Navigating The Wave Of U.S. Cannabis Investment

This article by Robert Hoban was originally published on Forbes and appears here with permission.

What happened in Canada when the presidential hopeful at the time, Justin Trudeau, announced he was supportive of cannabis legalization? Massive amounts of capital began flowing into the Canadian cannabis market. However, many investors never saw positive return on those cannabis investments.

That’s almost precisely where we are in the United States right now. There are indicators, not the least of which was the House's passage of the MORE ACT, that senior members of the Biden administration, like Senate Majority Leader Chuck Schumer, are moving toward federal cannabis legalization.

This is building a wave of momentum for U.S. cannabis investment and goes hand in hand with the trend of industry consolidation we’ve seen in recent months. With this growing enthusiasm and confidence, increasing mergers and acquisition activity, and investors looking for companies to fund, one must ask the question - how does one evaluate cannabis investments?

You may be surprised to hear that it’s not by dollars and cents. It’s not the bottom line or assets. Financial due diligence is one thing, but if we've learned anything about investments in the cannabis space, it’s that it takes a unique formula to evaluate cannabis based investments.

We've seen people lose their shirts on CBD investment and have been preaching that the ship has sailed. You can’t just follow the puck — you need to anticipate where it's going. Are there tools out there that the market makes available from learned people who understand industry due diligence?

There are, but they are not Cowen, not Wall Street analysts, and not anyone who thinks that the cannabis industry is just like every other emerging marketplace. It is unique and you need people who can rate and evaluate your potential investments based on industry knowledge, regulatory trends, political background, and perhaps legal expertise. These are the people who understand what direction the winds are blowing. That’s how you determine where the puck is going. 

We had Wall Street analysts leading people down the path to ruin for extraction- based investments in the CBD sector when in reality that ship sailed four years ago. This is likely because Wall Street analysts are missing context when it comes to cannabis. Early on, in the days of legal cannabis in Canada, companies that looked good on paper raised huge amounts of capital. That excitement was short lived. Like the dot-com boom, cannabis companies were grossly overestimated, and in 2019, the biggest publicly-traded Canadian cannabis corporations began to crash, collectively losing $14 billion in market capital.

This is precisely why industry-based due diligence is needed as investors position themselves for the opening of the U.S. cannabis market. If we don’t learn from the failures of the Canadian market, we’re doomed to repeat them. So who’s to guide them?

One offering from Gateway Proven Strategies (GPS) is COMPASS, a comparative analysis tool that uses a 150 data point proprietary algorithm that provides an analysis of a cannabis business. This scoring system strives to provide investors with context. It addresses the business market potential, how it fits into existing supply chains, how industry trends will impact the business, how predictive measures can analyze the survivability of a company, and a business's ability to adapt as the cannabis market matures.

While financial due diligence is a major component of it, COMPASS assesses intangibles that require a global cannabis industry perspective, something Wall Street analysts cannot possibly offer. Chief Operations Officer of GPS, Deanna Callahan comments, “Our firm is a think tank consisting of industry pioneers and subject matter experts within and outside the cannabis and industrial hemp space. The collective wisdom of these academics, entrepreneurs, seasoned executives, former law enforcement and regulatory agents, politicians, and thought leaders, is collated into an algorithmic system that could quantitatively measure a company's success potential- resulting in a comprehensive assessment that guides clients towards improving their odds of success in navigating the nascent waters of emerging markets.”

Another firm capable of providing industry-based context is Regennabis, which has recently launched Regennabis Ventures Funds. For the brain trust behind Regennabis, building sustainable development in the cannabis industry is paramount. As I’ve touched on previously, this industry is uniquely positioned to lead the adoption of environmental, social and governance (ESG). Regennabis has developed a system for evaluating a cannabis company’s ESG score. This is a valuable resource for ESG investing, with investors taking into account financial returns, corporate governance, environmental, social equity, and sustainability initiatives — a rapidly growing segment of the investment community.

Ultimately, the United States is now sandwiched between two nations that have enacted federal cannabis reform. It is no longer a question of “if,” but of “when” the U.S. will move forward with some form of medical or adult-use cannabis legalization at the federal level. 

Just as we saw in Canada, cannabis reform is gaining supporters at the highest level of American politics leading to a wave of excitement and causing investors to position for market entry. When that time comes, capital will begin flowing into the U.S. cannabis market that will far exceed the investment that went into Canada on the heels of the nation’s cannabis legalization. For those of us who’ve watched cannabis spring from night into the sun, who have seen the patterns and obstacles that are unique to this industry, the best we can do is share those historical lessons. Context and perspective are the greatest tools in the arsenal of navigating the global cannabis industry. As investors gain confidence and consider deploying capital into the cannabis marketplace, choose your guide wisely.