Cannabis is not a new industry. It has existed as a subterranean market since the advent of cannabis prohibition in 1937. What makes it feel new is the possibility that legal cannabis today holds for positive economic transformation all over the United States and the world. (Sidenote, check out how 420 got it's name.)
This is not just a situation where we are creating a handful of weedpreneurs; we are talking about how the end of marijuana prohibition has the potential to impact unemployment on a local, regional and national basis. We are talking about huge amounts of profit that can be re-invested into social enterprises, not to mention the tax revenue that can be recycled back into education and healthcare and many other projects if we choose to be thoughtful and committed in our approach.
The industry is moving at warp speed and excited cannabis investors that take a moment to step back and catch their breath, are going to see a wide ranging and expansive landscape of opportunities that reaches far beyond the basic production and consumption of the plant itself.
This dynamic, regulated marketplace will spark a wildfire of mission-critical services from traditional industries such as legal, advertising, sales, marketing, distribution, software, security and many more. It will also require a myriad of financial, advisory and real estate services to fuel the growth of this incredible economic engine.
Then there are the investments in infrastructure for dispensaries, labs, testing equipment, and research and development. Scientific research for medicines will spawn dozens, if not hundreds of powerful science start-ups and new divisions of larger enterprises based on genetics and new biotech based on the plant. And that does not even touch on patient and consumer products like vaporizers, storage devices and more. Some would say these ancillary vertical businesses will actually eclipse the cannabis market itself. As the old saying goes, it wasn’t the miners that got rich during the gold rush – it was those that sold the picks and shovels.
The investment opportunity
So where is the money to spur the growth going to come from? What are the terms of investment going to be? How much will be in real estate? How much will be in equipment, personnel, or consulting expenses, etc.? And, as these businesses raise money to build the infrastructure, what will they be valued at? Will they be valued at five times the amount of money they need? Ten times? Twenty?
We don’t know. If we use current company valuations as they are now as any guide, 10X money raised would not be unusual. Does that mean we’re going to be creating $200-billion worth of value in the next three years in the legal cannabis industry? Maybe. That is an awful lot of wealth generation and represents a much needed boost to our GDP. Although the overall opportunity may be significantly larger. And now we realize, yeah, the Kool-Aid tastes pretty good.
I spoke with Lindy Snider, a leading industry entrepreneur and founder of the Lindi Skin product line for cancer patients. Lindy provided helpful insight into the valuations of new cannabis companies.
“Generally you have a given multiple where you can base a valuation, but this industry hasn’t been around long enough to know what that looks like. The projected revenue is based on assumptions, and a bullishness around this industry and the assumption about its growth and the market share that any given business thinks it can grab. I think there is a lot of play between assessments with some companies that are undervalued and a percentage that are overvalued,” she said.
I also reached out to Tom Quigley, Founder and CEO of The GLUU, a wholesale distribution company offering ancillary products in legal cannabis for some outside perspective.
“Many investors are overlooking the pieces which will support the industry. Companies that are developing technologies, processes and services have just as much growth potential with often a bonus of less risk. These important pieces are being overshadowed by the sexier side of being a cannabis entrepreneur and are being ignored by analysts,” he said.
I agree with Tom about the blind eye regarding opportunities outside traditional cannabis verticals. There is research to support the thesis that ancillary businesses will have their heydays. A widely read white paper (The Economic Impacts of Marijuana Sales in the State of California) published by ICF International, estimates that legal sales of marijuana to California residents and visitors could support between 81,000 and 103,000 total jobs and between $8.4-billion and $10.6-billion in total industry activity, of which $5.5-billion to $7-billion would be new value added to the economy. The numbers are gigantic, but what I believe is even more awe inspiring is the concomitant opportunity to impact society for the better.
An elevated form of capitalism
Considering the sprawling financial and macroeconomic ripple effects of legalizing cannabis, we see the shift to a legal market as the impetus for sweeping changes in all aspects of modern society. People are not just going to make a ton of money - individuals who have been incarcerated for years will be released, hundreds of thousands more will never even be charged because of the tidal wave of change that drug reform will bring to bear on our criminal justice system.
Taxpayer funds will no longer be leveraged to warehouse and punish consumers of cannabis rather, taxes from the sale of marijuana will go back into public coffers. Money and lives will be saved and fortunes will be made. But once the fortunes are made and the growth of the industry has defied what anyone ever imagined cannabis could yield, what are we going to do with our profits?
If we take a sobering look back in time, we see devastating social and economic effects left by marijuana prohibition and we are moved to ask, will we be mindful enough to ensure that these criminalized and stigmatized segments of society are included in the financial benefits of legal cannabis? This and others are important questions.
Industry leaders press for social justice
Leaders in the industry discuss an imperative for social justice to be served by the emergence of cannabis as a regulated commodity and many companies have already expressed a commitment to making a positive impact through their participation in the industry. But as the end of Prohibition looms nearer, we must walk the walk. For truly socially conscious business owners in legal cannabis, the time is now for us to all to put our money where our mouths are. And the bottom line is that if we do not engage in serious dialogue and change our frame of reference right now, we will miss the opportunity.
Quigley's take is that the need to right the wrongs of our failed drug war is a shared responsibility and will be accomplished by creating positive connections and opportunities for those who have been adversely affected.
"Businesses in legal cannabis can help facilitate this process through progressive hiring practices and investing in training and education of our workforce. It’s developing positive inspiration from the mistake of mass incarceration.”
Ultimately, we both agree, the winners will be those companies that lead by example, exemplifying positive change through active engagement with local communities. They will tangibly support progressive policies at the grassroots and national levels and they will work towards creating an internal makeup that reflects the cultural diversity of the market they serve.
So I will say it over and over that we must change how we think about cannabis and capitalism. We must view our financial success as something linked to social responsibility and environmental stewardship. We must give back to our communities in meaningful ways and we must use our influence to steer public policy in directions that promote a more enlightened society, and that starts with a more enlightened economy. And that's Capitalism 2.0 meets Weed 2.0. Call it Capitalism 420 if you like and jump on the bandwagon.
This is the third in a series of monthly columns by Leslie Bocskor about financial issues in the cannabis industry. His last piece, Don't Let Emotions, Positive Or Negative, Fuel 'Green Rush' Investment Decisions, was published in October.
Leslie Bocskor with his advisory firm Electrum Partners is leading the evolving discussion around policy, entrepreneurship, and investment in the cannabis industry, nationally and internationally. As founding chairman of the Nevada Cannabis Industry Association, and with his far-reaching Wall Street background, he’s helping design the models for cannabis industry investment, business and regulation, as Nevada did with gaming. Whether it's big pharma’s long tail or first-mover investors taking advantage of early opportunity, Bocskor's insights and influence have made him a trusted expert and revered pundit on getting in and getting out of cannabis investments successfully.