despite regulatory hurdles, these 4 us cannabis investors are planting seeds for tomorrow

Bearish markets and high interest rates often cause private investors to turn away from anything resembling a risky investment. Yet, now is a very apt time to take another look at the cannabis opportunity in the U.S.

Quite a lot has changed since our previous U.S. cannabis survey from 2020. Recreational cannabis is now legal in a few more states, including New Jersey and New York, the latter of which has even launched a social equity program that aims to help communities affected by the War on Drugs. Despite the market downturn, the sector is growing — legal sales of marijuana and related products are slated to rise about 32% from 2021 to top $33 billion this year and reach $52 billion by 2026, according to MJBiz.

But cannabis startups still have a long way to go before they can begin to truly thrive in the country. The biggest roadblock is cannabis’ illegal status at the federal level, which makes things even more difficult and fragmented than in Europe.

As we learnt in our European cannabis survey, despite cannabis being illegal at a federal level in the EU, companies can produce cannabis in one country and sell to businesses across borders as long as they have the necessary licenses. It’s a stark contrast to the barriers to selling across states in the U.S., and the banking and tax headaches it creates.

The lack of access to traditional financing services — commercial banking, credit card merchant processors, etc. — is holding the industry back. “Banking reform is the key to unlocking access to the capital markets,” said Emily Paxhia, managing director at Poseidon. “Offering mainstream banking services to cannabis operators would break the market open and could change custody rules that prevent institutional capital from participating. It would also create better liquidity and efficiency for market dynamics around publicly traded companies.”

TechCrunch is widening our lens, looking for more, and more diverse investors to include in our surveys where we poll top professionals about problems and challenges in their industry.

If you’re an investor and would like to participate in future surveys, fill out this form.

No one has a clue when banking reforms, let alone federal legalization, could happen, so should investors just wait for more momentum? That’s perhaps what generalist investors are doing but not the specialists. No, indeed, they are looking to preempt institutional capital.

To turn today’s early bets into tomorrow’s lucrative investments, specialized firms like Entourage Effect Capital and Poseidon are deploying capital into so-called “plant-touching” and ancillary businesses. The latter refers to companies that are working on the infrastructure the sector will rely on once in full bloom, and the consensus among specialized investors is that they make for very worthy bets. Funds need funders too, however, and the lack of traditional LPs willing to write checks for this industry can be problematic even though investments are trending upward.

But VCs have found allies in family offices — a category of investors who are less constrained than their institutional peers and have plenty of capital to deploy. “We are seeing more and more first-time family office investors enter the industry at a pace we haven’t seen to date,” said Matt Hawkins, managing partner at Entourage Effect Capital.

We polled four active investors in the space to better understand the cannabis market right now in the U.S. and the regulatory hurdles the sector will have to overcome in the future.

We spoke with:

Jacqueline Bennett, managing partner and co-founder, Highlands Venture Partners Yoni Meyer, partner, Casa Verde Capital Matt Hawkins, managing partner and co-founder, Entourage Effect Capital Emily Paxhia, managing director, Poseidon Investment Management

Jacqueline Bennett, managing partner and co-founder, Highlands Venture Partners

As cannabis companies struggle to maintain their market cap in public markets and compete with the black market, what is keeping you excited about the space?

The backdrop for public cannabis companies remains bleak with no signs of a near-term recovery. That said, the fundamental business opportunity remains intact.

Weak markets and a challenging macro environment will test operators, expose misplaced strategies and tighten the wedge between cannabis capital (public or private) and liquidity.

While exhaustion is setting in and industry constituents long for a break, now is the best time for investors to discover talent and promising ideas. We saw record levels of M&A activity in cannabis over the past 12-18 months. Most of these acquisitions were paid for with large amounts of stock, and given where stock prices are trading today relative to 52-week-highs, seller’s remorse is the theme.

While economic loss is never fun, what this dynamic does promise is the re-entry of experienced talent in the market.

Have you seen a flight of generalist investors from this sector?

