Investing in North American cultivation assets at the end of 2018 is like trying to profit off the end of alcohol prohibition by buying a hops farm. Sure there’s some money to be made; but price compression is about to eviscerate cultivation profits, and besides, no major alcohol company grows its own hops and barley, said Narbe Alexandrian, vice-president of business development at Canopy Rivers Inc.
The great Canadian LP investment of 2014 through early 2018 has mostly run its course, with a wave of new licenses reducing scarcity premiums and increasing competition. There are still plenty of investment opportunities, Mr. Alexandrian told a room gathered at the MJBizCon trade show in Las Vegas last week, but these are on the ancillary side of the industry: data companies; edibles producers; research hubs; and brand houses.
Canopy Rivers – as what amounts to the venture capital arm of Canopy Growth Corp. – sees hundreds of pitches, Mr. Alexandrian said. His advice to people seeking VC funding: "Stop talking cultivation in North America if you’re going to start brand new. Tell me about what are the brands you want to develop and how your marketing strategy different than anybody else out there, because you brought someone on board that comes from an agency or comes from fashion or a CPG company or something like that.”
Intense focus by both the media and retail investors on the several dozen publicly traded cannabis companies is obscuring a much broader range of opportunities. Here are some of the trends he’s watching:
- Data companies: "There's shortage of reliable data in the market right now; a lot of companies, a lot of CPG companies, are shooting from the hip without even thinking about what [data] they're actually building off of."
- Online B2B platforms: "There’s hundreds if not thousands of dispensaries out there in North America, there’s hundreds if not thousands of brands out there in North America, how do you connect the two?”
- Differentiated edibles: "Maybe it's an upscale chocolate bar that's worth $35 per square, and they’re marketing it and developing it for distribution through very affluent markets, maybe a high-end department store or a high-end retailer.
- Vape technology: "This is probably one of the areas where we get the most deal flow… You look at regions like Colorado where dry flower has decreased and the amount of vaporizer use has increased... Pax has fantastic valuation, the Juul valuation on the e-cigarette side was phenomenal at billions and billions of dollars.”
- International cultivation: “You look at somewhere like Italy or France or Spain, Portugal or Greece, these are countries that are very interested in legalization...In those regions there’s very big scarcity in the number of licenses. In Italy, for example, there’s about five licenses that’s going to be given out to THC cultivators for greenhouse development.”
The investment space is still surprisingly open for mid-sized VC firms, Mr. Alexandrian added. There are a fair number of high net worth angel investors willing to put $100,000 into an early stage company, and an increasing number of hedge funds taking bought deals worth tens of millions of dollars, only to sell their positions to eager retail investors shortly after.
“But there’s not many players out there that want to put in $5-million and want to ride that investment for 10 years because they believe in the future of cannabis,” Mr. Alexandrian said.
These traditional VC players are largely constrained because the most compelling investment opportunities are in the U.S., where cannabis remains federally illegal. That will change with federal reform, Mr. Alexandrian said – perhaps due to the passage of the STATES Act, which would prevent certain federal cannabis laws from applying to states that have legalized cannabis.
Even with this caveat, venture-capital deals are getting bigger. In 2016 the median investment in a private cannabis company was around US$1-million, said Mr. Alexandrian. By 2018 the median investment had risen to US$4 million.
"The first half of 2018 is trending higher than all of 2017 in total. 2018 is expected to be the largest year in cannabis VC investment, with US$758 million of total deals to be done, estimated, through 206 deals,” Mr. Alexandrian said.
Mark Rendell