Fundraising at the Top of a Market Cycle

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.

1.      The cannabis industry has some of the strongest tailwinds of any industry in the world today. Arcview & BDS Analytics estimate that the legal industry will continue to grow at a ~26% CAGR from 2017 to 2022. So even if a recession wipes out one third of that growth, the industry as a whole would continue to grow at a healthy 17% CAGR.

2.      Cannabis, like consumer staples, alcohol, and tobacco, will likely show resilient levels of volume demanded in a recession, albeit with a shift in consumer preference towards lower price-point products.

3.      Venture capital fund commitments last the duration of the fund’s investment period, typically three to five years. Thus, in the event of a near-term correction, funds will be able to deploy capital at a time when most investors are fleeing the market, in turn allowing them to drive investor-friendly terms and valuations.

4.      Government budgets are stretched tighter in a recession, so there’s more legislative incentive to legalize adult use marijuana and generate additional tax revenues.

Of course, investors could always choose to hold their capital today in low-risk, low-yield asset classes like cash and bonds while waiting for a market correction to happen. The problem is that while we are in the tenth year of a bull market, no one knows with certainty when that correction will occur. And to quote the legendary investor Peter Lynch, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”.