“It’s interesting, but I think I’ll leave the checkbook at home for a while.”—Professional money manager commenting on investing in the legal cannabis industry
With the advent of a handful of states introducing legalized recreational marijuana, in addition to the 23 states that recognize medical marijuana, the legal cannabis industry has seen significant growth over the past two years. This has created an interesting new frontier market, and has captured the attention of professional investors who like to be the first movers – or at least the early adopters. However, if business owners—both existing and aspiring—want to attract and keep the interest, not to mention the dollars of professional investors, the industry is going to have to grow up.
Manageable vs. Unmanageable Risks
Professional investors don’t like to leave risk on the table, and the biggest risk facing cannabis is that it remains federally illegal. This is the biggest objection of “big money” investors. Until the US federal government either de-criminalizes or legalizes marijuana, many investors will choose to sit on the sidelines, regardless of how much money there is to be made.
Lack of a proper banking system, and the largely cash business is another risk that sidelines many investors. This is an offshoot of the federal legalization issue, which will likely will go away of its own accord with a change in federal regulation.
Other than actively lobbying, there is precious little the average cannabis entrepreneur can do to manage the “federally illegal” risk, but there is much that can be done to take business risks off the table and increase the chances for an allocation.
Taking Risk Off the Table
For the entrepreneur who wants to capture and keep the minds and wallets of professional investors, there are a few things they can do.
First, produce a flexible business plan that shows multiple scenarios and paths to profitability. Frontier markets, by their very nature, contain a lot of variables. Take the time to think through possible scenarios, such as the failure of the federal government to take any action. Can your company thrive in just one state? Are there natural applications to other industries (child-resistant packaging, for example, reaches far beyond cannabis) that would generate revenue?
Investors need to understand that you’ve thought through the possible scenarios and are capable of adapting quickly to changing conditions. Although interstate commerce currently is illegal, how would you manage your company’s growth if that were to suddenly change? Knowing that you have planned for now and for multiple potential futures will increase your chances of an investment.
Second, build a strong management team that balances successful business experience with cannabis experience. Because this is a nascent industry, it is difficult to find both of these skills in one person. Balance your team and be prepared for background checks. This may be a frontier market and it may be marijuana, but that isn’t going to make professional investors tolerant of felony convictions.
Third, build a culture of compliance right from the start. Standardization and proof of process are significant now, with seed-to-sale tracking a crucial part of cultivators’ and dispensaries’ businesses. The need for compliance and documentation will increase dramatically as more governmental agencies become involved. Entrepreneurs who demonstrate a culture of compliance from Day One will provide investors with a higher level of comfort and thus increase chances of an allocation.
Wall Street vs. The Weedies
Finally, “Mind the gap!” There’s a cultural gap between professional investors and some cannabis entrepreneurs, many of whom have been cultivating their “art” long before it became legal. There’s a gap that needs to be bridged and a synergy here that needs to be fostered. Both sides need to work together, as the professional investor can offer business experience, as well as cash investments. Many cannabis entrepreneurs bring years of experience and an understanding of the plant to the table. There is much to be gained on both sides. There is nothing to be gained by the entrepreneur who decides to “flip off The Man” and flagrantly disregard the rules.
Much needs to happen to bring the professional investors and their checkbooks to the table in a big way, but the good news is that the industry is growing up and money is coming in. More states are willing to put recreational cannabis on the ballot and if Canada and Mexico legalize, it will put further pressure on the U.S. federal government to act sooner rather than later.
By Kristin Fox, Editor-in-Chief of MJIC Media LLC, which owns and operates the leading properties in the emerging legal cannabis industry, including the Marijuana Index, which tracks and reports on publicly traded cannabis-related equities; Marijuana Investor News, the premier news agency covering the industry; Marijuana Investor Summit, a premium conference provider and industry educator; and Cannabis Trader, the go-to source for cannabis investment education and stock information. Ms. Fox may be reached at firstname.lastname@example.org
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