Q&A with Seke Ballard: Founder of Good Tree Capital
Conversations with the Cannabis 50
The Cannabis 50 highlights the pioneers and innovators helping push the cannabis, hemp and CBD industries forward. In addition to the 2019 Cannabis 50 Impact Review, we are also sharing interviews with our honorees to help spread their message of positivity and growth.
In 2019, Good Tree Capital earned national headlines when the small business lender announced they would be offering $250,000 in low to no-interest loans to social equity applicants hoping to enter the recently opened cannabis industry in Illinois. We chatted with Good Tree Capital founder Seke Ballard about the fundamentals of his lending system, overcoming the obstacles to entry into cannabis, and why social equity is so important to the future of the industry.
MGO: What about cannabis caught your attention and sparked the idea to launch Good Tree Capital?
Seke Ballard, Founder of Good Tree Capital: We have to think of it in two parallel threads, the first goes back to 2012, when I was recruited to join Amazon in Seattle, Washington. Both Washington and Colorado had recently legalized cannabis, and as a lifelong student of business, I observed the birth of the adult-use legalized industry and all of its growing pains.
My pot shop of choice was Uncle Ike’s in Central District and my first time going was pretty crazy. First there was a line of people wrapped around the block waiting to get in, and an armed guard at the door. It was pretty jarring to be going into a retail location and see an armed guard. And when I got in, there was a huge bottleneck of people queued up at the ATM because they couldn’t pay with credit and debit cards.
Just in those initial observations it was easy to see the issues the industry had, and continues to have, and how these complications can be traced back to the disharmony of the legal status of cannabis at the state and federal levels.
It wasn’t until a few years later, summer of 2015, when Dylann Roof, a white supremacist in South Carolina, went into Mother Emanuel in Charleston and murdered nine people. My mother’s side of the family comes from Charleston, so this was especially impactful for us. As a result, my dad suggested he and I take a road trip to Charleston to pay our respects to the victims. During this drive, I talked a lot with my dad, who is now 80 years old, so he has quite a bit of perspective about how far we’ve come, and how far we haven’t come, and I asked him: “how did we get here?”
My dad took some time to think about it and his response was really interesting and has been my motivation ever since. He said that as a people, we cannot sustain social and political advances if those advances are not built on a firm economic footing.
MGO: What is the key to building firm economic footing for a diverse population?
Ballard: He used his own history as a case-in-point. When I was a kid my dad owned a really strong, quintessentially American small business. He wanted to expand into nearby states so he applied for 13 small business loans… and was rejected by every single bank for every single loan. His hypothesis was that it didn’t really have anything to do with his business, because it was strong, profitable, and had been a going concern for over a decade. It probably had more to do with the color of his skin.
I like to think of myself as a data-based person, so my first reaction was to research his claim and it turns out he was spot-on. You can look at federal data on how debt financing is distributed, and if you hold all factors equal, you see pretty startling outcomes in terms of how debt financing is allocated.
So if I go into a bank, and a white guy goes into a bank, and we have the exact same background, income, debt, assets, credit score, you name it, we are the same person and the only difference is the color of our skin, I am 2.7X more likely to be rejected for a loan. And this is true for small business loans, mortgages, and to varying degrees, car loans, and personal loans. What is also interesting is that the same basic structure also applies to women, when controlling for gender.
If you look into the root cause of what is going on, it is that the loan officer is bringing all of his or her conscious and sub-conscious biases into loan decisions.
MGO: So how do you move beyond these biases?
Ballard: I felt this was an eminently solvable problem: simply remove the human from the equation and build a technology that can evaluate the creditworthiness of an entity based exclusively on the objective operational and financial merits of the business. When you do that, financing starts to get distributed more equitably based on merit, rather than factors that have absolutely no predictive value, such as gender or race.
Upon realizing this, I met up with some of the software developers and data scientists I worked with at Amazon, and posed this question to them: “how do we build a technology that evaluates creditworthiness objectively?”
That was sort of the nexus of it and from there I sought to build a predictive engine that does just that. I won’t bore you with the details of how we built it (laughs) but basically we can identify with 98.2% accuracy and certainty whether a business is likely to default on a loan.
MGO: At what point did the cannabis industry become your focus?
Ballard: This is where the parallel paths converge. I felt cannabis presented some really interesting opportunities to deploy this technology. You know, as well as I know, that the financial barriers for entry into the cannabis industry are often insurmountable, depending on who you are.
