Weed lover’s Paradise, entrepreneurs profit spree, the marijuana industry has most everyone seeing green.
By the first semester of 2018 recreational marijuana will be legal in Canada. Besides being a weed lover’s paradise, it represents a huge investment opportunity for entrepreneurs and investors. According to cannabis research firm ArcView, legal marijuana sales in North America are expected to grow 26% annually through 2021, a market worth nearly $22 billion. Globally, this number could reach $200 billion. As reported by the Brightfield Group, together the US and Canada will make up more than 86% of global cannabis sales in 2021. European markets will follow with 12% of sales, dominated by Germany, the Netherlands, Spain, and Switzerland.
In addition, roughly $100 billion worth of marijuana is sold illegally each year. World governments are moving to establish a formal and regulated legalization of medical and recreational weed, thereby tapping the immense potential behind the green industry.
Weed enthusiasts: a shift in opinion in the US and EU
Unlike its consumption, our society’s acceptance of marijuana is relatively new. The use of Cannabis was reserved for special groups of people, and was often the cause of discrimination or exclusion. However, during the last 10 years, people seem to accept it more as a recreational substance rather than a gateway to evil.
In 1995, the year before California became the first state to legalize medical cannabis for compassionate use, national pollster Gallup showed that just 25% of respondents favored the idea of national legalization. In contrast, the last 10 years has seen an increasing acceptance of marijuana as a recreational substance; by October 2017, favorability towards national legalization rose to 64%, an all-time high. Today, 28 states have legalized medical cannabis.
On the other side of the Atlantic, the future of weed is just as bright. In 2017, Greece became the latest European country to legalize the medical use of marijuana, following in the footsteps of Czech Republic, Finland, the Netherlands, Spain, and Portugal, the first European country to legalize the drug in 2001. In a survey of 2,000 people conducted by the British polling company ORB, some 47% of respondents back the idea of legalizing the sale of cannabis, through licensed shops, while 39% oppose it, and 14% “don’t know”. The German cabinet unanimously approved a medical cannabis law last year, which came into effect March 2017. More drastically, in 2013 Uruguay became the first nation to fully legalize marijuana for adult recreational use.
This change in opinion has not gone unfelt in the economy. In the US, legal marijuana now employs an estimated 120,000 people, a figure that is expected to triple in the next few years, according to research firm New Frontier Data. Vangsters, the cannabis industry’s largest hiring platform, which was launched in 2015, has successfully connected over 4,000 candidates with jobs in the industry. From CFO to marketing analyst, harvester, or lab manager, this is an industry where you will find jobs much like the ones in any regular sector.
Entrepreneurs and investors
Until now, investor participation in the legal cannabis market has been relatively small. Will that change? And, if so, how can investors get in on the ground floor?
Equity financing is the process of raising capital through the sale of shares in a company. Until now, banks closed their doors to cannabis companies looking to raise equity and reap the benefits from banking financial privileges like any other industry. Things are looking up. In January 2018, the Bank of Montreal broke the ice with its decision to co-lead, with boutique investment firm GMP Capital Inc, the underwriting of a $175 million stock sale of Canopy Growth, a marijuana producer. The financial industry’s participation gives the company access to a greater number of institutional investors, and the opportunity for greater development.
The absence of big banks in the cannabis space has meant that capital is often raised through family offices, high net worth investors, venture capital funds, and credit unions. This is the case for Matt Shalhoub, Managing Director of Green Acre Capital, a private equity firm, specializing in investments in the cannabis industry in Canada. Green Acre Capital invests mostly in companies focused on branding, software, hardware, and retail accessories for the cannabis market, with a cross-vertical approach that creates opportunities amongst portfolio investments and helps fuel growth innovation throughout the industry.
Similarly, Peter Thiel, the co-founder of PayPal, recently invested in the Seattle-based private equity firm Privateer Holdings, which funds marijuana-related medical research and products. The firm’s management includes Ivy League MBAs, PhD research scientists, marketing professionals, and operators from world-leading brands, and even former federal law enforcement professionals. On their portfolio you can find companies like Tilray, the only American-owned, federally licensed commercial producer of medical cannabis in the world. They serve Australia, Canada, European, New Zealand and Latin America.
For the individual investor, there is an opportunity to take advantage of the marijuana industry’s projected annual growth rate of 20%, either by directly investing in a marijuana business, or by joining a fund. However, due to the amount of capital required, and issues of access to deals, and illiquidity, this approach is not a viable option for most investors. Another option is to trade the marijuana stocks quoted in NASDAQ or NYSE and wait for a stock movement. Once again, there may be little incentive for sophisticated investors, as they can invest in less risky stocks with similar dividends and yields. On the other hand, average investors can buy shares in companies such as AbbVie Inc. or SMG, which both offer dividends around two dollars per share.
Marijuana—an all-around winner?
As is the case with tobacco, governments will inevitability severely tax the marijuana industry. The problem can be described by economics. Historically, growing and selling marijuana has been a lucrative business—solely because it was illegal. If you remove the government ban, the artificially inflated profit margins on the plant collapse. Marijuana becomes just another farming product like corn or soybeans. Meanwhile, a host of supporting services tied to the cannabis industry, including finance, insurance, logistics, technology, and medical research could grow exponentially.
The rush to get in on the marijuana craze has created hundreds of startups, but the odds are that many of them will fail. Considering the obstacles in the form of government regulation, the probability of failure is higher, and the winners will be established companies that will add value through their development.
In conclusion, in the words of the prominent Mark Hart, one of the increasing number of optimistic investors, “Legalized recreational weed is a virtual inevitability event… It’s a political winner. It’s an economic winner. It’s jobs, it’s votes. And institutional money is going to have to come into this stuff…”
By Nicolas Carvajal