So, you’ve seen the news about the emerging cannabis industry. Estimated to be a $25B industry in North America by 2021 and achieve a compound annual growth rate of 30%, its a generational wealth opportunity on par with the oil boom, the gold rush and the dot com era. Investing now, when prohibition and novelty is still keeping valuations low, is a no-brainer.
But, while its not hard to see the opportunity, it’s not quite as easy to choose the best way to go about it. Not only is the industry brand new, meaning even the most seasoned investor is unfamiliar with the ins and out, but it’s also still in a bit of a limbo.
When investing, there are two choices: Go it alone and make a direct investment into a cannabis business or choose to invest into a fund. There are pros and cons of each, but we won’t get into that today. Instead, we want to provide investors interested in a direct investment some words of advice as they begin the long process.
At CanopyBoulder, we run a venture fund that invests directly into cannabis businesses and offers investors a easy, no-hassle way of getting in on diversified and professional investments. Since 2014, we’ve made over 110 investments, creating aggregate company valuations of $200M. Unfortunately, what we’ve found combing through hundreds of deals is that the odds are good, but often, the goods are odd. That’s why we’ve put together a guide to getting yourself up to speed in order to avoid the lemons and cash in on the green rush.
Do you know what you’re looking for?
Before getting too far down the cannabis investment rabbit hole, start with the basics of what you’re looking to do. This will save you days of entertaining anything and everything.
You need to understand where you want to invest and why. Do you know if the US or Canada is a better bet for you? What sectors are you interested in? Are you looking to public markets, real-estate, ancillary companies or plant-touching businesses? Within each vertical, its important to understand the difference areas and which are most profitable - is it retail, cultivation, hardware, tech, data, media, etc? Understanding the nuances between these and how ever-changing regulations affect each vertical and market now and going into the future is key.
Also, consider your goals and how to achieve them. Which investment instruments make the most sense for the verticals you’re interested in? Debt is often a better bet for plant-touching businesses as valuations are kept low and they need working capital. Or, perhaps you split the difference with a SAFE or convertible note? Think as well about what kind of return are you expecting and when. Do you know which verticals are most likely to give you those returns? Look into things like the banking hurdles and 280e tax codes that affect many cannabis businesses.
Finally, think about what you can realistically do and how each of these deals fit into your overall investment strategy and portfolio. How much capital do you want to deploy? What’s your timing on when you’d like to deploy and when you expect a return? What percentage of your portfolio do you want to invest in ancillary vs. plant-touching vs. real estate vs. outside industry deals?
Volume, volume, volume
You know that saying: “There are a lot of fish in the sea”? Well, you know what else there is a lot of in the sea? Garbage. This seems to be true for the cannabis industry as well. Every year, we review hundreds of deals and, as you can imagine, throw the vast majority out. The reason we’ve been able to succeed as we have is because we take the time to really search for those shining diamonds. Because, let me tell you, there is an awful lot of noise. So, our best advice when looking through deals is to consider as many as possible in order to find the right one for your portfolio.
You might be catching a trend on this - a lot of time and effort. After narrowing down some deals, make sure you’re conducting due diligence in a way that will be most effective. Start by defining a distinct process for evaluating deals. Ideally, include a quantitative aspect into your process. We’ve found that giving weights to the areas most important to us and then judging deals on a scale of 1-5 give us a really good understanding of how they stack up against each other.
Due-diligence is also the time to look at things that indicate the potential of the business. Some of the areas we focus on during our extended due-diligence are the business’ target attainable market size, the current traction or progress, the quality of the team, the timing of that business in the industry and what that means for our investment (will this business be obsolete in a few months?), and finally, the actual concept.
Research the nuances
The good news is the industry is young and regulations are relatively straight-forward. It’s not that hard to read the laws and understand what’s expected in each market. The bad news is regulations change quickly and constantly so all that research goes out the window as fast as you can get it done. But, you have to start somewhere. Begin with the basics - learning about the different markets, what regulations exist in those markets, how they differ, how they impact business and how they shape opportunities or create threats. Once you have a baseline of understanding, read the cannabis news as much as you can (subscribe to our newsletter for investor-related cannabis news!). It’s really important to understand where and how you should be investing for maximum return.
Also, check out our podcast episode on the 10 questions investors should know the answers to before investing.
Ask for help when you need it
Part of the growing pains of a new industry is that few people really have their fingers on the pulse. Currently in cannabis, there are not many who can answer questions like how good of a concept a business has in the space and what the timing of the industry means for said concept or how likely a Justice Department crackdown is. To understand those intricacies, investors have to be extremely familiar with this brand new industry. If that’s not you yet, that’s okay because there are people out there who have that knowledge - be it industry professionals, entrepreneurs or even fund managers *cough, cough, CanopyBoulder*. Find them.
This one isn’t as helpful, unfortunately. But, it’s true. The cannabis industry adds a whole new layer of complexity to investing. All the nuances and changing regulations can make it seem like a lot. I wouldn’t recommend anyone trying to learn how to vet investments for the first time in such an odd and complicated space. Sure, you can do it. You can do whatever you want. But to best set yourself up for success, maybe a direct cannabis investment isn’t the place to cut your teeth. There are plenty of other opportunities out there to get involved with cannabis without all the research, effort and time that direct investments require.
If you’re interested in learning about some of those alternatives, check out a fund: