The rising tide of cannabis reform has led to an explosion of industry. Legal cannabis sales have grown from c. $3.4bn in 2014 to c. 10.9bn in 2018, creating tremendous wealth for entrepreneurs and investors. Legal cannabis now accounts for about 120-150 thousand jobs, and that only considers plant-touching businesses. While we in the industry tend to wear optimist hats and focus on the positive changes, not enough discussion has focused on an area of legislative reform that continues to lag woefully behind: social justice.
Cannabis Reform Today
Cannabis legislative reform continues to show great traction. Within the last year:
Oklahoma legalized medical cannabis (Jun-2018);
Epidolex became the first cannabis-derived medicine to be approved by the FDA and subsequently rescheduled by the DEA (Sep-2018);
Canada became the first G7 nation to legalize adult-use cannabis federally (Oct-2018);
Michigan legalized adult-use cannabis, and Utah & Missouri legalized medical cannabis (Nov-2018);
The excitement around investing in cannabis is obvious and undeniable. It shows up in headlines on a daily basis, and investors agree that the time to get involved is before federal legalization normalizes returns, not after. But when will that be? Most will readily say that legalization is going to happen, but very few can tell how or when it will happen. Still fewer can coherently explain the confused, fractured legal status of cannabis at the state level or the many nuanced ways cannabis could experience a de facto legalization that would stimulate huge growth in related capital markets. In this article we outline the myriad political pathways cannabis could take towards legalization, and just how soon it could happen.
In the late 1990s, hot tech stocks achieved massive valuations that look ludicrous today with the benefit of hindsight. Companies like eToys, WebVan, and Pets.com achieved respective market caps of $10.3bn, $10.9bn and $369m despite never exceeding cumulative net sales of $364mn, $271mn, and $34mn. Those valuations came crashing down starting in March 2000 when the bubble burst (all three subsequently filed for bankruptcy).
“Taking a company public” (a term used to describe a private company’s first issuance of stock on a public exchange) can be a long, complicated, and expensive process. In the case of cannabis companies—which often struggle to access private capital—many management teams have chosen to go public at a much earlier stage than would be considered normal for their counterparts in more established industries.
One of the most important and frequently misunderstood distinctions in the cannabis industry is that of hemp vs. marijuana. Semantically, hemp refers to cannabis bred for a variety of commercial items & industrial uses, including paper, clothing, biodegradable plastics and biofuel. Marijuana, on the other hand, is a slang term describing cannabis strains bred for the potent, resinous glands that grow on the flowers and leaves.
With the flood of recent news surrounding traditional companies entering the cannabis industry, such as Constellations Brands’ investment in cannabis cultivator Canopy Growth, Coke’s interest in producing CBD-infused drinks (or not), or Altria’s pursuit of cannabis cultivator Cronos Group, one surprising lack of news has come from Silicon Valley.
One of the most common questions we get from potential investors is about our bearish attitude towards investing in cannabis retail operations. Our response is that while many entrepreneurs and investors have successfully created shareholder value by opening dispensaries, the majority of that value can be attributed to the scarce number of licenses issued by local governments.
In venture capital, fundraising and deploying capital is difficult in any environment, and one of the most important (and uncontrollable) drivers of fund returns is market timing. This raises the question, is the tenth year of a bull market really the right time to be raising a cannabis-focused VC fund? Our view is that from a relative value perspective, in the event of a market correction in the next few years, cannabis VC offers one of the most attractive sectors for risk-adjusted return.