Slow-Paced Federal Legalization Could Be an Opportunity, Not a Setback for Cannabis Investors

The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.

Image Provided By Pixabay

While the lack of federal legalization has made some investors hesitant to add cannabis companies to their portfolios, Intrinsic Capital Partners sees that as one of the things that makes the cannabis investment space so attractive. It’s a hyper-growth market, projected to grow at a compound annual growth rate (CAGR) of 26.5% over the next decade. Still, because it’s not federally legal, most traditional sources of capital and strategics haven’t felt comfortable entering the space yet. 

There’s significant demand from cannabis companies that need capital to grow, but the supply of traditional capital has been slow to increase enough to meet that demand. However, this creates a unique opportunity for cannabis-focused investors looking for high-growth opportunities that otherwise could be hard to find in a fully legalized market.

Investors Might Change Strategy to Take Advantage of Pre-Legalization Cannabis Markets

A lot of investors in the space right now are spreading their bets around and counting on the organic growth of the market to deliver their returns. However, many may not be bringing a lot of operational expertise or directly partnering with the companies in their portfolios to really help them build and grow. 

That hands-off approach of spreading capital across a large number of companies might not be the best way to maximize growth potential in a market with the unique characteristics seen in the cannabis space. For instance, there are talented entrepreneurs who have visions of building their companies into industry leaders — but in many cases, they haven’t ever done it before, and they may not have access to the traditional capital that startups in other spaces do. 

To realize its growth potential, a cannabis business needs enough capital and enough operational expertise to translate that vision into an industry-leading company in its vertical. 

To that end, the cannabis investors, who could stand to see the most return on their investments, are the ones who focus on identifying a few of the strongest candidates in the space and then partner with their portfolio companies. This helps execute their visions and avoid some of the pitfalls that are common when trying to build a company.

The Characteristics of a High-Growth Cannabis Investment

Essentially, investing in companies that can build and scale into industry leaders could be a rewarding strategy — so that when full legalization may occur, there will be opportunities to have successful exits at possibly far higher valuations.

Those companies generally meet four criteria:

1. They are in verticals with a large total addressable market, indicating a potential for significant growth.
2. There is no clear dominant player in its vertical yet.
3. Relative to its peers, the company is well-positioned to scale, with the right guidance and the right execution, into a dominant player in that vertical.
4. They are in verticals where, when legalization occurs and traditional companies enter the space, they will look to acquire existing industry leaders as opposed to displacing them.

An example of an investment that might check all those boxes is Treez Inc., one of the highly promising companies in the Intrinsic Capital Partners portfolio. What attracted investors to this enterprise cloud platform was that it was created -- not adapted --  as a cannabis industry solution targeted to a gaping void and pain point in the market.  There was a lack of retail commerce software solutions and like many success stories, this comprehensive technology platform solved a serious and critical need for this accelerating marketplace. 

It’s a huge addressable market, and there’s no dominant player in the vertical yet, so there may be a significant opportunity for Treez to become the leader in that space. While its competitors have some low-cost, basic solutions to offer to retailers, Treez has built a highly scalable, enterprise-level cloud platform that solves a large number of problems for the retail supply chain, from distributors through retailers. It was deliberately constructed with flexible application programming interfaces (APIs) and integrations that could become industry standards, positioning Treez to be poised as a unique winner in the space.

There are also logical strategic acquirers down the line. As Treez scales for this accelerating marketplace, traditional companies in enterprise software might be more likely to be acquirers rather than looking to build their own vertical offerings. Business history would suggest this will be highly likely.

The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. The content that follows is for informational purposes only and not intended to be investing advice.