6 Things You Need to Know about CBD Investment Opportunities25th April 2019
Investors are always looking to get involved in an industry before it hits mainstream. It takes skill to identify an opportunity and make an investment of money, time or energy to turn the potential into profits. Those inputs are valuable – and that’s why investors are always looking for a nascent industry with a massive addressable market.
While it’s certainly not a secret anymore, cannabis and CBD are looking like the early stages of a massive market that investors crave. The forecasts are staggering. Some projections estimate the cannabis industry will hit $25 million by 2025. Others expect cannabis spending to reach $57 billion globally by 2027. CBD oil, the latest craze in the health and wellness space, is also projected to be a multi-billion dollar industry in a very short amount of time. The Brightfield Group, a cannabis industry analyst, believes the CBD market could hit $22 billion by 2022.
In the case of CBD (Cannabidiol), it feels like you can’t go a day without someone mentioning it’s purported health benefits or another business announcing a new line of CBD snack products. Cannabis, whether recreational or medicinal, is on the tip of everyone’s tongue. This is so much the case that South by Southwest added a “Cannabusiness” content track at this year’s conference.
When you have this much potential in a nascent market, it’s not surprising to see investors racing into the space. According to PitchBook, approximately $880 Million was invested in this space in 2018 – which was more than double the amount financed in 2017. Whether through institutional and venture investors, or via public markets, cannabis related businesses are seeking funding to position themselves for success.
Despite all that potential, many people have questions about the current state of investment in cannabis and CBD. Why is the space so exciting? What are investors looking for? What are they concerned about? Who is funding cannabis businesses? What opportunities are they considering?
This article shines light on those questions and provides a snapshot of the fundraising landscape for this promising, and rapidly growing, industry.
This is an exciting (and special) CBD investment opportunity
Cannabis has a projected compounding annual growth rate of 27%, so there’s little question that investors are excited about the profits. Yet the potential health benefits, ranging from daily wellness to pharmaceutical grade medicines, creates an additional level of excitement for many investors.
“Cannabis represents a rare opportunity to make a positive impact while also making a profit and creating jobs in the United States,” says Emily Paxhia, managing partner of Poseidon Asset Management, an investment management company that invests exclusively in the cannabis industry.
Paxhia is excited for the chance to do good in the world while also creating profitable businesses. “The potential for growth and profit is undeniable, but we have the opportunity to bring something to market that is beneficial for customers and a healthy alternative to alcohol or opiates.” She continues, “We have the opportunity to help legalize and regulate cannabis and help bring the benefits of this plant to the mainstream consumer. It’s all the positive outcomes that make this opportunity so special.”
Entrepreneurs must have these two things to see a check
Ask any investor in Silicon Valley for the most important factor for success and you’re likely to hear “team.” This is every bit the case with cannabis. And in the case of cannabis, investors are looking for one other big factor: expertise.
As the CEO of Arcview Group, one of the first cannabis-focused investment groups, Troy Dayton prioritizes both team and expertise. “We’re always looking for a good team, a good plan and a large addressable market,” says Dayton. “But with this industry, we want people with a deep knowledge of cannabis and the unique nature of this market.”
While the market is young, it’s clear that cannabis does not have much uncertainty with product-market fit. The risk is in the regulations. Therefore, investors are looking for entrepreneurs who have a team of experts who have the experience to anticipate issues and navigate the regulatory and legal landscapes.
Opportunities are everywhere
For most people, the obvious opportunities appear to be in retail products and dispensaries. Yet for savvy investors, the potential extends far beyond smoking marijuana or selling CBD oil.
Here’s a list that demonstrates the wide variety of opportunities in the cannabis space.
- Consumer – This category includes products and services around consumers, including: marijuana flower, CBD products, ready-made THC products, dispensaries, personal storage and other accessories.
- Technology/Software – A number of technology and software based verticals have become important to the entire cannabis supply chain, from soil to consumers. Opportunities include: AgTech (agriculture technology), real-time and predictive data analysis, machine learning, robotics, software-as-a-service, point-of-sale, supply chain and inventory tracking.
