Why Are Investors Shifting Away From Cannabis? Expert Says 'They Don't See It Feasible Compared To Other Markets'

As the cannabis industry matures, investors have begun re-evaluating the qualities they seek in companies, especially in light of ongoing regulatory hurdles. With cannabis stocks underperforming due to a lack of progress in banking and federal legalization, the investment landscape is shifting.

Jason Paredes, director and architect at Hearst, shared his perspective on how these trends affect investor behavior ahead of his appearance at the Benzinga Cannabis Capital Conference.

The Shift in Investor Priorities

Paredes explained that revenue and operations are now at the forefront of what investors are looking for in cannabis companies. "Investors need to be able to understand a company's market and wallet share at the total actionable market (TAM) to their serviceable obtainable market (SOM)," he said. This focus on solid financial performance and market share allows investors to gauge the stability and scalability of companies, especially in a highly regulated industry.

According to Paredes, companies must demonstrate consistent growth and have realistic plans for future expansion. “The key is to be able to show YoY and QoQ growth and the structure and standard operating procedures (SOPs) that are foundational in a company's growth,” he added.

Regulatory Uncertainty and Its Impact

The cannabis industry's struggle with the 280E tax code and lack of access to traditional banking continues to weigh heavily on investor confidence. Paredes noted that companies need to build their business models around potential regulatory changes, such as cannabis rescheduling and tax code reforms.

"These trajectories should have models focused on the rescheduling of cannabis to a schedule 3 and abolishment of the 280E tax code, something that has investors coming back to the industry," he said.

However, despite the promise of reform, many investors remain hesitant. Paredes highlighted how investor sentiment has shifted in recent years due to the lack of regulatory movement. "They have divested from the industry altogether as they don’t see it feasible compared to other markets," he said. Others have turned to debt rather than equity, often under predatory terms.

Looking for Indicators of Success

With fewer investors willing to take risks in the cannabis market, companies are under pressure to demonstrate profitability and growth in the near term. "They have to see strong indicators of success today and the future around profitability," Paredes said.

This change in investor expectations highlights the need for cannabis companies to navigate the current regulatory landscape and position themselves for future success.

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