Cannabis continues to be a phenomenal growth market. But like in any burgeoning industry, effective business growth requires capital. Plus, with typical banking services currently generally unavailable to the industry, growers, operators, and distributors need to be especially strategic and creative about financing. While special purpose acquisition companies (SPACs) have been a popular option for many cannabis-related concerns, their appeal has diminished due to increased scrutiny from regulators and investors alike. At the same time, market dynamics have made capital overall harder to come by.

At last month’s MJBizCon, as part of the CannaVest series, representatives from a number of capital providers, operators, and advisors discussed the diverse ways that today’s investors can access the cannabis space, during a session titled New Pathways to Liquidity & Capital: Private Equity, Venture Capital & SPACs. While each investment pathway is unique, with its own set of opportunities and inherent risks, the panelists gave insights into their experiences and forecasts for the industry. Read on for a summary of top takeaways.

• Merrick Friedman, Achari Ventures
• David Kirshenbaum, MeadeCo LLC
• Mina Mishrikey, Merida Capital Partners
• Helene Servillon, JourneyOne Ventures
• Valay Shah, C3 Industries
• In conversation with CohnReznick’s Greg Chin

Early investment theses still apply

For many in the industry, their initial investment thesis continues to hold true. For example, while the industry has certainly evolved, it is still more focused on the platform supply chain than on end-user brands. Investments in ancillary and tech-enabled companies in particular are getting more popular compared to plant-touching businesses. A noticeable change in the environment is that management of cannabis concerns is getting stronger; though capital is harder to raise, the fact that talented entrepreneurs continue to enter the market bodes well for the future.

Access to capital requires realism, rigor, and returns

While the financing funnel has been narrowing over the past few years, it is still very much there for stronger companies with solid fundamentals who can craft differentiated and compelling stories to meet investor requirements. Managing working capital and operating costs and focusing on margins is vital to creating pathways to liquidity, especially for companies that do not already have a strong investor base.

Compounding the financing issue is the fact that many companies today are overvaluing themselves. In the struggle for capital, they need to be more realistic about their performance. They also need to be more pragmatic about the timing of liquidity transactions, and, in light of increased market saturation, conscious about taking advantage of good opportunities when they arise.

At the same time, the reality is that cannabis is a “long play,” and if companies can’t manage the short term, they won’t survive. This means that operators must be practical about their capital needs today, mindful of the possibility of a recession, and fiscally prepared for riding it out.

Whether debt or equity, lenders across the spectrum are drilling down and becoming more careful in their underwriting, assigning greater value to not only strong fundamentals but also strong management. These are the companies that will be able to access capital and participate in buy/merge opportunities as the industry grows.

Changing expectations for liquidity events

Overall, operators would be well advised to recalibrate their exit horizon if they’re looking to maximize value. Limited access to capital means more equity-based mergers than cash-based transactions in the short term. It also means that many operators can’t afford to be too aggressive as they consider these deals. Beyond M&A, restructuring in its various forms is also an option for overcoming capital weaknesses and weathering liquidity issues.

Expanding the pool of investors… and lenders

When one door closes, another door opens, and so it goes in the cannabis space. For example, while family offices were entering the space at a frenetic pace just a few years ago, interest has waned. Conversely, as institutional investors have grown more familiar with cannabis, there is significantly more interest than ever before, and with it, a lot of institutional capital will potentially be available pending regulatory changes.

In terms of private equity and venture capital, there are also a number of emerging investors focused on specific niches in the cannabis industry, such as tech-enabled services and the application of e-commerce platforms.

In the meantime, the idea that SPACs are “dead” may be overstated. While there has been a lot of carnage in that market, and in fact investors are now buying up distressed SPACs, they remain another alternative and an easier path to going public for many companies who need capital.

And while equity capital is of course an important part of the picture, over the past few years the debt market has been an accelerating trend as a means of growth and acquisition capital. This is especially true for MSOs and other companies that have significant real estate and other collateral, as well as strong cash flow.

Optimism for the future  

New states continue to join the ranks of legal recreational and medical markets, and so despite what’s happening on the capital market side, the total available market of the industry will continue to grow. Numerous companies in alcohol and tobacco are getting more interested in cannabis investing as stigma declines and they become more knowledgeable about the industry.

In fact, investors are learning that cannabis is about more than dispensaries and buying products. There is a huge potential market in the use of hemp fibers for industries such as construction, automotive, and textiles, as well as nutritional uses for hemp seeds and pharmaceutical/consumer goods applications.

Overall, cannabis is an excellent growth industry, albeit an evolving one, with phenomenal prospects for the long term. While the market will likely look different in years ahead, companies with solid fundamentals, strong management, and strategic insight will be best positioned to thrive.

^{Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.}