- Industrial Hemp – While not as glamorous as facial creams and CBD oils, industrial hemp includes massive product segments. These segments include the following resources and materials, or an alternative to them: rope, textiles, clothing, plastics, concrete, batteries, fiber glass, paper and shampoo.
- Medicine & Science – When you consider that the United States pharmaceutical industry accounted for more than $1.3 Trillion in 2015, it’s easy to understand why investors are closely watching the pharmaceutical potential of marijuana and CBD. Studies are underway to determine the medicinal and pharmaceutical value of cannabis, either as new remedies or replacements for existing drugs and treatments. This potential also presents opportunities in genetics, testing and research.
CBD based products need quality standards
The 2018 Farm Bill decriminalized hemp and hemp-based products, including CBD if it has a less than 0.3% THC by weight. This legal breakthrough has led hundreds of celebrities, brands and other entrepreneurs to rush into the CBD space and sell product. This could be problematic for the industry – and it’s something that investors are watching closely.
“The explosion of interest in CBD has attracted hasty opportunists looking to make a profit amidst the hype,” says Paxhia. She continues, “Products with poor quality ingredients will not only lead to a bad consumer experience, they will also harm the future of the space. It’s in our industry’s interest to define what standards we want to uphold and to hold each other accountable to those standards. Brands need to make products that are great for our bodies and will help create positive consumer experiences with CBD.”
A number of CBD brands are focusing on this very issue. Steve Raack, CEO of Vitalibis, a wellness company that has a line of full-spectrum CBD products, is taking action to help customers understand what quality means and set an example for the industry.
“Educating customers and helping them obtain quality products should be the most important priorities for our industry,” says Raack. “Customers hear about CBD’s amazing benefits, yet they don’t yet know how to evaluate a product’s purity, quality and efficacy.”
Raack believes in a set of best practices that consumers should consider when sourcing CBD. “First, the extraction method (and if solvent-based, which solvent is used) has a big impact on the quality of the oil,” says Raack. He continues, “Second, consumers should understand the difference between a full-spectrum oil versus CBD isolate. Lastly, customers should check to make sure the product they’re buying is third-party tested for safety and purity.”
Startups have three options for funding
Put simply, there are three paths to funding a cannabis business: private investors, institutional capital or public markets. In terms of private investors, startups can raise money from seed stage or angel investors. This may not be enough capital for some cash-intensive businesses.
Entrepreneurs that need more capital should focus on institutional investors. Dozens of relatively new venture capital firms and hedge funds focus solely on startups in the cannabis space. These investors have the capital, resources and mindset to help founders fund, scale and navigate regulations.
Finally, cannabis companies have listed on the public markets in the United States and in Canada. If a business is not ready for an IPO, some cannabis companies have used the reverse merger process to become a public company and obtain funds from the public markets.
Not all investors are ready to get involved
Despite the massive addressable market and staggering growth projections, some investment firms are reluctant to invest in the space for a number of reasons. Erik Rannala, co-founder and managing partner of Mucker Capital shines light on why some investors are saying “no” to cannabis.
“First, some funds are restricted from investing in ‘vice’ markets like marijuana or alcohol,” says Rannala. “Other firms might be sensitive to the stigma that still comes with marijuana.”
There’s also a number of regulatory risks that can deter investors from writing a check. “The changing and complicated matrix of federal, state, county and city laws is difficult to navigate, says Rannala. “Regulatory risk also presents operational challenges, like obtaining credit card processing, finding banking resources and the restrictions around online marketing for cannabis products on platforms like Google and Facebook. These risks and hurdles don’t exist with many other markets.”
At this time, it looks like cannabis and CBD have all the requirements of a lucrative and important industry for investors. Investors understand that market demand is already substantiated by illegal sales of marijuana and further legalization will legitimize that demand – increasing the value of startups and companies building value in the space right now. It’s important to consider the different angles of cannabis and how investors, and entrepreneurs, will be looking to position themselves in this nascent and profitable market.
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