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The second half of 2019 saw a punishing devaluation of the publicly traded cannabis companies with drops of 60% or more after failures to meet performance expectations 1 . I hadn’t predicted it, but I had listened intently at the various canna-business conferences in 2018 and early 2019 as alternate predictions were made that the days of early stage and emerging cannabis companies were coming to an end 2 – they simply wouldn’t be able to survive the cash power and marketing prowess of the large players – and nodded my head I didn’t believe it. I understood the thinking: at the time multi-national tobacco and beer companies had recently made multi-billion dollar commitments in the industry 3 , and publicly traded companies were using their stock price to acquire across categories of the sector from seed to sale. So the predictions of demise for early stage companies seemed well reasoned. Still, I wasn’t onboard. Experience has taught me entrepreneurs, and their small and emerging companies, are the lifeblood of almost every business sector for the simple reason that bigger companies rarely innovate 4 . They’re too busy making what’s currently selling, while small companies have to innovate to compete.
$36.7 – $44.7 billion in 2019, and projected
As I said at the top, small companies are where innovation happens. In cannabis, whether it is meaningful applications in health and wellness, new genetics in flower, or the next generation inhalation device, it’s happening at companies that need to raise early rounds. Also as stated earlier, valuations have met reality, which means a lower cost basis, equating to greater potential returns. Lastly, the legacy of the industry, a hardscrabble history, has trained its entrepreneurs to withstand crisis. The operators know running a cannabis business can be hard, and aren’t surprised by a finicky crop, or a nonsensical licensing requirement, or just about anything – they’ve seen it. What they are is innovative and resilient, big words for smart and tough. I find some of them well worth betting on.
The unknowns are which existing CPG players will enter the space and who will win. Beyond the beer (Constellation Brands) and tobacco (Altria Group and Imperial Brands) companies already in, big pharma, beauty, and supplements have all signaled interest. On a more immediate basis, while it’s easy to identify the publicly traded cannabis companies and MSOs in trouble, it’s more difficult to identify which of the current leaders are ultimately going to be the winning consolidators. Given these unknowns for the top players, I like early stage and emerging companies for investment, where their immediate future is more predictable, and the potential exists for creating traditional CPG value towards acquisition.
Before getting to the company sizes that capture my attention in cannabis because they have a dedicated singular focus (they have to), these are my assumptions about the cannabis marketplace, which are generally held by the industry at large.