Jared Stanley, chief cultivation officer of Charlotte’s Web, with the company’s namesake, Charlotte Figi.

After founding Charlotte’s Web in 2013, the Stanley brothers were focused on carving out a legal market for their flagship product, hemp extracts containing cannabidiol, or CBD. By 2016, they were focused on a good problem: They were growing so fast that they needed to raise capital to fund an expansion.

In 2018, they issued one of only a tiny handful of IPOs from the middle of the United States, from their headquarters in Boulder, Colo. Charlotte’s Web is the exception that proves the rule — and its experience in the pandemic and position as the largest player in a rapidly evolving market shows the power of an IPO.

Early data suggests that CBD sales are climbing during the pandemic, and are expected to keep growing about 20% year-over-year. Despite regulatory uncertainty that has taken a toll on Charlotte’s Web’s stock price, analysts expect sales to rise over the next two quarters, with consensus estimates of $25.6 million for the second quarter and $28.8 million for the third quarter, according to CNN Business.

The analysts expect a loss per share for 2020, with a consensus of 19 cents, but they see profits in 2021 of 11 cents per share. Charlotte’s Web posted a net loss of $11.5 million on sales of $21.5 million in the first quarter of 2020, down from a profit of $2.3 million on sales of $21.7 million in the first quarter of 2019. Operating expenses were $23.3 million in this year’s first quarter, up from $13.2 million for the same period a year ago. 

The IPO helped Charlotte’s Web begin a shift toward online sales over the last several years. In turn, that tempered the company’s losses during the pandemic-related shutdown of retail stores, when sales were down less than 1% overall from the first quarter of 2019. After investing in a 137,000 square foot production and distribution center, Charlotte’s Web still had $53 million in cash on hand at the end of the first quarter.

Some of the elements of a public listing have been “frustrating,” acknowledged Joel Stanley, the company’s first CEO, such as the ups and downs of the stock price. It has fallen this year to below $7 from a high around $20 in 2019, in part due to warnings last fall from the U.S. Food and Drug Administration over the potential risks of CBD use.

But, Stanley said he has been willing to accept the frustration as part of the process. “In the end, we had to say we have the opportunity to raise money, to watch our baby grow up while we can still retain meaningful ownership and have a powerful voice as founders who care,” he said.

CEO Deanie Elsner eyes competition from an estimated 3,500 CBD brands and, possibly, companies like Unilever that could decided to enter the market.

A Long Shot From The Middle Of The US

Slightly more than half the IPOs since 2017 have been concentrated in three states: California (165), New York (78) and Massachusetts (62). Only three other states had more than 20: Texas (40), Florida (28) and Pennsylvania (23). Colorado has had 11, according to data from TK-based Pitchbook.

The small number of IPOs from places outside a handful of select cities is symptomatic of a larger trend. The number of U.S. companies trading on the market has dropped more than half since the late 1990s. The average annual number of new listings from 2009 to 2016 is 179, accord­ing to data from the Center for Research in Security Prices. The average annual number of new listings around the peak listing year from 1995 to 2000 was 683.5.

In a game of “go-big-or-go-home,” companies outside the big metropolitan areas are often not large enough to play.

But the impact of the narrowing path to an IPO is rarely examined. As businesses across the country struggle to recover from the effects of the pandemic, Charlotte’s Web is a case in point. It was able to get access to capital markets in part because of an unusually compelling story in a fast-growth, sexy sector.

The brothers entertained multiple offers from venture capitalists and family offices, partly due to its role as an early star of the CBD movement. In 2013, a CNN documentary by Dr. Sanjay Gupta highlighted one of the first patients to use products made by the Stanley brothers: Charlotte Figi, a child with a severe seizure disorder helped by CBD.

Figi, who died in April of coronavirus, is the Charlotte in Charlotte’s Web.

The Stanley brothers memorialized Figi on their company’s website. “What began as her story, became the shared story of hundreds of thousands, and the inspiration of many millions more in the journey of their betterment,” the brothers wrote. “Charlotte was and will be, the heartbeat of our passion, and the conviction that the dignity and health of a human being is their right.”

The brothers rejected most investors, fearing a potential loss of control. Nonetheless, by 2016, they had raised a little more than $6 million from a Colorado farmer and a family office in Florida who shared their sense of mission, Stanley said, declining to name them. “They deeply believed in what we were doing.”

By 2016, the brothers began considering an IPO because it offered a better valuation and a way to keep the founders’ voices intact.  “It was not a decision taken lightly,” said Stanley.

The rules around CBD were far from certain, but by 2016 the industry appeared ready to explode, said Joel Stanley.

“It was very obvious that we were going to have to raise money to keep up with all the growth,” said Stanley. The other brothers are Jesse, Jared, Josh, Jordan, Jon and Austin. Joel Stanley joked that he was the last one to say “no” when it came to identifying who would be CEO.

Family-owned businesses off the coasts most often end up accessing capital via private equity. “Until this point (the pandemic), it’s been a land rush from private-equity firms to gobble up family-owned businesses,” said Gary Plaster, who leads the family business strategy group at professional services firm Baker Tilly.

IPOs, however, are another matter. They can be expensive and they subject privately held firms to the standards of the public market, which is often less patient. “That’s a big leap to take, and it’s not that they can’t do it,” said Ryan Hurst, a partner at professional services firm RKL LLP. “But that’s a big difference when you’re used to calling the shots versus now I need to think how will the market react to it and will the market react rationally.”

