80 Top Colorado Cannabis CEOs Reveal Cannabis Industry Insights

By: Patrick Rea, Managing Director, Poseidon Garden Ventures & Colin Ferrian, Portfolio Manager, Poseidon Garden Ventures

What is on the minds of CEOs in the cannabis industry?

At Poseidon, we understand how every state in the US cannabis industry is unique. Market structures, regulations, key competitors, product strategies, and consumer trends, all vary at a more granular level and drive how operators shape their corporate strategies. 

While there is often sufficient data to understand structures and trends, picking apart operator sentiment and strategies requires a “boots-on-the-ground” approach.  

After more than seven years of investing into cannabis, we have learned how the value of a team dispersed across the most mature cannabis states can provide a nuanced view of these markets.  It’s the reason each of us are focused on supporting and understanding local businesses, despite our global investing reach. 

The following is just one example of how the Poseidon team shows up and invests from the front row.

Eighty of Colorado’s top cannabis CEOs, founders, and investors gathered in late August to discuss the persistent volatility facing the industry since 2022, and the conversations reflected the increasingly difficult choices executives must assess to survive.

Colorado is home to some of the industry’s most experienced operators. Many have navigated the legal cannabis industry since its medical debut in the mid 2000s, with multiple crop cycles affecting margin profiles and business earnings, bear markets affecting capital availability, and a constantly evolving end customer affecting inventory and pricing strategies. 

The insights of the executives in attendance provided an invaluable source of feedback for entrepreneurs and investors studying the “do’s and don’ts” in this fast-evolving industry. Those who spoke were blunt about the keys to survival, and the trending takeaways seemed to triangulate on the increasing importance of branding in an oversupplied and capital scarce environment.

Here’s what we learned.

Branding may hold the keys to future success

In the past, operators could get away with producing in-house flower at affordable prices, but as consumers mature, products with less brand recognition and low quality control are falling behind new entrants.  

As flower prices continue to drop, market dynamics are changing from benefitting vertically integrated operators to branded product companies. 

Where vertically integrated operators have historically held an advantage in developing and selling products through their own stores, the decline in crop prices and evolving consumer purchasing behavior is causing these companies to experience a mix of increasing cash burn for commoditized cultivation strategies and quickly declining customer loyalty for often underwhelming value-based products. Consumer tastes are evolving, where brands can’t win on price, consumers are developing loyalty based on quality.

In contrast, companies exclusively focused on creating branded products are taking market share from these in-house offerings, forcing vertically integrated operators to either adapt or risk revenue churn and margin deterioration. 

Further, there was general agreement that there is an opportunity for deeper collaboration and alignment between brands and retailers when it comes to unit economics and strategy. Misaligned incentives between brands and retailers have proven untenable in California, and this is informing  the activities of operators in Colorado and other states.  High shelving fees, slow/no pay, and general disinterest from retail purchasing managers in anything new are a few things frustrating brands.

For example, the excessively high shelving fees for new products or the trading of shelf space between vertically integrated operators could become strategies of the past. 

“In new and mature markets, retail and brand fundamentals are becoming a timely necessity for sustainable growth,” asserted one Cannabis CEO.  “Now is the time to engage and collaborate to achieve mutually aligned objectives between brands and retailers.”

Further, reflections on the state of the industry led CEOs to remark how launching in a new state has changed so much in a short time. Consumers in newly legal states now expect access to recognized branded products.  They used to be happy with legal weed.  Now they want more. The opportunity exists for operators to parachute their brands into new markets from day one, a stark change from a few years ago.

Oversupply remains an issue across markets

The industry has overbuilt cultivation capacity in many markets, like Canada.  Managing cultivation in the wake of sustained oversupply is of growing importance.  

In the face of plummeting crop prices, it is noteworthy that some single-state and multi-state vertically integrated operators have temporarily shut down their grows in the wake of a price trough. 

