A Cannabis VC Fund Breaks Down Its Thesis: Why This Plant, Why Post-Seed Companies, Why Now?

By Poseidon.

The cannabis industry is at an inflection point. Essential-business status created an unexpected leap in new consumer adoption. Sales were up 40% in 2020. The results appear in nearly every sector but are most visible in the quarterly reports of the publicly traded multi-state operators (“MSOs”). Green Thumb Industries’ GTBIF sales were up 133% and CuraLeaf CURLF’s sales were up 200% in the LTM as of Q4 2020.

Though investments in MSOs can provide risk-averse institutional investors 2–3x returns, those seeking outsized returns and true cannabis alpha must target the early stages. Post seed, when a company is pre-Series A but experiencing early traction and product-market fit, provides a natural point for alpha-chasing investors to engage and mitigate risk. In this post, we will explain why now is the time to invest in post-seed cannabis to achieve internal rate of return (“IRR”) gains of 30% or more.

Why cannabis? The cannabis industry will double in size over the next 5–6 years. Legal U.S. cannabis sales exceeded $17.5 billion in 2020, up 46% over $12.1 billion in 2019 sales. Forecasts predict sales will double again in less than six years to $41.3 billion — and that’s just the U.S. Global cannabis sales pegged at $21.3 billion in 2020, will grow to $56 billion in 2026. Simply, these conservative estimates position cannabis as one of the fastest growing markets and investor opportunities in the world.

So why post seed? Seed investors seek 100x returns. Series A investors target 10x returns. Late stage investors demand 2–5x returns. In cannabis, the probability of achieving these returns is aided by legalization expansion, distribution growth, and opportunities for product evolution/innovation. Institutional investors — newly woke up to the outsized returns inherent in cannabis — are flooding late stage down to Series A and driving up valuations. This leaves opportunity for post seed investing — the last round before Series A. Poseidon’s private investing data indicates a significant valuation delta between post seed and Series A. The combination of these factors creates the greatest opportunity for professionally managed, diversified funds to generate cannabis alpha.

So why now? The cannabis industry is just beginning to realize its acknowledged potential. Multiple MSOs are achieving $100 million revenue quarters, with line of sight to $1 billion in annual sales. Plus, a Blue House, Senate and White House increases the probability of any new legalization milestone. These trends are resonating with entrepreneurs who are growing in numbers and, more importantly, quality as the business climate improves. While institutional capital is funneling into later stage companies currently, natural investing cycles indicate this capital will trickle down to post seed companies today, likely via M&A, rewarding investors for their foresight. And finally, the consumers are growing more particular on the quality of their products, encouraging those with expertise in absorption, bioavailability, and efficacy to add another growth multiplier to the industry’s potential. Now is the time.

Conclusion

At Poseidon, we have seen great opportunities for investors in cannabis since our first entree into the market in 2014. Collectively, our team has raised 7 funds and invested in nearly 200 businesses. Achieving a 10X multiple on invested capital is possible. We know this because we’ve hit this mark. We’ve helped this industry grow from the front lines, beside our founders. It’s clear to us, that the combination of investing today…in cannabis…at the post seed stage, is where the greatest returns can be generated in the industry. For those investors who invest selectively, assist actively and profit aggressively, true cannabis alpha is possible.

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• Photo: Cannnaclusive