Cannabis industry investors are a passionate group. Many are willing to take the risk that comes with investing in companies that mostly described as speculative. Plus, the overhang of being in a federally illegal industry affects every decision an investor in this group faces.
Before committing your hard earned dollars in this group, you must ask yourself these three questions. Does the company have a real and viable business plan? Is the management professional and effective? Can the company withstand the upheaval in the marijuana market?
If all this work seems overwhelming, consider working with a financial company that specializes in cannabis companies. Invictus MD (CSE: IMH, OTC: IVITF) looks for traits like this when they are deciding to deploy capital. They look for brands that are leaders in the space or have the potential to become top brands. They also make sure the company has advantages over their competitors and Invictus has high expectations regarding the management team. It's this kind of disciplined and prudent approach that leads to successful investing.
1. Kick the tires and do your homework before investing in a cannabis company.
Read the company's business filings and don't rely on just news articles to learn about a company's business. Some news stories may be helpful, but it should not be your only source of information. If the company is public, there will be numerous documents filed on behalf of the company. Take the time to read these filings.
Ask yourself whether the company's plan is viable and if their growth projections are realistic? Do they have a real business or it is merely a business idea? If they sell a product, how much revenue is coming in? If it isn't much, but the projections are for double-digit or triple-digit growth, how are they getting there? Are the growth projections based on hard numbers or does it seem like guesswork? Perhaps this is a red flag.
2. Is there an actual product?
Talk is cheap. Does the product or business actually exist? Is the location a real location? Plug in their address in Google maps and check the earth view to make sure you see what they are claiming. Can the product be manufactured in volume? Small batch is easy, but can this business grow? Can this business then be replicated in multiple states? Look at the company's expenses. Startups frequently need to spend a lot of capital to get off the ground, but do the expenses look unusual?
Once you are satisfied that this business is real and they are who they say they are, then look at the management. Are they in it for the long haul or looking to merely enrich themselves on the “greenrush.” Are they loading up on excessive amounts of stock or giving themselves unusually high salaries? Don't be afraid to call management with questions you've compiled after doing your initial analysis of the business. They may be busy, but good management is normally willing to answer well-thought out questions of an potential investor.
3. Check the management's background.
Many cannabis companies are bringing in top talent from more traditional industries. Look at LinkedIn to see if in fact they worked at the places they claimed. Was management successful in other businesses in other industries. For example, if they were successful REIT manager before, then the chances they will be successful REIT manager in the cannabis space is more likely. If they worked for a major food company like Nabisco or General Mills, then it's highly possible that they will be successful as an infused edible producer.
The cannabis market is in a period of uncertainty with the new administration. Is the company you are considering for an investment able to survive this uncertainty. Does it have enough capital to withstand years of not making money? If in the worst case scenario the government decides to crack down on cannabis businesses, could your company engage in another sector that doesn't rely on cannabis? For example, could your indoor cultivator turn to growing organic vegetables? Can the edible company still sell food that isn't infused?
These are three critical questions to ask yourself before committing your disposable income with any cannabis company. This is a nascent industry and like many companies from the dot com era, several will not be around in a few years. However, with some good research you may be able to uncover the future leaders of the cannabis industry.