“Given regulatory hurdles surrounding plant-touching companies, investing in ancillary businesses has also provided us an opportunity to bring in more traditional investors into the space.” Yoni Meyer, partner, Casa Verde Capital

Any pullback from investors, I believe, is temporary and driven by current market conditions as opposed to loss of confidence in the sector. It feels impossible to not see opportunity after being submerged in the industry and exposed to the endless potential of both the plant and resulting innovation across verticals.

I’ve never bifurcated the industry in this way for investing purposes. We have a good balance of ancillary and plant-touching companies in our portfolio, and this is reflective of the diversity in my partnership with Tahira [Rehmatullah] and our category-agnostic investment thesis.

What we won’t compromise on is: strength and experience of management, purpose-driven products or services and a TAM that expands at the intersection of industries.

Do you see any opportunities in this space that are being overlooked by investors and entrepreneurs?

Companies led by women, people of color and minorities. While not unique to cannabis, subconscious bias amongst investors and operators guarantees missed opportunities. Cannabis also happens to be an industry best understood by these overlooked demographics.

Health equity and innovation in women’s wellness is slowly unlocking in parallel with the cannabis industry, and we see significant synergies in R&D and product innovation. The challenge I pose to myself and my peers is to pause, look up and break habits.

There is significant trapped value in cannabis, and until we acknowledge and remove bias from business, we will continue to miss opportunities for justice and innovation.

Cannabis production is still illegal under federal law, which means companies in this industry can’t use traditional financial services. How much of a roadblock is this to the industry’s growth, and how do you advise your portfolio companies to deal with these restrictions?

Restricted [access to] financial services is a massive impediment for the industry and affects every industry participant in a material way. The silver lining is that we get creative, collaborative and deepen a sense of community. These are the same traits we look for in our portfolio teams and so it becomes a self-fulfilling prophecy!

Cannabis is not for someone needing a well-trodden path void of obstacles. People join and stay in cannabis because of a connection that extends beyond business. It’s the mission. At least that’s true of myself and many of the wonderful folks I’ve been fortunate to meet.

With New Jersey legalizing recreational use, several U.S. states could legalize medical or adult use this year. Do you expect these milestones to impact valuations? Are you watching for any changes in regulation that would break this market open even wider?

Following the 2020 U.S. election results, the markets showed us what could happen with regulatory change at the federal level with an immediate uptick in valuations. Since then, Congress has made little to no progress toward federal legalization and cannabis stock prices barely flinch at news of regulatory advances at the state or federal level.

All this is to say that I believe the markets are now waiting for the actual implementation of legislation that has potential for sustained value creation in the industry, like SAFE Banking.

Has the type of LPs willing to invest in cannabis-related funds changed at the pace you hoped?

There has absolutely been an evolution in LP community interest in cannabis. Cannabis remains one of the very few industries with guaranteed growth for many years to come. The challenge is understanding where to find this growth and be comfortable with locking up cash for longer-than-expected periods.

We still meet LPs with strict policies that do not allow investment in the industry, mostly on the plant-touching side. LPs who previously held back because of sentiment or lack of knowledge have been gradually crossing the floor.

My strong advice to new capital in the industry is to partner with experienced cannabis investors. You cannot prepare for the degree of surprise in the space. Never a dull moment!

NY is creating a social and economic equity program as part of its retail license attribution. Are you seeing investors adopting an equity-minded approach to open up the space to communities harmed by legacy drug enforcement policies?

We are gradually seeing more investors and operators acknowledge social equity and the importance of creating and prioritizing opportunities for communities harmed by the War on Drugs and other social injustices.

How do you prefer to be approached, a cold email, or a warm pitch?

I do love a warm pitch.

Keyword: Despite regulatory hurdles, these 4 US cannabis investors are planting seeds for tomorrow

TECH'S NEWS RELATED

Google gets serious about wearables with the Pixel Watch

2021 was the Pixel’s year. The Pixel 6 saw Google finally getting its act together and introducing a flagship that could rival the likes of Samsung and Apple. But while the line is getting a solid upgrade this year with the Pixel 7, it was inevitable that the handset was ...