“In Colorado, at least 5 major grow operations decided to either shut down or reduce their cultivation businesses this year,” said Colin Ferrian, Portfolio Manager at Poseidon Garden Ventures.  “During these lean times, the value of shrewd business practices shines through.”

Many operators believed they could ignore traditional business economics and have met poor returns. Companies securing high-interest loans from predatory lenders and embracing production models that produce pounds for less than wholesale value are quickly crumbling. Like any industry, those who embraced efficiency and lean operations across the board will continue to thrive.  

Legacy operators with multiple years of experience and a genuine love for the plant are the ones who are fighting the hardest to survive. The executives in attendance recognized a need for greater alignment between the better capitalized operations and seasoned entrants, as the lessons learned by the more experienced operators can be adapted to overcome some of the industry’s seemingly insurmountable obstacles.

Michigan’s wholesale cannabis price collapse was mentioned several times. With wholesalers in the state concerned about making ends meet some are now willing to trade flower trim for zero dollars, and that continues to drive the market into a downward spiral. The fall out could look similar to the tax issues seen in Washington, the Colorado wholesale  price crash in 2016, outdoor harvests cutting indoor cannabis prices by 50% in Oregon, the struggling markets of Arizona, the semi-permeable barrier between the legal and illicit cultivations in California, and the over-issuance of cultivation licenses in Oklahoma.

One Colorado cultivation CEO noted that hyper-efficient grows still have a chance for success, even in states like Michigan. This experienced cultivation operator was moving forward to launch a grow in Michigan and plans to compete by leveraging years of experience navigating low wholesale prices in Colorado.  

The industry seems poised to self-correct in an unfortunate manner for some, and a cleansing is needed for the overall health of the cannabis ecosystem. Nationally, we expect to see a smaller number of thriving, well-funded companies in the near future, and it is likely that underfunded startups will struggle to find financing and may need to make some hard strategic decisions about the company’s future. 

Funding is becoming difficult to find

When it came to the topic of financing the cannabis industry, the current market produced a somber mood among executives. 

In most cases, investors were as exhausted as operators. On the topic of startups entering the Series B and C funding rounds, one industry venture capitalist asked, “Who will fund these rounds?  How many of these businesses will fail in the next year?”  

As valuations continue to fall in public and private markets, the current funding environment puts immense pressure on players across the industry. CEOs are anxious to close commitments quickly and eliminate the possibility of investors pulling out at the last minute. There is a knowing look in the eyes of local Colorado CEOs as they watch the deal activity in other states. They’ve been here for a while. Straight equity and debt deals are becoming less common, as investors seek to structure their investments in ways to increase the probability of returns in the low exit multiple environment. 

Brands are being viewed as the way to hold onto margins in the future, but few brands outside Cookies, Zig Zag, and High Times have successfully transcended state borders. Capital is being invested to break through and reach consumers at a national level, with few successful case studies to date as a result.  

Celebrities remain interested partners in the cannabis industry with the belief they can be signals in the noise for consumers, but based on the existing examples, it’s difficult to pinpoint how these partnerships can provide incremental value.  It’s also very difficult to predict if there’s any incremental value from a celebrity’s involvement.  

The budtender remains the key influencer in many consumer purchasing decisions. Recommendations from budtenders, when rendered, directly impact purchases 80+% of the time. They are THE influencers in the cannabis industry, and the brands understand this.  This may be why intelligence platforms like SparkPlug and Happy Cabbage are doing so well.

A Rapidly Changing Industry

The takeaways from the conference highlight the value of being connected at every level of the industry and building reliable peer networks. When times are tough, we need each other more than ever - even CEOs. The way forward is constantly evolving and may look different tomorrow, but we learned that the knowledge and experience of Colorado CEOs touches every legal cannabis state. Local cannabis CEOs are paying attention to other pioneering markets and aren’t afraid to use them to inspire creativity within their organizations. In Denver, on August 30th, many offered hardened and truthful insights on their outlooks within cannabis. 

 

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