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The Latest Trends In Cannabis Company Fundraising: Bigger Deals, New Markets Coming Online

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The Latest Trends In Cannabis Company Fundraising: Bigger Deals, New Markets Coming Online

The North American cannabis sector experienced a decline in the frequency and sum of capital raised over the first five weeks of 2019 versus the same time period in 2018 according to Viridian Capital Advisors data reported by Marijuana Business Daily.

At the same time, the average of each deal size increased during the same period.

During the first month of the new year, Viridian tracked capital raises among public and private cannabis companies that totaled $686.8 million versus $820.6 million in the first weeks of 2018.

The average deal size is on the rise, jumping from $13.7 million in 2018 for public cannabis companies to $24.6 million in 2019, according to Vridian.

“While private capital raises year-to-date in 2019 have outpaced those from the first five weeks of 2018, public raises have lagged behind,” said Viridian Vice President Harrison Phillips.

The key driver in this year's reduction stems from a decline in funding activity for Canadian licensees and license applicants, Phillips said.

"In early 2018, these firms were rapidly raising funds to scale and to prepare for the national adult-use market that was legalized in Canada in late 2018."

Bigger Investments, Fewer Deals

420 Investor's Alan Brochstein said investors should expect to see capital raises shift toward the United States and other regions.

"Most of the capital raising for Canada is done, and many of the operators there will be able to use free cash flow going forward," Brochstein said, adding  that "we may see some issuance of debt in Canada as well, but the bulk of the equity capital raises is complete in my view."

Vridian's Phillips said the trend of more substantial investments at lower frequencies applies to capital raises by Canada's licensed producers and multistate operators in the United States.

The cannabis companies in question are some of the largest operators in the industry and attract larger amounts of capital, Phillips said — and the additional funding is needed for fixed assets like real estate, storefronts and equipment. 

The Vridian VP describes this as a "land grab" strategy: raising capital to acquire other companies. In doing so, the acquiring business is able to consolidate its market share while developing a presence in a new market.

Investment From Outside Sectors

Branded products are a cannabis segment that have begun to raise more significant sums of capital, Phillips said.

The accumulated capital is going toward brand development in existing markets or to expand operations into a new market, he said.

Viridian's findings and other market discussions have led some in the space to expect more of the same going forward. Viridian expects to see a continued increase in capital raises in larger sizes, Phillips said. This trend will be further propelled as the industry develops along with the industry's "more mature players," he said.

The emergence of larger entities from alcohol, tobacco and other sectors will likely result in additional strategic investments, the VP said. Such investments have already been undertaken, including Constellation Brands' (NYSE: STZ) $4-billion stake in Canopy Growth Corp. (NYSE: CGC).

Mazakali CEO Sumit Mehta said 2018 was highlighted by a "largely expected" entry into cannabis by big pharma, software and alcohol.

This year may bring investment from industries like hospitality, food, entertainment, retail, packaging, wellness and automotive, Mehta said.

"When one considers the 750 medical uses and 50,000 industrial uses afforded by the cannabis plant, one is hard-pressed to think of a single industry that will remain untouched in a federally legal environment."

New Markets Come Online

Viridian does anticipate that smaller raises will continue to occur in other parts of the industry. This likely occurring in newly legal cannabis markets, Phillips said, giving the example of Massachusetts' expansion into adult use sales.

Markets where new licenses are being issued, such as retail licenses in Canada, could see continued small capital raises, he said.

New frontiers of legalization may result in similar financing activity, such as the Farm Bill's nationwide legalization of hemp.

" ... New products, technologies and services are consistently being created, and these businesses will need to be capitalized, likely by smaller initial raises," Phillips said.

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