Because banks are sitting on the sidelines, if you want to pursue this industry you really only have your personal wealth to rely on. So I saw the opportunity to raise a fund and use my technology to determine which cannabis companies are creditworthy, thereby creating equitable paths into the industry.
MGO: When did you start issuing loans?
Ballard: We made our first loan in 2017, and since then we’ve amassed a portfolio of borrowers in six states, including California, Oregon, Washington, Colorado, Massachusetts, and Illinois.
MGO: With your product doing much of the analysis on loan applicants, at what point does your decision-making enter the process?
Ballard: Applicants provide us with extensive information in the application and we, of course, seek additional corroborating information from third-parties, like rating agencies, and use all of that data to assign a risk rating. If applicants meet our risk standards, they are provisionally approved. At that point, we manually validate what the applicant self-reported in the application.
It is all pretty seamless, especially compared with a traditional bank, where you’ll spend 4-6 months applying for a small business loan. This creates additional barriers to entry. To the degree we can minimize or eliminate those barriers to financing, particularly for an industry that already has complications in gaining licensure, I think that’s the right work we want to be focused on.
MGO: What characteristics of applicants do you look for when making final decisions?
Ballard: If you look at our portfolio, our average borrower has been in business for 7.5 years, has at least 13 employees, and they have long-term assets (real estate, machinery, licenses). So what we look for, at least historically, is whether you have already proven you can operate a licensed business.
In Illinois, what we are doing is different. The social equity applicants we are financing have never had a cannabis business, because they are applying to be licensed. We evaluate them by focusing on the individual, rather than a business entity. We look at factors like credit score, income-to-debt ratio, and their ability to provide security for the financing.
MGO: That must be a very different risk profile for the Illinois applicants, is that translated into the loan terms?
Ballard: Yes and no. Because banks are sitting on the sidelines, there is a massive shortfall in the supply of debt financing. There are a ton of people out there who want it, but don’t have a place to go to get it. Because we are one of the very few players providing private debt, we are able to choose the crème-de-la-crème. We choose only the most qualified people. So the risk profile is only different in the sense that we evaluate the individual, rather than the business.
In terms of the folks who are coming out of Illinois, the structure is unique in that we are financing the non-refundable application fee, which is $2,500, and that tranche is less than 3% APR, so really just enough so we don’t lose money on inflation. But we are also providing a letter credit for $250,000 in the event that they succeed and receive a provisional license. Then that tranche of financing will reflect the average portfolio rate up to this point.
We see this as an effort to try something experimental. If you look across the nation you see states and municipalities trying to carve out opportunities for social equity or economic impairment applicants to have meaningful ownership in the industry … but all have failed resoundingly. That’s largely because we haven’t put enough emphasis on preparing people during the run up to submitting applications. At the very least, we are helping make sure applicants have part of the financial hurdle cleared, and then on top of that, we are also hosting them at these hack-a-thon events where we match them with experts to really help them shore up their applications. So it’s a two-pronged effort.
And if it works and we get a couple dozen completed social equity applications that starts to look like the beginnings of success.
There is one statistic I like to share on this. When Massachusetts, a state with provisions supporting social equity applications, launched their program they got thousands of applications. Of those thousands, only 247 were deemed by the state to be “complete,” and of those only four of those came from social equity applicants.
So if we are able to help 20-30 applicants get across the finish line that is already orders of magnitude better than what Massachusetts did.
MGO: Is your program meant to act as a more effective replacement for government-level equity programs or are you hoping to work within and alongside these initiatives?
Ballard: I think this is a multi-faceted problem requiring a multi-faceted solution. I think the government is one piece of the puzzle, and private actors are another piece. How they all come together is what is important.
The reason we are trying something different in Illinois is because I really believe in the legislation. The puzzle piece on the state side that makes Illinois unique is the Cannabis Business Development Fund, a first-of-its-kind innovation where the state is saying we are going to finance, using tax-payer dollars, loans, grants and technical services to support social equity applicants. That’s great, but that financing and support is primarily available after you’ve submitted your application. So the question then becomes what happens before they submit? Who is going to pick up the slack during this critical period? That’s where I see Good Tree Capital coming in.
MGO: What should the cannabis industry focus on to move forward in 2020?
Ballard: I believe wholeheartedly in the concept of restorative justice. The potential for this industry to be used as a catalyst of change is high. We cannot miss this opportunity to build social cohesion and rebuild communities, that’s how we make this an industry that gains ubiquitous support.