Street to fulfill his cannabis-startup dream (with help from ‘The Marijuana Show’).

July 25, 2017

Photo by Jermaine Amado

“I’m founder and CEO of Cloud CO Farms. We will cultivate over 80 acres of CBD-rich, non-psychoactive cannabis per year.”

Luke slightly falters after the opening line to his pitch on season 1 of “The Marijuana Show.” The then-24-year-old is visibly nervous in front of the investors: He is fidgeting, his voice is monotone and he is hesitating. He makes the mistake of saying he has partnered with more experienced cultivators and that they will take 50 percent of the crop at the next harvest, which the panel of these “Shark Tank”-like investors interprets as him only being a 50-percent owner of the company.

One by one, the investors announce they won’t join Luke’s venture—although the two dispensary owners on the panel say they will sell his product in their stores if and when he is operational.

“The Marijuana Show” creators and producers, Wendy Robbins and Karen Paull, felt that Luke deserved a better result. So they gave him a second chance.

“A lot of times, we’ll go off of somebody’s passion and somebody’s reason why they’re doing something,” Robbins says. “His family had already put all their retirement money into this farm with the belief system that he would succeed.”

“There was something in us that just knew that he would do whatever it took. And sure enough, he really has,” Paull adds.

On his second try pitching to an investor, Luke (who preferred that his last name not be published) was able to secure a quarter-million dollars for a 25-percent equity stake in his company—a million-dollar evaluation for a cultivation company that didn’t have any plants growing yet, led by an owner that has very little cultivation experience.

With that money, Luke has finished building, and now oversees, 11,500 square feet of greenhouse space dedicated to growing hemp for extraction purposes. And with the recent addition of a $300,000 extraction lab, paid with a loan from the company’s main investor, Cloud CO Farms now is making plans to change the makeup of Colorado’s San Luis Valley.

From Wall Street to High Life

Atypically in this industry, Luke did not have any cultivation experience prior to moving to Colorado. A native of Warwick in upstate New York, he earned his college degree from Loyola University—a private Jesuit school in Baltimore, Md.—in business management with a focus on finance. He got his first job out of college in July 2013 at a stockbroker’s house, where he spent his days cold-calling potential clients.

He says that side of the finance industry was not the right fit for him, as he wanted to help people rather than sell to them. He then moved to Northwestern Mutual in a financial advisory role, helping people make better financial decisions.

Throughout his ventures on Wall Street, Luke was keeping an eye on a burgeoning industry on the other side of the country: cannabis. A trip to Colorado to visit his brother in February 2014 solidified the notion that this was something he could do. He took a growing class at an establishment that, he says, “wasn’t too legitimate,” but still offered him good experience.

His return to New York City was a short one: He sold most of his belongings to his roommates and friends in the city, packed a couple of bags and left in July 2014 to start working on his cannabis dream.

“The only reason I ditched all that and came out here is because I saw an opportunity that was better than the one that I was currently looking at [on Wall Street] that would satisfy the two things I was trying to do, which are: provide financial independence for myself and my family, and find a way to help people in doing so,” he explains.

Photo by Jermaine Amado

Learning the Ropes

Luke’s first stop on his new journey was Pueblo, Colo. Along with other hopeful cultivators, he met with a real estate developer with 300 acres of land, who wanted to divide them into 5-acre lots and build greenhouses for cultivators to lease.

The next six months were spent in planning meetings, designing the greenhouses, planning security, listening to equipment-supplier pitches. Ultimately, however, the owner of the property lost his funding, and the project fell dead.

Despite the setback, Luke says he learned a lot about every aspect of the cannabis industry, especially about the risks associated with a start-up industry. He says everyone involved in the project failed to do their due diligence about the property owner’s finances.

“We trusted this guy, ’cause we had spent so much time together, and he gave us the assurance that it was moving forward, repeatedly. But eventually, I guess, when it comes time, you figure out real quick who’s actually gonna be able to pull it off and who’s not,” he says.

Greenhouse frame by Oregon Valley Greenhouses. Luke began running out of funds while building his greenhouses, prompting him to apply for, then appear on “The Marijuana Show.”
Photos by Jermaine Amado

Luckily, he was able to get his money back: roughly $150,000—his mother’s entire retirement savings. He says knowing where his money is coming from motivates him “to work 100 hours a week, every week,” and pay himself a $5/hour salary. “I can’t imagine losing that. … I could never let that happen,” he says.

