By Tiby Erdely
There is an uninformed myth that claims the earliest investors in the regulated cannabis industry were all unsophisticated cowboys, or earthy folks that believed cannabis was good for society as well as an untapped source of medical innovations. While this is at least a partially accurate portrayal of some early cannabis investors, most of the industry’s first financial backers were sophisticated capitalists who seized an opportunity to help create a new industry with the potential of producing huge profits.
However, what is universally true of these early investors was that they all shared an appetite for, and acceptance of, the risks involved in building businesses based on a plant that at the time was still very much illegal federally and in most U.S. states. With the growing acceptance that cannabis enjoys today, it can be difficult to recall just how risky those earliest investments could feel. But the risks in those early days were many and varied.
A little more than 10 years ago, few investors were looking seriously at cannabis businesses as a viable investment choice. First and foremost, there were very real fears that the U.S. federal government would not recognize a state’s decision to legalize the industry. Many were concerned a federal crackdown would occur eventually, and that any profits made from cannabis businesses were at risk of being seized. The reputation of the cannabis plant itself influenced the attitude of many investors at the time, manifesting as a distrust of those launching these businesses and viewing them as disorganized and unable to manage a complex enterprise. Finally, the stigma associated with cannabis remained a strong deterrent for potential investors who were concerned their reputation would be tarnished by associating with a federally illegal substance.
In addition to these perceived risks, there were some very concrete barriers for early investors that still remain today. The lack of access to banking services for cannabis businesses, along with the fact that almost no mainstream financial institutions would touch the industry made investing in cannabis extremely unnerving for many investors. And the industry’s strict and ever-evolving regulatory environment has been a consistent source of hesitation for investors, who sometimes view the “Wild West” atmosphere of the industry with an eye of uncertainty.
Over the 10+ years since Colorado and Washington first legalized recreational cannabis, much has changed – in both the industry and U.S. culture. Today, the medical use of cannabis has been legalized in 39 states, as well as the District of Columbia. Recreational or adult-use of cannabis is now legal in D.C. and 19 states. The first cannabis stock began trading in 2014 on Toronto’s TSX Venture Exchange, and that was just the beginning. Today there are 29 marijuana stocks traded on the New York Stock Exchange and NASDAQ collectively valued at more than $30 billion.
In 2018, leading beverage alcohol company Constellation Brands increased its investment in Canopy Growth (NASDAQ:CGC) to the tune of $4 billion. The following year vape manufacturer Pax Labs, a spin off from e-cigarette maker Juul, announced the close of a $420 million equity round of financing from a mix of both cannabis-focused and institutional investors. In June 2020, generic drug giant Perrigo entered the CBD market through a strategic investment in a Colorado hemp company. And more recently in 2021, Canadian multinational Couche-Tard, which operates convenience stores worldwide, loaned $30 million to cannabis retailer Fire & Flower, which planned to use the proceeds to fund further development of its consumer digital platform.
As legalization has proliferated, the stigma surrounding cannabis has dramatically declined. And as more cannabis businesses achieve success, increasing numbers of previously cautious investors are becoming intrigued. In a move that would be unfathomable only a few years ago, Senate Majority Leader Chuck Schumer (D-New York) placed the full backing of his office behind total cannabis legalization at the federal level this year, and last week for the second time the U.S. House of Representatives passed a bill that would legalize cannabis at the federal level.
The result of all this activity has been to effectively mainstream cannabis. Today, the marijuana holiday of 4/20 is celebrated in states across the nation, whether a legal market exists in the state or not. There are more options than ever for investors to dive into the space, and there are more proof points than ever to convince investors their investment choices will yield positive results. Cannabis businesses are increasingly hiring executives with “mainstream” Fortune 500 experience from brands like Coca-Cola and retailers like Home Depot and others. And institutional investment is at a tipping point, with a wider variety of funds and a wider variety of businesses to consider. With the growing presence of cannabis across the United States and increasing numbers of consumers expressing interest in cannabis products, the mainstreaming of cannabis is in full bloom from coast to coast. In our view, cannabis investments provide a solid risk-adjusted return with the potential for high growth in a true emerging market right here in our own backyard.
So for those who ask if the cannabis investor is changing, the answer is simple: It already has.
Tiby Erdely is a founding partner at KEY Investment Partners, which provides institutional-quality investment management for the cannabis industry.
