LUXURY wellness and CBD brand OTO is the first cannabis-based company in the UK to be funded by taxpayer money and part-owned by the British government.
This follows investment from the Future Fund, a financial initiative launched by the government alongside the British Business Bank during the early months of the pandemic last year.
Its goal was to offer ‘innovative’ UK companies – in the early stages of their financial lives Convertible Loan Agreements – enabling them to bridge the pandemic until investors were once again willing to commit their cash to new businesses.
As a company with feet firmly in both the retail and hospitality sectors, OTO faced exposure on numerous fronts just six months after it started trading.
£250,000 Pandemic Boost
“No one knew at that stage how long we’d be locked down or what the future might look like,” OTO’s co-founder and chief executive James Bagley told BusinessCann.
“The government launched the Future Fund which essentially said, this is like a convertible loan. If your existing investors are putting X forward ‘we will match that investment’… and at your next fundraise that would convert to equity or you pay us back. And so we took advantage of that scheme.”
After raising just over £125,000 from existing private shareholders, OTO managed to attain a quarter of a million pounds in funding to see it through the pandemic.
Ahead of its series A funding, which is currently underway, OTO launched a further far more substantial £1.45m funding round at the start of this year.
“And so at that point, the future fund loan also converted and amazingly, the government became an investor on our cap table on a cannabis-related business. An interesting kind of quirk of Covid,” he added.
Package Helps Create Jobs
This investment has allowed OTO to increase its workforce from eight employees based solely in the UK, to around 30 people operating in the UK, Japan, Hong Kong, Spain and the US.
Does the fact that the government is willing to invest in a cannabis-based company represent a major milestone in the shifting of public perception?
While it is certainly a positive step forward, Mr Bagley believes it won’t be long until the sector must endure another step back.
He explained: “I’ve also learned over time that in this industry, it tends to be a case of two steps forward one step back. I’m not sure how actively they were looking at the investments they were making, so long as they hit the criteria or the thresholds.”
Investors may view this differently however. With the government looking over the shoulders of the companies it’s invested in, there is a certain assumed guarantee of financial transparency, stability and good governance.
Aside from the cash itself, Mr Bagley believes this is the most positive thing to come from the investment.
“The early governance that the Future Fund or the government being a shareholder on your cap table brings I think is really, really positive for us in terms of making sure we’ve got good governance, and we’re in a good position,” he continued.
“And also, if I was an external investor I think it adds whatever you’d call it, validity? Confidence that there’s a certain level of good governance underway and in place in this business.”
Established in 2018
Mr Bagley co-founded OTO in 2018 with his wife and OTO creative director Gemma Colao, after establishing himself in the luxury sector with drinks retailer DMD Ventures, where he acted as chief executive for nearly three years.
Prior to launching OTO, he also co-founded and funded California’s first legal online dispensary Big Moon Sky.
OTO began trading in September 2019 and Mr Bagley says its core philosophy is founded on maintaining a gold-standard of ‘quality, efficacy and consumer trust’ in the industry in an effort to tackle ‘scepticism around what CBD is and what it can do’.
OTO was one of the first CBD brands to be stocked in luxury retailers including Selfridges, Harrods, Fortnum & Mason and John Lewis.
The brand’s vision to help create a legitimate UK CBD industry which sees it support the UK Food Standards Agency’s (FSA) controversial Novel Food compliance legislation.
Novel Food Support
While the goal of the FSA is to clean up the UK’s eclectic CBD market, it has left hundreds of companies in a regulatory limbo as it deals with a huge backlog of ‘complex applications’, including OTO.
After the deadline for Novel Food compliance applications passed in March this year, any manufacturers still waiting to hear if their products have been validated are unable to launch any new ‘ingestible’ products.
Though OTO had CBD ingestible products on the market before February 13, 2020, meaning they are allowed to ‘stay on the market until a decision on their authorisation has been made’, the hold-up has forced it to focus on alternatives.
Mr Bagley explained: “Like so many other brands and businesses’ Novel Foods applications were awaiting validation.
“We have launched new products, but not not new ingestibles. One might view it as holding up innovation in the space. However, I guess that is just part of the process. It has not stopped us from innovating.”
Instead, OTO has brought a number of products outside of the ingestibles space, such as in beauty, lifestyle and spa treatments, to market while it waits on a decision from the FSA.
It has also brought a number of ingestible products with “slightly different blends of botanicals or flavours” to foreign markets like Japan, Hong Kong, and the US.
Despite the obvious frustrations with the Novel Foods timeline, Mr Bagley believes that overall it will be a hugely positive development for the sector.
“It’s created some confusion or hesitation in the industry and certainly amongst businesses and retailers, grocers and places like that, that are waiting until there’s more clarity around novel foods in that space,” he continued.
“And so that has perhaps held things back. But ultimately over time that will be positive. I think ultimately, what’s going on there is something that has the potential for real positive consumer impact and hopefully positive industry impact.”
An HM Treasury spokesperson said: “The Future Fund has helped nearly 1,200 firms of all shapes and sizes across the country, from digital tech to life sciences, to get through the pandemic by stimulating investment.
“The Fund used a set of standard terms with published eligibility criteria including a minimum prior raise of £250,000, independent of ministers. This was a clear, efficient way to make funding available as widely as possible, irrespective of location.”
Stephen Murphy, CEO of Prohibition Partners, sees a certain irony in the Government supporting a CBD company whilst at the same its quango – the FSA – is unable to adequately establish a regulated industry.
“Months after the deadline has passed for the publication of the Novel Food Public List the industry is still waiting for the FSA to deliver on its promises, yet at the same time the Treasury is taking a stake in a CBD company. It seems like a case of the right hand not knowing what the left hand is doing,” he said.
Main Image: OTO Founders – Gemma Colao and James Bagley – with OTO CBD Selfridges Window Display – (Image: Geoff Moore)