Cannabis gold rush: how to invest without risk

Cannabis gold rush: how to invest without risk

In 2021, startups supplying software and services to the cannabis industry will be in special hands of global investors. Big capital is investing record amounts in them in an effort to gain time to take advantage of the rapidly developing process of a once taboo industry. At the same time, without the slightest risk of conflicts with regulatory authorities.

As of November 9, about $2.6 billion has been invested in the cannabis production and distribution industry, which is significantly more than last year’s result ($1.45 for all of 2020). It is curious that more than 1.6 billion dollars were not received by the main players in the industry, but by the companies that serve them.

Sometimes a shovel is worth more than gold

Canada is the second country after Uruguay to legalize cannabis for medical and recreational purposes. The corresponding law at the federal level was adopted in 2018. This slowed down the global legalization process.

So in the US, where the maximum number of “hemp” startups and companies are concentrated, marijuana is still considered a “Schedule I controlled substance.” And this despite the fact that several states have already legalized its recreational or medical use.

Despite its not-quite-legal status, investments in the cannabis industry are breaking records. And the most notable interest among investors is sparked not by marijuana manufacturers and distributors, but by tech startups dedicated to serving an up-and-coming industry.

Experts are talking amicably about the new trend. Today, money is not invested in market players, but in their subcontractors, suppliers, in companies that develop software or other solutions for the industry.

All this is painfully reminiscent of the days of the “gold rush”, when it was not so much the gold miners who got rich, but the manufacturers and sellers of shovels and other trench tools.

«If you are an investor and you are thinking of participating in this gold rush, the only way to do the right thing is bet on technology», confirms Jeffrey Harris, CEO of Springbig.

His company develops software to sell and retain customers, and Harris himself is actively investing privately in startups focused on the cannabis business.

Without technology and marijuana is not marijuana

Just a few years ago, traditional venture capitalists and private equity viewed the cannabis industry as completely insignificant and too complex for serious investment.

Everything has changed. The fast-growing industry is of particular interest to venture capitalists, who are literally lining up to invest. The only factor that dampens the enthusiasm of the financiers is the legal fact of non-recognition of cannabis in the US (at the federal level).

That is why the big tech companies have so far bypassed this industry by refusing to serve it. They have something to lose. Meanwhile, niche startups are happy to partner with the cannabis industry. They are ready to offer services in inventory management, marketing, payroll, customer retention.

That is, today’s start-ups provide manufacturers and distributors of in-demand products with exactly what allows them not only to survive, but also to prosper: digital analogs of a shovel and a pickaxe from the times of the “gold rush.”

Technology companies serving the industry have become for many investors the only way to legally participate in the development of a growing industry with money.

Offers, offers, offers

The cannabis business wants to make the most of the current favorable situation: many are preparing to go public.

For example, springbig plans to list on the Nasdaq through a combination with Tuatara Capital Acquisition, the so-called “Special Purpose Acquisition Company” (SPAC).

And this is not the only example:

  • cannabis information site weed maps entered the stock market through the Nasdaq in June 2021 through a merger with SPAC. As a result of the transaction, the company was valued at about $3 billion (about $20 per share). Since then, shares of Weedmaps have fallen more than 40% to $12 per share. In principle, this is typical for public “hemp” companies.
  • leafy – a Weedmaps competitor – announced in August that it would go public through a SPAC deal with Merida Merger Corp. Implementation of this plan will bring Leafly more than $530 million.
  • e-commerce start-up Dutch in Bend, Oregon, closed a Series C funding round with D1 Capital in October, raising $350 million, pushing Dutchie’s valuation to $3.75 billion, having raised $200 million just seven months earlier.
  • In December, the New York Technology Platform Leaf Link successfully completed a $40 million Series C funding round. Lead investors were Peter Thiel Fund and Josh Kushner’s Thrive Capital.
  • Start up fyllo closed a $40 million Series C funding round in November. Although the company does not disclose the valuation, it is known to have raised around $100 million since August 2020.
  • flow center The Denver-based inventory and fulfillment services firm raised $19 million in October. The funding round included investors like Jay-Z, who secured the company’s $200 million valuation. To date, Flowhub has raised nearly $50 million.
  • New York Cannabis Trading Platform by the sea in August it closed a $4 million round led by Casa Verde Capital, a cannabis-focused fund that reportedly includes rapper Snoop Dogg among its co-founders.

Go easy on cannabis services

The “hemp” industry has traditionally been driven by investments from family-owned companies specifically focused on this industry. They also had invaluable experience navigating the regulatory gray areas between federal and local marijuana laws.

And it’s much harder for institutional investors to finance conditional “vices”: firearms, tobacco products, gambling, and now cannabis. Serious legal and reputational risks arise.

But having many small tech companies serving an under-legalized industry makes it possible to bet on a growing industry without directly touching marijuana and everything related to it.

“It is impossible to ignore this opportunity. This is an excellent investment option,” says Fyllo CEO Chad Bronstein.