The fierce competition for capital in the fragmented, quasi-legal cannabis industry showed hope for relenting this week at the National Cannabis Industry Association’s CannaVest conference.
“Looking forward we see tremendous growth continuing,” BDS Analytics CEO Roy Bingham said during a panel discussion. “I can’t think of a meaningful sized industry in which one has the confidence in that sort of growth rate except when we go back to the early days of the internet.”
According to BDS and Arc View Market Research, global legal cannabis spending in 2018 reached $12.2 billion. The firms project spending in 2019 to reach $16.9 billion and $17.1 billion, respectively. Recreational sales are expected to fuel the majority of market growth, over medical sales.
The anticipated growth will be decidedly easier for companies already in the game.
“The barriers to entry in regulated cannabis are extraordinarily high — capital barriers, expertise barriers,” Michael Dundas, CEO of Sira Naturals, told Yahoo Finance. “After building our business — and we started out as small as you can get — it just struck us as very, very difficult.”
“Capital in the cannabis space is quite expensive because you don’t have the option to go through traditional banking means,” Paul Penney, Managing Director, Sr. Research Analyst Northland Capital Markets, said.
Scott Fortune, an equity research analyst for Roth Capital, said his firm is starting to see potential financing from California companies looking for investment opportunities, though it uses a measured approach given marijuana’s classification as a federally illegal substance.
“We’ve been seeing for years this industry starting to mature, but we’ve been conservative because of the regulatory legal framework,” Fortune said.
Smoke Wallin, president of Vertical Companies and CEO of its spinoff Vertical Wellness, said his companies raised around $60 million, though decided to separate marijuana and hemp assets to dodge continued funding roadblocks.
“With the 2018 Farm Bill that got passed and the president signed into law in December, that allows us to basically take all hemp and CBD assets, separate it from the cannabis side, and really have access to mainstream institutional capital and the ability down the road to take that company public,” he said.
“We’ve raised going on $60 million now for our business,” Wallin said. “But it’s all been individuals, high net worth, family offices and individuals who write checks, which has been great, but it’s a lot of work to get that much money with those small checks.”
Access to capital
Dundas’s Sira launched an accelerator program to help smaller, unlicensed cannabis companies scale. The program permits “micro-cannabis” businesses to use the company’s processing facilities, laboratories and distribution network, and provides them with raw cannabis materials. In October, Sira announced it would be acquired by Cannabis Strategies Acquisition Corp. (CBAQF), a Toronto-based acquisition corporation.
The incubator is one of few workarounds available to fledgling entrepreneurs needing to ease costs and gain access to capital, as conventional lenders remain on the sidelines, minding federal marijuana prohibition.
Hurdles are the highest for “plant touching” cannabis companies — those that sell plant-derived products, as opposed to peripherals like vape pens, software and manufacturing equipment.
“This next big step forward I really do think is around CBD,” Lisa MC Thomas, managing director and Associate Director of Research for Cowen and Company said, adding the caveat, “Nothing in this business is uncomplicated.”
A subcommittee for the U.S. House of Representatives Financial Services Committee held a hearing Wednesday to examine access to banking services for cannabis-related businesses.
Yahoo Finance’s Jessica Smith reviewed a discussion draft proposing that federal banking regulators refrain from discouraging, prohibiting, or penalizing depository institutions that serve marijuana-related legitimate businesses.
Asked what it would take for “plant touching” cannabis companies to trade on the NYSE or NASDAQ, Bobby Burleson, equity research analyst Canaccord Genuity told by Yahoo Finance’s Andy Serwer, “It would probably take a change in federal law that was conspicuous enough to bolster the confidence of banking and the exchanges and of course the big institutional investors...that aren’t touching it right now.”
Alexis Keenan is a New York-based reporter for Yahoo Finance. She previously produced live news for CNN and is a former litigation attorney. Follow her on Twitter at @alexiskweed
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