Despite regulatory hurdles, these 4 US cannabis investors are planting seeds for tomorrow – TechCrunch

Bearish Markets and high interest rates often cause private investors to turn away from anything that resembles a risky investment. Still, now is a very opportune time to take another look at cannabis opportunities in the United States

Quite a bit has changed since our last US cannabis survey in 2020. Recreational cannabis is now legal in a few more states, including New Jersey and New York, the latter of which has even launched a social justice program aimed at helping communities affected by the war on drugs. Despite the market downturn, the sector is growing — the legal sale of marijuana and related products is growing is expected to rise about 32% from 2021 to over $33 billion this year and reach $52 billion by 2026, according to MJBiz.

But cannabis startups still have a long way to go before they can truly thrive in the country. The biggest hurdle is cannabis’ illegal status at the federal level, making things even more difficult and fragmented than in Europe.

As we learned our European cannabis surveyAlthough cannabis is illegal at the federal level in the EU, companies can produce cannabis in one country and sell it to companies across borders, as long as they have the necessary licenses. It stands in stark contrast to the obstacles to sales in the US states and the banking and tax problems that come with them.

The lack of access to traditional financing services – commercial banks, credit card dealers, etc. – is holding the industry back. “Banking reform is key to accessing capital markets,” said Emily Paxhia, Poseidon’s managing director. “Offering mainstream banking services to cannabis operators would open up the market and could change the custodial rules that prevent institutional capital from participating. It would also create better liquidity and efficiency for market dynamics around public companies.”

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No one has any idea when banking reforms, let alone federal legalization, might happen, so should investors just wait for more momentum? That may be what generalist investors do, but not the specialists. No, they are actually trying to pre-empt institutional capital.

To turn today’s early bets into tomorrow’s lucrative investments, specialist firms such as Entourage Effect Capital and Poseidon are deploying capital in so-called “asset-touching” and ancillary businesses. The latter refers to companies working on the infrastructure that the sector will rely on once it is in full bloom and the consensus among specialist investors is that they are making very worthwhile bets. However, funds also need backers, and the lack of traditional LPs willing to write checks for this industry can be problematic Investments trend upwards.

But VCs have found allies in family offices — a category of investors that are less constrained than their institutional counterparts and have plenty of capital to deploy. “We are seeing more first-time family office investors entering the industry at a pace we have not seen before,” said Matt Hawkins, managing partner at Entourage Effect Capital.

We interviewed four active investors in this space to better understand the current U.S. cannabis market and the regulatory hurdles the sector will need to overcome going forward.

We spoke to:

Jacqueline Bennett, Managing Partner and Co-Founder of Highlands Venture Partners

As cannabis companies struggle to maintain their market cap in the public markets and compete with the black market, what excites you about this space?

The backdrop for public cannabis companies remains bleak, with no signs of a short-term recovery. However, the fundamental business opportunity remains intact.

Weak markets and a challenging macro environment will test operators, uncover inappropriate strategies and widen the wedge between cannabis capital (public or private) and liquidity.

As exhaustion sets in and the industry longs for a break, now is the best time for investors to uncover talent and promising ideas. We’ve seen record levels of cannabis M&A activity over the past 12 to 18 months. Most of these acquisitions have been paid for with large amounts of stock, and with stock prices today trading relative to 52-week highs, seller regret is the issue.

While economic losses are never fun, this dynamic promises experienced talent to re-enter the market.

Have you seen a swarm of generalist investors from this sector?

“Given the regulatory hurdles surrounding plant-touching companies, investing in side companies has also provided us with an opportunity to bring more traditional investors into the space.” Yoni Meyer, Partner, Casa Verde Capital

Any investor pullback is, in my view, temporary and driven by current market conditions and not a loss of confidence in the sector. It seems impossible not to see opportunity after immersing yourself in the industry and being exposed to the endless potential of both investment and the resulting innovation across all industries.

What interests you more in the short term: supplier companies or companies that come into contact with plants?

I’ve never split the industry this way for investment purposes. We have a balance of ancillary and plant-touch companies in our portfolio and this reflects the diversity of my partnership with Tahira [Rehmatullah] and our category-agnostic investment thesis.

What we don’t compromise on is: management strength and experience, purpose-built products or services, and a TAM that expands at the intersection of industries.

Do you see opportunities in this area that are being overlooked by investors and entrepreneurs?

Businesses run by women, people of color and minorities. While it’s not just cannabis, the subconscious bias of investors and operators guarantees missed opportunities. Cannabis is also an industry best understood by these overlooked demographics.

Health equity and innovation in women’s wellness are slowly being unleashed alongside the cannabis industry and we see significant synergies in R&D and product innovation. The challenge I set for myself and my colleagues is to stop, look up and break habits.

There is significant value in cannabis, and until we recognize and remove bias from business, we will continue to miss opportunities for equity and innovation.

Cannabis production is still illegal under federal law, meaning companies in this industry cannot use traditional financial services. How severe is this as a barrier to industry growth, and how do you advise your portfolio companies to manage these limitations?

Restricted [access to] Financial services is a massive industry impediment and impacts every industry participant in a significant way. The silver lining is that we get creative, cooperate and deepen the sense of community. These are the same qualities we look for in our portfolio teams, and so it becomes a self-fulfilling prophecy!

Cannabis is not for someone who needs a well-trodden path with no obstacles. People come and stay with cannabis because of a connection that goes beyond business. It’s the mission. At least that’s true for me and many of the wonderful people I’ve been lucky enough to meet.

After New Jersey legalized recreational use, several US states could legalize medical or adult use this year. Do you expect these milestones to affect reviews? Are you looking for changes in regulation that would open up this market even further?

Following the results of the 2020 US election, markets showed us what could happen with federal regulatory changes with an immediate rise in valuations. Since then, Congress has made little to no progress toward state legalization, and cannabis stock prices rarely shy away from news of state or federal regulatory advances.

All of this means that I believe the markets are now awaiting the actual implementation of legislation that has the potential to create sustainable value in the industry, such as SAFE Banking.

Has the type of LPs willing to invest in cannabis-related funds changed at the pace you’d hoped?

There has definitely been a development in the interest of the LP community in cannabis. Cannabis remains one of the few industries with guaranteed growth for many years. The challenge is understanding where that growth is to be found, and being content with holding cash longer than anticipated.

We still face LPs with strict policies that don’t allow investment in the industry, mainly on the plant-touching side. LPs, which had previously held back due to sentimentality or a lack of knowledge, gradually crossed the floor.

My urgent advice to new capital in the industry is to work with experienced cannabis investors. You can’t prepare for the level of surprise in the room. Never boring!

NY is creating a social and economic justice program as part of its retail licensing business. Are you seeing investors taking an equity-focused approach to opening up space for communities harmed by outdated drug enforcement policies?

We are beginning to see more and more investors and operators acknowledging social justice and the importance of creating and prioritizing opportunities for communities harmed by the war on drugs and other social injustices.

How would you like to be addressed, a cold e-mail or a warm speech?

I love a warm pitch.

Despite regulatory hurdles, these 4 US cannabis investors are planting seeds for tomorrow – TechCrunch Source link Despite regulatory hurdles, these 4 US cannabis investors are planting seeds for tomorrow – TechCrunch

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