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.
“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.
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.