Primer
Current State:
We expect these trends to continue as cannabis requires smart capital to navigate regulatory challenges.
Upsides:
High growth, global opportunity with long term value
US cannabis market estimates are projected to be $27.2 billion by 2024. This projects all states offering medical cannabis 20 states offering adult use.
As early as 2018, the city of Aspen saw total cannabis sales eclipse alcohol sales. Many analysts believe this trend will continue in other geographical areas.
Investment opportunities
Strong opportunities to invest at the ground level with smart, well positioned companies
Variety of segments in which to invest
Variety of segments in which to invest: retail, cultivation, manufacturing/product development, extraction, ancillary services
Risks:
Legal
Cannabis remains federally illegal in the US. While that is expected to change, timing and details remain uncertain.
- Cannabis product manufacturing, wholesale, retail and ancillary services
- Market, consumer, and competitive research
- Business planning
- Brand strategy and development
- Retail strategy and development
- Organizational design and development
- Product research and development
- Licensing and franchising
Banking
FDIC insured banks cannot knowingly do business with cannabis businesses.
Business risks
- Credit
- With the number of regulations around cannabis business, they have higher chances of being put out of business overnight.
High volatility environment
- No federal protections
- Constantly changing regulations
- Extremely limited banking options
Regulations:
The key to understanding cannabis regulation is to know that it varies from state to state and from jurisdiction to jurisdiction within legalized states. It is also important to recognize that regulations in established states are constantly evolving. An example is cannabis delivery in Colorado. This was not a part of the original regulatory landscape. The state legislature created a rolling program to introduce medical delivery in January of 2020 and recreational delivery in 2021. Each municipality within the state of Colorado will determine their own delivery parameters, including whether or not it is allowed. Alternatively, delivery has long been a key part of California’s regulated model.
With cannabis being federally illegal, product cannot legally cross state lines, even for states sharing a border where both states have legal cannabis. This means all operations, from seed to scale, must happen with the originating state. Clearly this informs operations, scalability, product consistency and availability, and ultimately the customer experience.
The federal situation currently loops cannabis under 280e tax laws. Originally designed to attempt to rein in illicit king pins, this burden puts most cannabis businesses into a 60-80% tax bracket. Well designed cannabis businesses will have dynamic, informed accounting structures to optimize revenue.
Management considerations:
Cannabis continues to evolve quickly, while being an incredibly unique business case. To this end, it is important for management teams to have both deep business acumen as well as hands on experience in the cannabis space.
Ancillary Business and Plant Touching Businesses:
Ancillary businesses are especially hot for cautious investors interested in the cannabis space. Not being subject to 280e tax rules as well as being more geographically nimble, these businesses offer services, technology, equipment, and accessories to plant touching cannabis businesses.
Plant touching businesses include those who cultivate, extract, manufacture, retail, and deliver THC infused products. Ultimately, we believe the plant touching businesses will determine the customer experience and drive the best returns.
THC, CBD, and emerging cannabinoids:
Until just a few years ago, people thought cannabis equals THC. Recently CBD has entered the spotlight for its medicinal and wellness applications. Due to THC being most closely associated with the psychoactive effects of cannabis, the majority of the regulations apply to products containing more than trace amounts of this compound.
CBD can be found in a handful of mainstream retailers as of late 2019. That said, CBD products still lack FDA guidance which creates hesitancy for most retailers.
Emerging cannabinoids, such as CBN – associated with sleep – and CBG – showing antibacterial properties – need to be on the radar of scientists, cultivators, manufacturers, investors, and consumers.
Cannabis Business Segments:
Cultivation
Cultivators grow, harvest, and cure cannabis flower and periphery plant parts (primarily leaves) to be used in infused products.
Extraction
Extractors utilize cannabis plant materials to create both finished products, such as oils and smokable concentrates, as well as the active ingredients for edibles, tinctures, topicals, and other infused products.
Manufacturing
Manufacturers develop, build, produce, package and oftentimes market a variety of cannabis products from edibles to vape cartridges.
Retail
Retails build assortments, purchase and stock inventory, educate, and serve cannabis customers.