At the time, Luke was living in an apartment in Pueblo with his mother. He took the retirement savings and rented a greenhouse operation to get some experience growing and some cash flow. He also bought a limousine to help him sell his recreational cannabis product to dispensaries.

“In Colorado, you can legally smoke in a vehicle while driving if the driver is in a separate area of the vehicle where he’s not exposed,” Luke explains. The plan was simple: Drive to dispensaries, invite the purchasing manager for a test drive where they could sample the product in the back of the limo.

“Now that we’re doing hemp, it’s turned into a family collector’s item,” he says with a laugh.

While working the greenhouse operation, Luke also was searching for properties across the state. An online search yielding a thousand potential properties was narrowed down to 30 that he wanted to visit in person, which, in turn, became a handful of viable options.

Luke says the first thing you need to look for when shopping for properties suitable for cannabis cultivation is water. The second? Also water. It took him another six months to find a suitable property, but in July 2015 he finally found the right place to build out his dream: Alamosa, Colo., in the San Luis Valley.

“It was 127 acres for less than $1,000 an acre; it had three agricultural wells with water rights,” he says, “so we would be able to do what we needed to do in terms of irrigation.”

The other attractive point about the property was the owner being open to finance the purchase, so Luke only needed a 20-percent down payment.

“For us, the property was affordable, it had a lot of space and room to grow,” he says. “The local county officials were open to working with us in terms of giving us our certificate of occupancy, and allowing us to do the hemp cultivation and also the hemp processing.”

Containers filled with CBD distillate oil. Cloud CO Farms can process another cultivator’s crop into distillate for $2/gram in a buyback deal.

Unstructured and Out of Money

What the property did not have, however, were any structures; it was just “a big piece of vacant land,” as Luke describes.

So the young entrepreneur shifted his focus from real estate to greenhouses. At first, Luke says he was considering all options from “the state-of-the-art … greenhouses … all the way down to little cold-frame hoop houses.”

“I’m always just looking for the best value I can find—something that works, that’s gonna get the job done,” Luke says. Ultimately, he settled on a 30-foot by 96-foot greenhouse frame from Oregon Valley Greenhouse, purchasing four of them, and sourced the rest of the parts from different suppliers.

One of those sourced parts is a solar cover made of woven fabric that Luke says is “significantly stronger than your typical poly cover.” Those covers have been on the greenhouses for 18 months, and he hopes to get another five to six years out of them before they need to be replaced, barring any serious tearing from winds.

“Also, one of the biggest points on this one was that it has a 100-percent diffusion rate,” he continues. “If you picture a ray of light coming in at a straight line, it’ll hit that cover, and that cover will basically blast it into thousands and thousands of particles going everywhere.”

There are several advantages to having proper diffusion rates: You improve your light coverage, reduce heat by dispersing the energy throughout the structure, and reduce the risk of burn spots, which can damage crops, he says.

While Cloud CO Farms’ team reduced costs by building the greenhouses themselves—Luke’s brother worked as a construction manager in Manhattan, notably for the Bank of America building—the company ran out of cash during the building process. In addition to his mother’s retirement savings, Luke was able to amass another roughly $100,000 in loans from family and friends. When that was spent, he turned to “The Marijuana Show.”

Crystallized CBD processed by Cloud CO Farms. Similar to the distillate, the company can produce 99-percent pure CBD crystals, according to Luke, for $4/gram in a buyback deal.
Photos by Jermaine Amado

Showing Off

Looking back at his appearance on “The Marijuana Show,” Luke realizes the odds of him leaving with an investment were pretty slim, especially given the size of the project he was pitching and his lack of experience.

“I’m coming in there with probably the biggest idea out of anybody on the [show’s first] season,” Luke recalls. “What I was trying to do was large-scale, ... pushing boundaries. And to investors, that’s pretty scary, especially for somebody who hasn’t done it before.”

To Robbins and Paull, Luke made a few critical mistakes in his pitch, not the least of which was giving the impression that he did not fully own the company.

“And then he offered them too [little equity] based on the expertise that they would have brought to the table and would have needed to bring to the table,” Robbins says.

Paull believes this is a common problem in the cannabis industry: people believing their company is worth more than it is because it’s cannabis, or are making sales projections based on today’s figures without considering the drop in prices that is currently being seen across the industry.

“You don’t want to overshoot in your evaluation [and say], ‘I’m worth $20 million,’ [when] you haven’t put anything in the ground. This won’t make sense” to the investors, Paull explains.

After Luke failed to secure financing on his first round, the show’s creators coached him on ways to improve his pitch. Notably, they told him that he would have to be open to giving a bigger equity stake in his company and that the investor is going to want control of the company should he get off track. When all is said and done, it’s about the money for the investor.

Luke says his extraction lab will allow his company to start changing the makeup of the region as they convince farmers to introduce hemp into their fields.
Photos by Jermaine Amado

“That makes sense because that is what an investor is going to do,” Robbins says. “And that’s part of it, too, if you’re a young entrepreneur or a young cultivator, … you want to interview [the investors] as much as they interview you” to ensure your visions for the company are the same.

“Your investor also wants to know that you’re coachable,” she continues. “So … we would tell anybody, including Luke, … to make sure that you’re really ready for the investment, that you’re available to be coached, that you’re available to hear the needs, that you’re going to do what needs to be done to be profitable.”

His appearance on the show also allowed him to make connections with people he otherwise would not have met, some of which have turned into business opportunities. In addition to the two dispensary-owners/investors who said they were interested in carrying Luke’s products in their stores, Luke says he also has created a partnership with another contestant from the show “who does dog treats and dog bones.” He has been selling his extracted CBD oil to them for use in their medicated dog treats.

Building those relationships has been crucial to the company’s growth, and Luke never completely shuts the door on anyone, even people who have turned him down in the past.

“You can never do that, as much as you want to,” he says. “I’m just trying to build my network as much as possible, and not burn any bridges, ’cause you never know what might come up down the road.”

Hemp vs. Marijuana

What made Luke stand out from the rest of the entrepreneurs on the show’s first season, apart from pitching a cultivation business, was that he was not pitching a marijuana business, but rather a hemp business. While he thought the marijuana industry was reaching a saturation point, Luke saw the CBD market as filled with opportunity.

“This was mid-2016 ...,” Luke says. “The price for CBD was very high, at that point, because there wasn’t any supply, really.”

There were other advantages to growing hemp instead of marijuana: The cultivation license for hemp is only $500 versus $25,000 for a marijuana cultivation license; there is no plant count limit for hemp; and you can grow it outdoors anywhere in the state, whereas marijuana can only be grown outdoors in Pueblo, he says.

More opportunities also exist for partnerships with groups outside of the marijuana industry. Luke is in talks with Adams State University in Alamosa, which is starting to research the industrial uses of hemp. While Cloud CO Farms is not focused on industrial hemp (its focus remains on CBD production), Luke is “trying to get some interns for biology in the greenhouses, and some interns for chemistry in the lab doing processing.”

Luke says the cover he has on his greenhouses allows for 100-percent diffusion of light, meaning there are not harsh heat spots on his crop.
Photos by Jermaine Amado

Cloud CO Farms’ extraction lab has become the crux of Luke’s plans. When he was planning the harvest of his first crop, he realized that he would have to spend $200,000 to get it processed because “processing options were so limited.”

“We decided we could either spend $200,000 to get this [crop] processed, or we could spend $300,000 and build our own processing facility and do it ourselves,” he explains.

With those extraction tools, Luke and his employee Dennis can process raw CBD flower into anything from oils to 99-percent pure CBD crystals, Luke says. But more important than that are the business opportunities this opens up: processing for other cultivators.

Luke already has his business plan in place: $2 per gram buybacks on distillates and $4 per gram buybacks on 99-percent pure crystalline isolate. Additionally, cultivators low on cash can kick back a portion of the distilled product to Cloud CO Farms.

Now, the 25-year-old has begun looking toward nearby farms as potential revenue streams. With one of the greenhouses on the property reserved for nursery production, Luke can sell hemp seeds and clones to those local farmers he can convince to start growing hemp as part of their regular crops.

“The strategy of our business is to be able to provide clones or seeds to farmers, so that they can plant their fields. And then, be able to provide them with processing services so that when they’re at their harvest, they can take their hemp and actually turn it into a more viable product,” he explains. He’s also working on adding distribution to the company’s list of services to become a “one-stop shop” for farmers unfamiliar with the cannabis industry.

“Our goal as a business is to take all those concerns off of the farmer’s plate, and just have them do what they do best, which is farm,” he says.

The biggest challenge for Cloud CO Farms and the entire CBD industry, Luke says, is getting consumers educated about CBD to increase demand. But with $150,000 in revenue in his first three months selling his product, it seems that Luke is on the right track to pay back all his creditors.

Especially his mom.