The amount of capital flowing into the cannabis industry is growing. According to one cannabis research firm, over $3.2 billion worth of capital entered the industry in 2017 — a significant increase from the $1.1 billion of investment in 2016. Despite the many risks associated with the budding industry, one thing is certain: 2018 will be an even bigger year for cannabis investment.
Cannabis became legal for adult-use in California at the start of 2018. Vermont recently legalized and New Jersey, a potential billion dollar a year market, is expected to adopt adult use legislation soon. Analysts are estimating that the California market alone will generate over $5 billion per year, and yet core challenges like access to banking and tax restrictions are still ever present for cannabis entrepreneurs. The industry is far from mature — although consumer demand is VERY well established and rapidly expanding. Thus, there is still ample opportunity for investors to realize ROI. So how does one invest?
Cryptocurrency and Cannabis Blockchain
It seems like the only thing booming more than cannabis these days is cryptocurrency. Although there have been attempts — hempcoin, potcoin and dopecoin, among others — to combine the two, there has yet to emerge any crypto which has captured significant industry adoption. Cannabis businesses are disenfranchised from financial institutions and operate in an all-cash market — a huge challenge for a rapidly scaling industry and one that blockchain technology can alleviate.
Publicly Traded Equity
If you’d have asked me about publicly traded cannabis equities 18 months ago, I’d have told you they’re complete scams and to avoid them entirely. Although this is still true for the vast majority of publicly traded marijuana stocks, there are now multiple legitimate businesses on the market. Specifically, there are Canadian companies that are legally producing and distributing cannabis at scale. There are also biotech firms working to develop, patent, and market cannabis-derived pharmaceuticals.
Unless you have day trading experience and a deep understanding of cannabis business, you should think very carefully before investing in any OTC marijuana stocks. There is no shortage of hustlers who are willing to defraud investors.
As a result of the JOBS Act, companies can now raise up to $50 million under Regulation A+ and up to $1 million under Regulation CF from the general public. Equity crowdfunding is a great vehicle for cannabis entrepreneurs.
Private Equity and Cannabis Hedge Funds
There are more cannabis-focused funds and investor groups being formed every quarter. Several institutional funds and family offices are creating subsidiaries to explore the emerging industry, though many are still cautious to associate their names with a federally illegal substance.
Due to the challenges associated with funding cannabis ventures, lenders are able to command higher interest rates in cannabis. It is not uncommon to see investors earning 15 to 30 percent and more on short-term debt. Cannabis businesses — especially those that are scaling — often need working capital, and savvy entrepreneurs prefer to issue debt rather than diluting their equity. As with any investment, close attention must be paid to deal structure, terms and the underlying business financials. Most cannabis debt investors collateralize their loans against real estate, machinery equipment, intellectual property or state-issued cannabis licenses.
Marijuana as Impact Investing
For all the enthusiasm behind impact investing, there are still limited investment opportunities that have the potential to deliver both strong financial returns and social returns. It’s even harder to find an impact investment that offers enough capacity (i.e., demand for capital) to justify writing an eight- or nine-figure check without sacrificing returns. Cannabis is one of the few industries that checks all three boxes.
Perhaps the greatest challenge for beginner cannabis investors is gaining access to deal flow. After that hurdle, they must acquire the cannabis knowledge to adequately evaluate risks.
The two cannabis investments I recommend most frequently to those without industry knowledge are education and activism. The downside is limited only to how much time you invest. The upside potential, however, includes expanding the industry into new markets, reversing the cannabis stigma, repairing the communities damaged by prohibition, and facilitating policy reform that will have transformational implications for society.
Mike Zaytsev is a Leadership Coach with an extensive network of entrepreneurs in all verticals of the Cannabis industry. He’s also the Founder of HighNY.