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New Ways For Cannabis Companies To Raise Money

October 12, 2018 6:42 am
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The cannabis industry is poised for further growth in the next decade as more U.S. states and other countries legalize medicinal and recreational weed.

Global cannabis sales stood at $9.5 billion in 2017, according to Arcview Market Research and BDS Analytics. The U.S. accounted for most of the sales, at $8.5 billion. By 2027, cannabis sales could reach $57 billion, with more than 65 percent representing recreational marijuana, and North America will remain the largest market with sales of $47.3 billion.

Big Money Tests Cannabis Waters

In this way, it’s not surprising to see investors who are willing to enter the new industry. Venture capital funds have been active in the cannabis space for the past several years. According to research firm Pitchbook, cannabis startups have managed to raise almost $300 million in 54 deals with VC funds this year alone.

Major investors are taking stakes in the cannabis industry as well. Just last month, billionaire William Wrigley Jr. II’s Wychwood Asset Management led a $65-million investment round for a Georgia-based startup, Surterra Wellness.

Hedge funds are also looking at weed, and a few well-established cannabis-focused hedge funds already exist. One of them is San Francisco-based Poseidon Asset Management, which has been in operation since 2014 and has $60 million in assets under management.

Billionaire hedge fund manager Leon Cooperman invested in Green Thumb Industries, a Chicago-based cannabis grower. In an interview with Marijuana Business Daily, Cooperman said he has known the founder and chairman of Green Thumb Industries Ben Kovler “since birth." 

In addition to VC funds, hedge funds and rich families, some cannabis companies attracted the attention of companies from other industries.

As the full legalization of marijuana use takes effect Oct. 17 in Canada, alcohol companies in the U.S. are taking the opportunity to diversify in the new market.

Constellation Brands, Inc. (NYSE:STZ) invested $4 billion in Canopy Growth Corp (NYSE:CGC), Molson Coors Brewing Co (NYSE:TAP) has formed a joint venture with Hydropothecary, currently known as Hexo Corp (OTC:HYYDF), and the list goes on. 

Cannabis Companies Still Face Many Challenges

Despite the strong outlook and obvious interest from investors, cannabis companies still face challenges when trying to raise funds. Pension funds and mutual funds still prefer to stay on the sidelines, although Canada has recently witnessed an influx of pension funds in the cannabis space. Nevertheless, according to Bloomberg, retail investors own at least 90 percent of most cannabis stocks.

“I think retirement funds are currently placing their shareholders at a significant disadvantage by not participating in the gold rush of our generation. By completely ignoring a industry that is booming and will continue to boom for a decade, your shareholders are at a severe disadvantage,” said LeafWire CEO Peter Vogel.

Institutions have good reasons why they're not invested in the marijuana industry — with a big one being legal uncertainty in the U.S. 

“Medical marijuana may be legal in more than half the states in the US, but in many states it is only for very limited conditions and marijuana is not accessible to the general public," Vogel said. 

Marijuana is truly recreationally legal to everyone in less than 10 states, meaning it's not yet the norm in most states, he said. 

"The industry is still fighting against 50-plus years of stigma, but we're chipping away at it, one state at a time." 

More Public Cannabis Companies, More Financial Reporting 

Cannabis companies are beginning to list on stock exchanges rather than the OTC market, with examples being Canopy Growth Corp (NYSE:CGC) and Aurora Cannabis Inc (OTC:ACBFF).

“In terms of my experience, I find the cannabis market to be more attractive now than ever before — simply because there are no longer companies without operational structure or sustainable business models being publicly traded on some OTC markets," Green Rush Daily's Scott McGovern said. "Rather, you now have large companies like Canopy Growth and Cronos Group Inc (NASDAQ:CRON) for example, that are trading on the NASDAQ, doing really well, and reporting all their quarterly numbers.

The stocks allow investors to track what is occurring in the sector, as publicly traded businesses on some OTC markets do not have to report earnings, he said. 

Six months to a year ago, those more opaque companies were the only type of cannabis trades available, McGovern said.

"During this time, it was a lot more challenging for investors on account of far more FUD — fear, uncertainty and doubt,” he said. 

In this way, as the industry evolves, it's likely to see more cannabis companies filing for IPOs and reporting their results, which will remove some of the uncertainty and make them more attractive for institutional investors.

The Role Of Accelerators, Incubators In The Cannabis Industry 

Since the cannabis industry is still considered an emerging one, many entrepreneurs entering the space are most in need of two things: feedback and capital.

One option for cannabis startups to obtain both funding and help from experts is to join a startup incubator or accelerator.

The Orthogonal Collective is a startup incubator that focuses on socially conscious investing. It provides capital and resources to cannabis companies in exchange for an equity stake in their business.

Another is Canopy Boulder, a startup accelerator for cannabis companies. Canopy Boulder is usually the first investor in a cannabis startup and, in addition to providing capital, has a large team of industry experts, mentors, and alumni that can share their experience with new entrepreneurs and provide crucial feedback at early stages that traditional investors or venture capital funds won’t offer.

Canopy Boulder also praises itself as the most founder-friendly accelerator.

CEO and co-founder Patrick Rea said the accelerator usually asks for between 6 percent and 9.5 percent of a company’s equity and only in form of common stock. They also take massive risks by often being the first investor in a new company.

To sum up, even though cannabis companies' funding choices remain limited, the industry still has support from various investor including VC, hedge funds, accelerators and incubators.

As the cannabis industry in the U.S. matures, investors should expect even more barriers to funding to fall.

Javier Hasse, director of Benzinga's cannabis newsdesk, contributed to this report.

Related Links: 

MedMen Just Became The Biggest Cannabis Company In The US 

Marlboro Maker Altria May Be In Talks With Cannabis Producer Aphria About A Minority Stake 

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