The recent growth of the cannabis industry attracts hundreds of new business entrants a year, from brands and retailers to ancillary and technology companies. As one of the early technology companies to receive investment from a mainstream venture capital fund, we are frequently approached by investors looking to get into the cannabis space.
While technology companies in cannabis have been instrumental in the growth and maturation of the industry they are not the only opportunity for investors to consider. There are many types of businesses that make up and support the cannabis supply chain, the best of which are positioned for exponential growth as the industry continues to expand.
For people looking to invest in the industry, understanding the supply chain and how a product develops from ‘seed to sale’ (as we say in the industry) is a great place to start in vetting which companies are positioned for success. Below are some vertical profiles investors might consider as they explore this burgeoning space.
Related Link: What Cannabis Retailers Can Learn From Marie Kondo
Setting The Stage: Cannabis Stays In Its Origin State
Before we dig into the supply chain, it’s necessary to mention the defining principle of how cannabis moves in the United States: cannabis products can only be sold and consumed within the state that the original plant was grown.
There are regulatory systems in place to ensure this happens. All cannabis-touching businesses—from growers to retailers—must be licensed to carry out a specific step in the supply chain. Each state has their own licensing and enforcement system that cannabis businesses must work with to stay compliant.
There is also an entire category of cannabis technology companies dedicated to tracking the movement of cannabis throughout a state’s supply chain. Known as “seed to sale” technology, these systems make sure that all batches of harvested cannabis are accounted for and that it’s possible to tie every finished product back to its original batch.
Many newly legal states start off with a vertically integrated system. In New York, for example, one license holder must handle the cultivation, production, and retail sales of medical cannabis products. More mature states have developed a supply chain that more closely resembles that of most other industries, where companies specialize in one piece of the supply chain. Those states will be the ones we focus on in this overview, because the movement of cannabis between entities is where things get interesting—and more complicated.
The Cannabis Capital Conference returns to Toronto April 17-18!
The Seed: Where It All Starts
Like all agricultural products, cannabis starts with what is essentially farming. Depending on the state, they may call it growing or cultivating. The companies in this stage of the supply chain specialize in harvesting quality cannabis, which can be done indoors or outdoors. They strive for consistent and dependable harvest schedules and often have proprietary methods of growing to enhance quality and shorten the time it takes for the cannabis plant to mature.
After harvest, growers will either process their flower themselves or pass on the raw material to a wholesaler who will trim, dry, and cure their plants before creating a finished product. Sometimes one company will grow their own cannabis and produce a packaged product ready for wholesale, but for the sake of this overview we’ll assume they are handled by different companies.
Before selling their harvest, each batch will be assigned an ID and sent in for lab testing. Every state has its own regulations around mandated testing, but it usually includes reporting on cannabinoid potency and the presence of pesticides and foreign material.
Ancillary Vs. Plant-Touching Businesses
As a potential investor, the first distinction you’ll have to make is whether you want to invest in plant-touching companies or not. Many larger funds have restrictions that prevent them from investing in companies that produce, move, or sell cannabis products directly.
There are many ancillary companies supporting the industry that may be better options for investors with restrictions. Companies that support agriculture including lighting, greenhouse infrastructure, irrigation systems, fertilizer, testing, and seed to sale software.
Production And Wholesale: Making The Finished Product
At this stage of the supply chain, dried cannabis flower is transformed into finished products. This process can look very different depending on the end product. Flower can be packaged into jars or rolled into joints ready for sale. Extraction companies create concentrates that can be packaged and sold or turned into vaporizers, topicals, or edibles. These companies will operate like specialized production factories.
Products that have been modified from the original flower that was already tested need to be tested again. Most states require a sample of the product (it can be an edible, concentrate, topical, etc) to be tested on behalf of the entire batch of products made from the same original harvest. These test results are then associated with that batch in the state’s seed to sale software.
Sometimes the company who handles production will also package, brand, and sell their product to retailers. However, white-labeling is very common in the cannabis industry; a brand will buy finished but unbranded products from a second company and add their own branding and packaging to create the products that consumers recognize in dispensaries. Branding plays a huge role in the success of cannabis products as it can be a primary differentiator for both retailers and consumers.
Ancillary companies that support production and wholesale include packaging, banding & creative, wholesale marketplace, testing, and seed to sale software
The Many Forms Of Cannabis Distributors
Distributors in the cannabis industry come in many forms. Depending on the state and the operations of the wholesale brand, distributors can be used in the following ways, or a combination of them:
- Shipping product on behalf of the wholesaler
- Warehousing product on behalf of the wholesaler
- Serving as an external sales team for the wholesaler
- Collecting payments from retailers and moving money on behalf of the wholesaler
- Contract manufacturing of product
The variety of distribution models in cannabis can only be attributed to the fact that the industry is so new. We predict a consolidation and simplification of these models in the coming years, likely in a way that ends up with distributors existing solely to move product between wholesalers and retailers.
The Sale: The End Of The Cannabis Supply Chain
Consumers can only legally purchase cannabis from licensed retailers, often called dispensaries. Like retailers in any industry, they strive to carry a variety of products that cater to their customer demographic.
As a cannabis retailer, finding vendors becomes a bit more complicated than in other industries because you can only purchase from licensed brands in your state. To remain compliant, retailers must check the licensing and lab testing of all the brands they bring into their store. This is where LeafLInk fits into the supply chain. As a B2B marketplace of only compliant brands and retailers, LeafLink allows retailers to discover new brands with confidence, knowing that they’re licensed.
As mentioned previously, the state typically mandates a specific seed to sale software that is required by growers, processors, and retailers. Retailers must input their inventory to ensure the traceability of every unit of product from the moment it was placed in the soil all the way through to its purchase by a consumer.
Choosing The Cannabis Investment That’s Right For You
This overview is not exhaustive; there are many intricacies and variations within the legal cannabis supply chain, and we didn’t even scratch the surface of the banking challenges in this space. But if you’re looking to invest in the cannabis industry, you should have a better idea of how product moves and the limitations of operating in a highly regulated space. Understanding which part of the supply chain you want to impact, and whether or not an ancillary investment is right for you, empowers you to vet potential investments with a more informed lens.
Ryan Smith is the CEO of LeafLink, an online marketplace for wholesale cannabis.
Photo by Javier Hasse.
See more from Benzinga
© 2019 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.