By Colin Keeler, investor
The cannabis industry had a seemingly rough 2019.
Major transactions within the space have been terminated, like the $682 million MedMen and Pharmacann mega-merger. A vaping crisis struck the nation. Prominent companies have endured layoffs and seen their stocks slide more than 50 percent.
To some, the near-term outlook for the cannabis space might seem grim.
On the other hand, consumer demand and public opinion are at all-time highs, and according to Casa Verde Capital, a $45 million venture firm that counts Snoop Dogg as a partner, there’s never been a better time to be a specialist in the sector.
Casa Verde has emerged as a top partner for cannabis executives. I spoke with Karan Wadhera, managing partner at the firm, to understand how a seemingly gloomy 2019 is overshadowing an attractive sector and creating opportunities for thoughtful investors.
A private market perspective
The public markets have long acted as the bellwether of the entire cannabis industry, but a true divergence between the public and private markets is challenging that approach. “The best analog might be the late 90s tech boom, with companies entering a frothy public market on the hopes of future adoption. The reality was that these business models would only truly come to fruition with the support of private markets, well after the dot-com bubble,” Wadhera says.
That viewpoint is supported by the growing interest of traditional private investors now evaluating the sector. Mainstream investors ranging from early-stage venture funds to multi-billion dollar private equity groups are consistently inquiring to learn more about the industry from Wadhera and his team at Casa Verde. More importantly, top tier institutions like Tiger Global, Lerer Hippeau and Thrive Capital are actively investing in cannabis transactions alongside Casa Verde.
Scalability amid regulation
The public market turbulence has also served to prove out Casa Verde’s focus on ancillary cannabis (businesses that support the industry, but have little-to-no contact with the plant itself). As Wadhera describes it, ancillary was a concentration originally born out of necessity and research. “With our first fund, there were limits to how large we could be given the nascent ecosystem, so it made us really think about how to get optimal exposure in the most capital efficient, scalable ways possible,” he notes.
Ancillary businesses are unencumbered on a state-by-state basis and, unlike cultivation, can actually benefit from the regulatory and legal hurdles of the industry. Examples abound in the Casa Verde portfolio, including Metrc, which raised $50 million last year to help governments track cannabis plants across their supply chain, and Green Bits, a point-of-sale software that aids retailers in automating their compliance reporting.
“Compliance and regulation are part and parcel of the cannabis industry. We’re starting from a place of ultra-transparency. Some of the biggest opportunities in the space revolve around helping participants stay compliant,” Wadhera explains.
Beginnings of brands
Years into the evolution of the legal cannabis market, it’s not just pure ancillary providers that house upside. Looking forward, expect the emergence of industry defining brands built outside large, vertically integrated, cultivation-to-retail operations.
But don’t expect those brands to be exclusively in California. While the US’s biggest market is expected to be a leader due to its unique cultural history coupled with its talent base, the California brands of today are well positioned to be the national brands of tomorrow, as many have already established partnerships with various multi-state operators.
“It’s only recently that the necessary infrastructure has been built to handle brands scalably. We’re hitting an inflection point where you can now build in an effective, asset-light fashion,” Wadhera says. “Similar to broader consumer packaged goods, you don’t have to own your production, as the success of brands like LEUNE and Old Pal are proving.”
Diligence through uncertainty
Through reviewing over 1,500 cannabis businesses and investing in 17 companies, Casa Verde has developed a unique perspective on the winners to come. While it’s important that young companies believe in themselves, rosy projections will only go so far.
“More conservative forecasts grounded in reality, that’s where we gain trust and respect. It’s not just giving us accurate insight into a business, but it’s showing us the type of entrepreneur and partner you’ll be,” Wadhera says.
Validating those projections can be difficult in such a high growth, high uncertainty environment. Casa Verde leans on a robust network of advisors, portfolio companies, LPs and industry experts, while comparing prospective investments against the universe of data points they’ve accumulated to date.
“The tempting, run-quick to public markets bubble may have burst. However, for long-term investors like us, this is an exciting entry point. The next wave of wealth creation in cannabis is emerging and we think it’s all going to happen in the private markets.”
Colin Keeler is an angel investor in the cannabis sector and previously invested in cannabis with Salveo Capital and healthcare with Sterling Partners.