Feature by Tom Quigley
Did you know that the legal cannabis industry is currently 9 billion dollars and expected to grow to over 24 billion in the next few years? There are over 30 states which have medical cannabis businesses, 9 with adult use and additional state legalization on the table in the upcoming elections. Some predictions estimate we may see full federal legalization by 2019.
These changes in laws have created opportunities for investors to find early stage companies which are developing solutions for the scaling, management, and operations of this industry. Investors are finding these companies before they are acquired or go IPO, and some mergers and acquisitions have already begun in the space.
I am asked all the time by friends how they can be involved or invest in these opportunities. So, I decided to break down what is available.
New businesses are providing the services to the cannabis industry like trash removal, security systems, build out, marketing, education, testing, corporate training, payroll processing, compliance, ancillary products for use, analytics, branding, sales, tours, entertainment, and media. The list goes on and on!
These types of ventures are currently being funded by angel investors, accelerators, VC funds, and some through the public markets.
Angel investing involves capital investments by accredited investors (people with a net worth of $1 million or more excluding the value of their primary residence, or with income of $200,000 or more per year/ $300,000 for a married couple). These investments are in startups, usually with less than $1 million in revenue and less than five years old. These startups have high growth potential and angel investors look to invest in companies that have a believable plan to be able to return 10X their investment or more within five years.
The ArcView network is a membership group of investors which hold approximately 5 live events per year. They structure it like “Shark Tank” where companies pitch on stage and are rated by the investors. This is one way investors are locating new companies or participating in private offerings.
Business accelerators like CanopyBoulder invest in early-stage startups in the cannabis industry and provide them with additional resources. This is similar to how tech startups launch, validate and fund their pre-seed and seed rounds. They raise money through a fund and then deploy into new companies. Since 2015 CanopyBoulder specifically has helped 80 companies go from idea to funding with initial seed capital and follow-on investments.
Venture capital funds are investment funds that manage the money of investors who seek private equity stakes in startup and small- to medium-sized enterprises with strong growth potential. These investments are generally characterized as high- risk/high-return opportunities. In the past, venture capital investments were only accessible to professional venture capitalists, although now accredited investors have a greater ability to take part in venture capital investments. The cannabis space has had numerous funds start over the last 5 years. These funds include CanopyVentures, Phyto Partners, and Privateer Holdings to name a few.
A majority of the cannabis stocks are over the counter (OTC). These companies have either reverse merged with an existing listing or IPO. This allows for anyone to purchase equity through shares.
Investing in these takes a lot of research, many are not reporting and the price per share is inflated due to the hype, press releases and pending regulations inflating their fair value. There is money to be made by diligent investors, however, there is also a risk. Advisory services like Technical420 and Marijuanastocks.com track these companies and research their fundamentals.
Most recently 2 companies made headlines with over billion-dollar valuations on the Canadian market, MedMen $MMEN and The Green Organic Dutchman $TGOD both raised capital through private offerings initially prior to being listed.
In summary, the cannabis industry is full of creative, innovative opportunities for both investors and founders. Currently, there are potentially billions of dollars sitting on the sidelines unable to invest in the industry due to regulations and unclear legalities. This presents an opportunity to the early investors; however, these opportunities do come with risk. My advice to anyone is to do your homework, research and understand not only the legalities of the industry but the companies and individuals involved. Historically there are more failures than successes in startup companies, however, the rewards of finding the next billion-dollar unicorn do exist.