Benefits of an Investment Fund in the Cannabis Industry
It’s certainly possible for savvy individuals to navigate this avalanche of information with a lot of time and work. For others, though, an investment vehicle such as a diversified investment fund could be the key to mitigating the risks of cannabis investment.
There are tremendous opportunities to be had in the legal cannabis industry. If you’re reading this then you’ve probably seen the numbers: $2.7 billion market value in 2015 behind 74% growth in 2014 with an ancillary market that could be three times the size of the market of the plant itself. These enormous positives obviously come with some challenges, and while all investments involve some degree of risk cannabis investment definitely has some unique hurdles. How can a new investor make sense of the variance in state and local regulations (or lack thereof), 280e, and the trials of an emerging market? It’s certainly possible for savvy individuals to navigate this avalanche of information with a lot of time and work. For others, though, an investment vehicle such as a diversified investment fund could be the key to mitigating the risks of cannabis investment.
Benefits of a Fund:
Diversification
A diverse investment portfolio is important with any kind of investment. With the uncertainties and exploding competition in the cannabis industry, diversification is a necessity. Companies now are generally looking for minimum commitments anywhere between $50,000 to $200,000 so someone looking to invest $200,000, for example, will not be able to participate in enough investments to achieve real diversification. Spreading the risk among 8-12 companies would be ideal, and pooling money together in a larger funding vehicle allows for that without individually having to put up a million dollars or more.
Term Sheet Negotiation
Investors aren’t the only ones that see the opportunity in cannabis. The individual companies see the coming years as more lucrative than anyone else, and they have put in the sweat equity to prove it. Consequently their valuations often reflect a lot of potential value that can be much higher than actual current value. Individual investors – again around that $50,000 to $200,000 point – might not have the negotiating power to secure a better valuation which means their dollars would purchase less equity and/or lower return. Once again, pooling money into a larger fund creates advantages, this time in leverage. A single entity controlling a large investment amount will have more negotiating power than several smaller individuals.
Expertise/Resources
One of the things that makes the cannabis industry so potentially lucrative is that it touches so many other industries: software development, technology, agriculture, retail sales, research, etc etc. It would be very difficult for an individual to amass expertise in all of these fields along with having the financial experience to evaluate the business side of each company. Additionally laws across the nation are constantly shifting. Researching and vetting companies and keeping up with the industry is a full-time commitment, and vehicles whose principal occupation is investing in this sector exist to handle this work.
Deal Flow
There are good companies in the cannabis industry, but finding them can be like looking for a needle in a haystack. You often have to sift through hundreds of companies to find ones with the idea, the team, the experience, and the plan to make investment worthwhile. Research, going to conferences, making connections, and being a public enough face that good deals search for you is yet another enormous commitment of time and money.
Considerations of Investing in a Fund:
Management Fee
Expertise, travel, accountant fees, and legal fees are necessary expenses and with investment vehicles these costs are paid by the investors, usually in the form of either a budgeted fee or 2% of committed capital.
Decision Making Authority
In addition to the management fee, the benefits listed above come at the cost of some authority as to which companies will be selected. Individuals obviously have 100% of the decision making power with their dollars, but once money is committed to a fund some of that is ceded to the firm. This may not be a negative, however, as the investor is able to rely on the firm’s industry knowledge and expertise.
Illiquidity
Committed funds are not liquid investments. Once the capital is called it is often working – and inaccessible – for a period of three, five, eight or more years. Investors should understand this before putting money into a fund.
As mentioned earlier, individual investment is absolutely possible, and groups like the ArcView Investor Network take care of a lot of the research and deal flow legwork – for a cost. Folks with the time to commit, a large amount of money, and a larger appetite for risk are certainly able to have an impact in funding in the cannabis space. For those with interest and capital but without the time and the expertise there are already several options to help you participate in the industry without sacrificing your piece of mind.
Salveo Capital Exhibiting at Marijuana Investor Summit
Salveo Capital is attending the Marijuana Investor Summit in Denver, Colorado. Managing principal Alex Thiersch will be on hand and the company will have a booth in the exhibitor hall. Stop by booth 730.
Salveo Capital is attending the Marijuana Investor Summit in Denver, Colorado. Managing principal Alex Thiersch will be on hand and the company will have a booth in the exhibitor hall. Stop by booth 730.
The Marijuana Industry Must Lead The Way With Regulation
“Regulation” is often considered a four-letter word in business circles, but the truth of the matter is that for those of us in the marijuana industry regulation is exactly what we should be supporting. We shouldn’t be pining for a wide-open wild west where anyone can get away with anything they can imagine. We shouldn’t be afraid of codified rules. Statutes protect patients and customers, instill confidence in industry skeptics, and – paired with initiative and foresight – allow decisions to be made by those most qualified to make them. We in the industry must be at the forefront, because if we don’t allow our expertise to inform the law then politics inevitably will.
“Regulation” is often considered a four-letter word in business circles, but the truth of the matter is that for those of us in the marijuana industry regulation is exactly what we should be supporting. We shouldn’t be pining for a wide-open wild west where anyone can get away with anything they can imagine. We shouldn’t be afraid of codified rules. Statutes protect patients and customers, instill confidence in industry skeptics, and – paired with initiative and foresight – allow decisions to be made by those most qualified to make them. We in the industry must be at the forefront, because if we don’t allow our expertise to inform the law then politics inevitably will.
There are snake-oil salesmen in every lucrative marketplace, so it shouldn’t be surprising that the FDA recently issued warning letters to several makers of CBD oil, some of whose products did not even contain CBD. This type of authority to protect consumers is exactly what the industry needs, because we are still at a point where, in the public’s perception, every action reflects on every company. When products are not what they say they are, when strains are not of consistent strength, when people are taken advantage of by opportunists all cannabis businesses are affected.