View more: Google gets serious about wearables with the Pixel Watch

Typhur cooks up $20M to channel your inner sous vide chef

If you’re a budding home chef eager to try your hand at sous vide cooking, Typhur Technology wants to be your new best friend. The San Jose-based culinary innovation company has been quietly working on its first product, the Sous Vide Station, which is poised to debut at CES ...

View more: Typhur cooks up $20M to channel your inner sous vide chef

Jiko wants to help companies park their cash in T-Bills as everyone yield hunts

Jiko started its life as a mobile bank for consumers. But over time, the fintech startup has evolved its model – mostly fueled by demand – and is now making a push into corporate money storage. In 2020, Jiko made headlines by being the first fintech to acquire a nationally ...

View more: Jiko wants to help companies park their cash in T-Bills as everyone yield hunts

The Rounds raises $38M Series A for its sustainable ‘household restocking’ service

Online shopping and speedy delivery through services like Instacart and Amazon Prime are the height of modern conveniences, but for many consumers who care about sustainability and e-commerce’s impact on the environment, every box and plastic bag deposited on their doorstep is also accompanied by a feeling of guilt. If ...

View more: The Rounds raises $38M Series A for its sustainable ‘household restocking’ service

Revelio Labs raises cash to scrape the public web for HR insights

Revelio Labs, a startup developing analytics software for HR teams, today announced that it raised $15 million in a Series A round with participation from Elephant Partners, Alumni Ventures, BDMI, K20 Ventures, Techstars and Barclays. Bringing the company’s total raised to $19 million, the proceeds will be put toward expanding ...

View more: Revelio Labs raises cash to scrape the public web for HR insights

Techstars unveils sustainability-focused acceleration program in Paris

Techstars, a network of startup accelerators and an investment company, is launching a new accelerator in Paris called Techstars Sustainability Paris. This isn’t the first time that Techstars is running an accelerator in France as the company originally launched Techstars Paris in 2017. With this sustainability-focused accelerator, Techstars is ...

View more: Techstars unveils sustainability-focused acceleration program in Paris

Gather AI secures new cash to scan inventory in warehouses using drones

Gather AI, a startup using drones to inventory items in warehouses, today announced that it raised $10 million in a Series A round led by Tribeca Venture Partners with participation from Xplorer Capital, Dundee Venture Capital, Expa, Bling Capital, XRC Labs and 99 Tartans. The proceeds bring the company’s total ...

View more: Gather AI secures new cash to scan inventory in warehouses using drones

UK to probe Inmarsat and Viasat’s $7.3B merger on competition grounds, says it could lead to pricier in-flight Wi-FI

The U.K.’s Competition and Markets Authority (CMA) has announced that the proposed merger between London-based satellite communications company Inmarsat and its U.S. rival Viasat raises potential competition concerns, and plans to launch a full-scale investigation into the deal. The $7.3 billion transaction, comprising a mix of cash, equity, and ...

View more: UK to probe Inmarsat and Viasat’s $7.3B merger on competition grounds, says it could lead to pricier in-flight Wi-FI

AI-powered supply chain visibility platform Altana bags $100M

Watch Google unveil the Pixel Watch and Pixel 7 here

Lightdash takes on Looker with an open source BI platform built for dbt

Walmart counters Amazon’s Prime Early Access Sale with its own fall deals event

I almost joined McKinsey before starting Bhanzu: Meet Neelkantha Bhanu, the world’s fastest human calculator

Fiserv, LG back Korea Credit Data as the SME-focused fintech startup raises another $24.7M

Halo Car’s teleoperated car-sharing service to roll out this year with no one behind the wheel

Is it time for Elon Musk to find a Tim Cook for Tesla?

As Iran throttles its internet, activists fight to get online

Engage with AT&T, Polygon, & more at TechCrunch Disrupt

SpaceX notches eighth human spaceflight mission with Crew-5

Daily Crunch: Google will use private subsea cable to launch its first full-scale cloud region in Africa

OTHER TECH NEWS

;