Six Myths About Investing in Cannabis

The cannabis industry tends to be a lightning rod for strong opinions: While some people are excited to see its growth and development, others are less than enthused.

Within the investment community, the lines can be just as clear cut, but as the industry matures and developments on the regulatory front advance, more investors are increasingly willing to at least consider investing in cannabis capital.

Regrettably, a portion of the information available on the space can be misleading. Especially around the following six misconceptions, which we’ve spent seven-plus years debunking.

Myth #1: Until cannabis is federally legal, the risk of losing my investment remains elevated

Name another industry experiencing double-digit growth and adding new markets every year that would prompt this fear. Within the cannabis space, as new markets are regularly launching legal programs nationwide, industry sales are steadily growing at least 10% per year.

From an investor standpoint, the demand for capital far outstrips supply for operators in an industry that is fully legal in 24 states and Washington, DC, and is legal on a medical basis in 14 other states.

As with any investment, there are risks, but individuals may help mitigate those by investing alongside investors who follow and research the industry daily, know what traps to avoid, understand how to best structure deals, and add value to portfolio companies.

Myth #2: Institutions and large investors don’t invest in this space

This simply isn’t true. Since our founding in 2017, we’ve seen family office and real estate investors in the industry, as well as institutions. What’s shifted has been the market dynamics.

For example, private financing deals have historically been largely pursued by family office and real estate investors while institutions primarily held publicly traded assets and securities in the industry. Over the past few years, however, institutions have begun making small forays into the private side of the industry.

Should the proposed federal rescheduling of cannabis to a Schedule III drug from a Schedule I drug under the Controlled Substances Act occur, we anticipate that will open the door for more institutions to take advantage of the large dislocation of capital in the industry.

Myth #3: Cannabis equities have not fared well to date, surely the industry is struggling

Admittedly, there have been some dramatic ups and downs in cannabis-related stocks over the past decade, much like you would see in any emerging industry susceptible to soaring enthusiasm, crushing disappointment, and everything in between.

For example, cannabis equities hit all-time highs when President Joe Biden was elected with the expectation that he would legalize cannabis. A lot of capital flowed into the industry at that time under an “if you build it, they will come” assumption. Amid the fervor, companies that were barely generating revenue but relied on a business plan that featured collecting multiple cannabis licenses across the country raised capital at 10x-20x forward revenue valuations.

Eventually, the bubble burst and valuations plummeted when investors realized legalization was not on the immediate horizon.

This was not so much a reflection on the success of the cannabis companies, but rather a reset of valuations based largely on sentiment. Currently, most companies trade anywhere from 4x-8x trailing EBITDA, which many argue is either in line with where valuations should be or much lower than fair value.

Myth #4: Cannabis companies don’t have access to banking services which makes it difficult to invest with confidence

Yes, for a period of time, most banks and other financial service providers avoided working with cannabis-related companies for fear that the federal legal status could undermine their federal charters.

Currently, the landscape is much different.

There are over 700 banks and credit unions in the U.S. that participate in the cannabis industry. While some of the large national banks do not—and will not—participate in the space until it is federally legal, the Financial Crimes Enforcement Network set out a legal framework almost 10 years ago that outlines how all financial institutions can legally participate in the space.

As a result, most cannabis operators have partnered with banks and credit unions to support their business. A lingering issue is the associated costs for financial institutions, which are required to set up dedicated personnel, processes, and procedures for cannabis clients, who are usually asked to shoulder the expenses, which can be considerable.

Myth #5: Legacy cannabis operators are unlikely to follow conventional business practices

While this may have been more common during the first wave of legalization, industry management and professionalism has consistently improved year over year.

This is a result of long-time operators continually innovating and improving their standard operating procedures, as well as new talent entering the industry to bolster best practices from adjacent industries such as consumer packaged goods and Big Agriculture.

The best operators have realized that a successful, sustainable cannabis company requires a blend of corporate discipline and agility, alongside strong ties to cannabis culture and end consumers.

Myth #6: Success in other businesses automatically translates to cannabis

Cannabis is a nascent, high-growth, highly regulated, and volatile industry.

While adjacent industry experience has proven valuable in many ways, cannabis businesses are anything but plug-and-play.

For example, it has proven difficult for new industry entrants to mimic corporate structures and practices from other industries. The cannabis industry is a blend of pharma, healthcare, consumer packaged goods, retail, agriculture, and more.

Ultimately, the best newcomers from other industries have effectively leaned on best practices from their prior experiences while tweaking and molding them to fit the nuances of the cannabis space.

Shedding Myths Potentially Shines a New Light

Investors value transparency and truthfulness, but such virtues can be derailed by persistent myths and misconceptions. As we’ve discussed investing in the cannabis space with hundreds of investors over the past seven years, these half-dozen myths have proven stubborn.

Moving ahead, we’re intrigued to see how these fade or change as the market evolves around its growth, increased sophistication among operators and investors, and the ever-shifting regulatory landscape.

What’s your comfort level with investing in cannabis capital?

Willing to explore it? Might consider it with more information? Not a fit? For a quick objective read, take our Reality Check quiz.