Is the Cannabis Industry at an Inflection Point?

Labelled an 'essential business' amid COVID-19, cannabis has proved itself to be a "non-cyclical industry" that could give rise to more progressive market regulation, and legalisation.

Bursting from its version of the 1990s dot-com bubble, Cannabis appears to be riding a wave of pandemic success with record sales and investment intrigue, following 2019's massive drive for floating cannabis companies.

According to Karan Wadhera, a managing partner at Casa Verde Capital (CVC), the cannabis-focused venture firm founded by Snoop Dogg in 2016, "we're going to see a lot of progress in the next four years." With a history in the music industry and a 20-year professional relationship with Snoop, Wadhera has been involved in cannabis since 2014.

In two interviews with Penta and Tech Crunch, Wadhera described the exciting time as though they "were hitting an inflexion point toward broader legalisation and acceptance". Back then, the "nascent" sector had a real need for institutional investors, according to Wadhera, leading to "speculative trading and valuations that weren't really founded in reality."

"[We're talking about] projections multiple years out into the future, and then crazy revenue multiples on top of that. Things just got really frothy, and that eventually burst, and last April or May was sort of apex of that moment."

Wadhera described many of the companies management teams as "poorly run," leading to, what he calls, "a pretty serious implosion." Sentiments echoed by MMJ Group Director, Mike Curtis, suggesting that an over-investment in facilities to grow cannabis was not justified by forecasted retail earnings.

And that's before getting into the 2019 Vape Crisis, which created a fearful atmosphere around the cannabis industry.

While the impact of 2019 was "pretty painful," the macro business has continued to improve despite COVID-19.

The pandemic has seen the industry achieve record sales for March, April and May following the US government labelling the industry an essential business. With this trend expected to continue, Wadhera is anticipating more support from the government as they look for additional sources of tax revenue.

"The potential urgency around cannabis legalisation is going to be there, which is going to be massively positive for the industry," said Wadhera.

"The ancillary tech-lead opportunities for businesses are going to benefit from the overall macro theme of legalisation and globalisation of the cannabis industry".

With the recent passage of the Farm Bill in the US, the accelerated commercialisation of CBD as a wellness ingredient has given the cannabis compound greater staying power.

"[CVC] are optimistic that the growing acceptance of CBD will also spark later acceptance of other cannabinoids, including, but certainly not limited to, THC."

Signalling a pivot away from potency and price-driven sales, Wadhera is also focused on consumer-brands, citing the alcohol equivalent that decisions are not made "by walking into a liquor store and asking what's the highest-proof vodka for the best price."

Cannabis companies, however, are unable to use traditional media channels, requiring an increased level of creativity and caution when it comes to reaching customers in the "tricky world" of DEA Schedule 1 drugs.

"Until we see kind of full-scale legalisation, or until we see at least some of the current bills in front of Congress passed or the rescheduling of cannabis from Schedule 1 to Schedule 2 or lower [by the Drug Enforcement Agency], some companies are going to be concerned about jumping into the space."

For now future acquisition opportunities in the ancillary, and periphery business will be a much safer option due to its separation from "directly touching the plant."

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Elliot Nash
Elliot Nash

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