Fewer Tech Companies Mean Fewer IPOs

Another factor in the dearth of heartland IPOs could be the types of companies there, said Matthew Gustafson, an associate finance professor at Penn State University’s Smeal College of Business. Manufacturers, common in the Midwest, are less exciting and tend to go public less frequently, even though they might benefit from the capital and visibility an IPO brings.

“The public market … does tend to favor certain industries with a lot of growth potential,” Gustafson said.

And while technology has shrunk the distance between people, geography still plays a role in exposing a company to potential partners, investors and employees, Gustafson said. That’s why tech companies flock to Silicon Valley: convenient access to talent, ideas and capital.

“You could make a case that because you have access to all of that before going public that there’s really less need to go public,” he said. “However, it’s probably also easier to do it.”

Marty Vanderploeg, who has taken two Iowa-based companies public, said the chief hurdle in the heartland is the lack of leaders with IPO experience, at least for tech companies. “That is the biggest gap that exists right now, that network of talent in the second half of their careers,” said Vanderploeg, CEO of Ames, Iowa-based Workiva, which sells a technology platform for regulatory compliance and reporting.

When Charlotte’s Web began mulling an IPO, visibility was not the issue, largely due to the CNN documentary and the role the Stanley brothers played in advocating for hemp, the plant from which CBD is derived. Hemp and its sister crop, cannabis, also have been perceived as high-growth industries. 

What the company needed was experienced leadership, which it found in executives with corporate and regulatory backgrounds. They included Hess Moallem, who joined Charlotte’s Web as CEO in early 2018 after a stint as a consultant. He had worked previously as general counsel and chief compliance officer for Onnit Labs, a fitness and dietary supplement startup based in Austin, Texas. 

Why Canada And The Future Of CBD

Under Moallem’s leadership, Charlotte’s Web went public in September 2018 on the Canadian Securities Exchange. The IPO raised nearly $78 million in U.S. currency. The company chose Canada because its exchanges were more familiar with cannabis companies and the legal picture there was clearer, said Joel Stanley, who had become chairman of the board.

But once that was done, it was time for leaders with different skills, said Stanley. In April 2019, the CEO job went to Deanie Elsner, an executive who had worked for a range of high-profile consumer-packaged goods companies, including Kraft Food Group and Kellogg, where she was president of the snacks business unit. She had left corporate America in October 2018 and said she was looking for what to do next.

“This is the one opportunity that I just couldn’t mentally shake,” Elsner said of Charlotte’s Web. Her role is to manage the company’s growth from scrappy startup to established player without sacrificing the vision of its founders.

Maintaining Control Of The Company

The Stanley brothers want to certify Charlotte’s Web as a B Corporation, which entails a commitment to sustainability and other social and environmental issues. And they do not want to cut corners when it comes to the quality and consistency of their CBD product, whose tagline is “the world’s most trusted hemp extract.” While they could set a lower bar to save money and still meet regulatory requirements, for example, they have insisted on keeping the bar higher, Stanley said.

“There’s nothing wrong with good businesspeople coming in and suggesting better ways,” Stanley said. “But it was important for the founders to keep our brand what it is.”

It has not been an easy path. Regulatory uncertainty and increased competition have dinged sales for Charlotte’s Web, especially through retailers. At the same time, the company has been investing heavily in its online direct-to-consumer operations, which offer a clearer view of consumer preferences. The channel is growing — it accounted for nearly two-thirds of first-quarter revenue, up from half for the same period a year ago. But the spending has cut into the bottom line. 

Charlotte’s Web also is acquiring a company called Abacus Health Products that makes CBD for topical use, a product line that Charlotte’s Web could have developed itself but chose instead to acquire, Elsner said. “It would have taken us two years probably to get there.” The deal, expected to close in the second or third quarters, is valued at around $70 million.

The science behind CBD is another area of investment for Charlotte’s Web. The company said June 9 that it has joined six other CBD brands to sponsor a study addressing FDA’s concerns about the product. The study is being conducted by a contract research firm called ValidCare LLC, which has locations in Atlanta and Denver. Earlier in the year, the company started an internal research and development lab, called CW Labs, to focus on innovation and product quality.

Competitors abound. Elsner estimated there are about 3,500 CBD brands. But she also sees potential rivals in large consumer brands, like Unilever and Nestle, which could bring CBD products to market through their existing channels. Companies focused on the medicinal and recreational marijuana market, like Canopy Growth and The Cronos Group, also could make inroads into the CBD market. Then there are the large ingredient suppliers like Archer Daniels Midland Co. and Cargill Inc.

“That’s the competition I look at every day,” she said.

Elsner, however, is confident in the long-term outlook for Charlotte’s Web and the management team she has brought on board, which includes other veterans of the CPG industry. 

“We believe Charlotte’s Web will be one of a handful of companies who will be standing at the forefront of this industry,” she said.

This story and others on New Builders Dispatch are made possible by a sponsorship from the Ewing Marion Kauffman Foundation. The Ewing Marion Kauffman Foundation is a private, nonpartisan foundation that provides access to opportunities that help people achieve financial stability, upward mobility, and economic prosperity – regardless of race, gender, or geography. The Kansas City, Mo.-based foundation uses its grantmaking, research, programs, and initiatives to support the start and growth of new businesses, a more prepared workforce, and stronger communities. For more information, visit www.kauffman.org and connect with www.twitter.com/kauffmanfdn and www.facebook.com/kauffmanfdn.