When we establish ourselves as responsible, reliable, consistent operations, however, the opposite happens. People that once viewed marijuana as the arena of college students and slackers will consider participating; if not as future business partners then as future consumers. Fair, comprehensive rules mean that individual companies operating in the marijuana space are relieved of the burden of reshaping the plant’s image alone. It creates an institutional infrastructure that assures the public that we as an industry are looking out for their well-being.
The result of dragging our heels on oversight is a set of laws based on fear, prominence of old ideas, and ultimately over-regulation. In many of the states with the most recent medical marijuana laws the operating rules are incredibly strict, severely limiting not only who can have access to medicine (approved illness lists have been shrinking in each new state), how many businesses are allowed to operate (number of issued licenses at launch have been shrinking as well), and how patients can consume (several laws stipulate extract- or edible-only), but even how many individual strains are allowed to be grown.
Where marijuana is legal – both for medical and adult use – we must set examples for what a properly regulated industry looks like. We must establish high standards and work with lawmakers to create structures that will make sure every business that wants to work in this space meets those standards.
Colorado has been paving the way in this respect, and Salveo Capital’s senior industry expert Elan Nelson is an active participant in that state’s Marijuana Industry Group. She and MIG have worked to advance consumer safety and industry regulation, testifying on child-safe packaging and comprehensive tax rules among other things, and many states are looking to emulate Colorado’s policies from lab testing to doctor-patient prescription rules. If the rest of the industry shows same level of responsibility then we improve the situation for our customers, our patients, ourselves, and all future states whose legal markets are still finding their way.
We have the opportunity to let science and experience shape the regulatory structure of our industry. All we have to do is take the lead.
Legal Marijuana's Biggest Growth Is Still To Come
The legal marijuana industry is already the fastest growing industry in the United States. The revenue projections from both the growing and selling of cannabis, and from the ancillary industry, are truly staggering, and even conservative projections predict that the legal marijuana industry will be valued in the tens of billions of dollars within the next five years.
The truth, however, is that this industry’s potential, even when compared to some of the great industry explosions in history, is undervalued. Although the “gold rush” and “oil boom” are commonly referenced as comparative markets, none of those industries currently match the immediate growth potential of the legal marijuana market. Given the convergence of medical marijuana, recreational marijuana, and technology we haven’t scratched the surface of how large this “green boom” is going to be.
The legal marijuana industry is already the fastest growing industry in the United States. The revenue projections from both the growing and selling of cannabis, and from the ancillary industry, are truly staggering, and even conservative projections predict that the legal marijuana industry will be valued in the tens of billions of dollars within the next five years.
The truth, however, is that this industry’s potential, even when compared to some of the great industry explosions in history, is undervalued. Although the “gold rush” and “oil boom” are commonly referenced as comparative markets, none of those industries currently match the immediate growth potential of the legal marijuana market. Given the convergence of medical marijuana, recreational marijuana, and technology we haven’t scratched the surface of how large this “green boom” is going to be.
Consider these facts.
One: Legal cannabis is headed in two different directions, each with the potential to be multi-billion dollar industries. Comparisons to alcohol after Prohibition forget that, unlike alcohol, marijuana has very real application in medicine. Pharmaceutical companies are already preparing for the inevitable consolidation that will take place once the federal prohibition on marijuana is lifted. The amount of money that will be made from the medical side of cannabis – research and development of new strains and treatments, new delivery mechanisms, extractions of certain components – might very well dwarf the amount of money made from the regulated adult use market.
And adult use will be a massive market. In 2014 legal marijuana sales in Colorado doubled in the first year of expansion from medical-only to full adult use. It is possible, if not likely, that marijuana will be fully legalized throughout the entire west coast by the end of 2016. California and Nevada are almost certainly passing such bills in 2016, with states like Arizona, New Mexico, and Montana considering laws as well. On the east coast, Vermont, Rhode Island, and Maine will have full legalization bills on the books in the next two years with much of the rest of the northeast corridor following suit soon after.
Two: The federal prohibition on marijuana is ending much quicker than even the most ardent supporters anticipated. Rand Paul, who yesterday announced his candidacy for President of the United States, is the sponsor of a bill to legalize medical marijuana. This makes the legalization of cannabis a legitimate election issue, and not one that a viable candidate can readily oppose. Not when swing states like Ohio, Pennsylvania, and Florida are set to pass comprehensive cannabis laws, and a recent Quinnipiac poll in these states showed over 75% support for medical marijuana. Several other swing states – Colorado, Nevada, Washington – already have recreational or medical laws on the books, and even Ted Cruz and Jeb Bush have both stated that they would not interfere with state marijuana programs.
Three: Underlying both the recreational and medical marijuana markets is the fast-growing ancillary and technology market. This market (often referred to as the “pick and shovel” market) is growing just as quickly as marijuana itself. As state laws are passed and prohibition is lifted, new startups are working quickly to fill the vast infrastructure gap left by marijuana’s former illegal status. These firms are offering cutting edge solutions in a landscape with no entrenched leaders, and together these they could develop into yet another billion-dollar industry.
The legal marijuana market grew by an astounding 74% in 2014, and with legal expansion on the way in many parts of the country that growth is likely to continue. We are receiving funding requests from every imaginable sector – cultivation centers and dispensaries, research labs, pharmaceutical companies, software developers, and the like – as entrepreneurs pair with established business professionals to capitalize on the astonishing opportunity the legal marijuana market presents. In the industry we like to talk about the boom of recent years as a “green rush” but the coming months will show that we haven’t seen anything yet.