Guest post by Chris Ganan, Chief Strategy Officer at MedMen
The numbers are impressive, and familiar to many who follow the U.S. cannabis industry: Triple digit growth in recreational marijuana sales in recent years and predictions of more than $50 billion in total annual sales within the next decade. The recent passage of recreational marijuana in California, Nevada, Massachusetts and Maine, and new medical marijuana laws in Florida, Arkansas and North Dakota have served only to solidify those predictions. This is by far the fastest growing industry in the U.S. today.
Naturally, there has been a lot of investor interest in the space. From an investment perspective, the federal ban actually creates significant opportunities since it limits options for traditional financing. Given the large addressable market and the general lack of liquidity, much has been written about the “Green Rush.” It is easy to get caught up in the novelty of it all. But here’s a newsflash; the cannabis industry is governed by the same fundamentals that govern every other industry.
Knowledge is still power, and it boils down to evaluating and mitigating risk. The regulatory environment is highly fragmented and rapidly evolving, while the underlying business is operationally intensive. Understanding the various layers is key for investors to achieve outsized, risk adjusted returns.
Understanding The Market
The federal ban makes investing in marijuana an inherently risky proposition, but it is only one factor in the risk assessment, and not a very big one if you understand the facts. The U.S. Congress has prohibited the Department of Justice from cracking down on legal medical marijuana programs as recently as December. Medical marijuana is legal now in 29 states and accounts for roughly a third of the $7 billion market. Given that public support for legalization is the highest it’s ever been, and the near sweep of pro-marijuana state measures in 2016, it is unlikely that Congress will change its stance.
A bigger challenge for cannabis ventures is the patchwork of state and local regulations that govern business operations. Practically speaking, there is no such thing as a national cannabis market, say in the way that there is a soda market. The legal cannabis market is hyper-fragmented along state, and sometimes municipal, regulations. New York, for example, has issued only five medical marijuana licenses for the entire state. Licensees are highly restricted on what they can produce and sell limiting their ability to diversify offerings, but the small number of licenses also means less competition and potentially big returns.
On the other end of the spectrum, California was the first state to pass medical marijuana, but the state legislature took nearly two decades to formally regulate the program, allowing a huge grey market with thousands of businesses operating in this arena. Today, California is the biggest marijuana market in the U.S. Los Angeles alone accounts for an estimated $1 billion in medical marijuana sales a year. New state regulations for both medical and recreational marijuana will go into effect in 2018, and are expected to profoundly shape the way the industry operates going forward. Investors who understand those impacts will be better equipped to evaluate winners and losers.
Understanding Investment Options
The Green Rush has spawned myriad investment opportunities, including venture capital, private equity and several public companies, most of them traded in the over-the-counter stock market. The over-the-counter exchanges are less liquid, transparent and regulated than traditional stock markets such as the Nasdaq or the New York Stock Exchange, making such investments highly speculative.
Late last year, San Diego-based Innovative Industrial Properties (NYSE: IIPR) became the first cannabis-related company to be listed in the NYSE. IIPR is a real estate investment trust that seeks to acquire properties and lease them to plant touching companies, meaning they work directly in the production and distribution of cannabis. Companies that offer ancillary services or products to the industry have garnered some attention. For instance, Scotts Miracle-Gro (NYSE: SMG) has positioned itself as the premier supplier for indoor marijuana growers. Both companies offer some risk mitigation for investors, real assets in the form of commercial buildings in IIPR’s case and Scotts Miracle-Gro is a household name that does not depend on marijuana for its core business.
Venture capital and private equity are two other popular cannabis investment vehicles. Generally speaking, venture capital invests in start-ups with high growth potential, whereas private equity firms buy existing companies and take over management in an attempt to increase revenues and value. Investors also may opt to invest directly in start-ups, marijuana related real-estate or private companies.
Regardless of the investment option, at the core of any successful cannabis investment strategy should be a clear understanding of the regulatory landscape, and a deep grasp of the complex nature of cannabis operations. Running a cannabis business involves a lot more than knowing the difference between sativas and indicas. Does the company or venture you are interested in have the expertise to run and scale a successful operation?
The industry is quickly becoming institutionalized requiring top notch expertise in fields like agro-technology, chemistry, marketing, operations and logistics, to name a few. Some of the most cutting edge techniques in indoor cultivation like new LED lighting technology, for example, are being developed in the cannabis industry today.
The offerings are so many and the market is growing so rapidly that even sophisticated investors are tempted to skip the fundamentals. But it is important to remember that this is less about investing in marijuana, and all about investing in solid business models backed by the right premise, and the right people.
About the Author:
Chris Ganan is chief strategy officer of MedMen, a leading cannabis firm based in Los Angeles, and a general partner of the firm’s investment fund. Mr. Ganan will be a featured speaker at the Institutional Capital & Cannabis Conference, March 28 through 29 in San Jose, California. The conference, the country’s first ever cannabis expo for institutional and accredited investors, is collaboration between MedMen and IMN, a global organizer of institutional finance and investment conferences.
