The Three Stages of Cannabis Investment

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Are you interested in an investment in the cannabis industry?   For many people, cannabis is the new “dot-com’ – the next big thing.  Actually this attitude has been developing for quite a while and as with all new industries, there are stages of risks/rewards that evolve over time.  In this post, I am going to discuss what I define as the three stages of Cannabis Investment.

Stage One

In Stage One of Cannabis Investment, true entrepreneurs risk involvement in a new upstart industry.  Risk-takers are very familiar with early stage development. Think of the early automobile industry. A small number of people invested in internal combustion automobiles when only few could imagine what would come of it. ( In fact, until the refinement of crude oil into gasoline, which occurred about the same time as the development of automobiles, cars might not have made at all.) The same is true of telephones, electricity, trains and the internet.  A distinction is that all of these are examples of once “new and unproven” technology. Cannabis, however, is neither new nor technology;  instead it is a natural material that has been in use for over 5000 years.  It is, according to some, an essential part of the human receptor system and after nearly a century of politicized criminalization, it is finally being understood and scrutinized for its positive effects.

During Stage One, true risk-takers spend time and money in a very bold fashion, usually using their own money unsure that any investment will be recouped. They take risk without any certainty of reward and with a high likelihood of failure.  This was the status of the cannabis industry as recently as 2014, when Colorado became the first recreational state. Back then, there was very little “traditional” investment funding. That is, the kind of financial resources that usually find its way into real estate or start-up business investment was also available for the cannabis industry.  Not only was cannabis use, possession and cultivation illegal under federal law, as it still is, the attitudes then were that federal law enforcement could shut down the whole business, despite state law authority. That was a real concern, as there was not yet the relative “comfort” that currently exists that, despite federal law, the cannabis industry will survive and thrive.

Investors in Stage One are more likely to be people already involved in cannabis cultivation in some form. They are early adopters of the current trends toward legalization and believe in it enough to risk whatever they have to enter the industry.  These are not typical investors, but instead they are risk-taking entrepreneurs.

Stage Two

Stage Two investors are those that have observed the successes of the Stage One risk-takers and also their mistakes.  These are people and, in some cases, capital funds that can measure and define a certain pathway to success in the industry and follow the nascent, but relatively stable, pathway to success.  For these investors, large dollar investments are measured against now established industry metrics.  Investment in locations, products, even services can be connected back to the studied successes and failures with the Stage One Investors.  Stage Two is similar to early stage investment in other industries, say for example a new app for internet use.  It may be new, but it is possible to accurately measure who the users are, where they may come from, what they want, etc.  In this way they can build a working model, financial pro forma and rate of return that is in the comfort zone of most traditional investors.

Stage Three

In this Stage, the “big money” has arrived.  This is very reliable investment model.  Here publicly-held companies, now convinced of the efficacy and long term viability of the cannabis market, are willing to invest because cannabis is a proven money maker and they need a cannabis component to complement their own portfolio of products. Most people think of big agriculture, big tobacco and big alcohol industries as being in this category.

I believe we are currently in Stage Two in most places, Stage One in some and Stage Three has not yet arrived in the United States, although it may have in Canada.

 

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