The green rush. The irony in the name lends itself well to the current rush of companies looking to become the biggest names in cannabis. While companies scramble in a “race to the top,” many of them are not only falling behind but falling out of businesses altogether.
It isn’t often that a completely new business category opens up. But, when it does, it almost always begins and ends in the same way. Take the dotcom bubble as an example. In the late 1990s, U.S. technology stocks soared as investors drove up stock equity valuations of internet-based companies. By 2000, however, the bubble began to burst, leaving investors’ pockets empty from investing in “can’t fail” new technologies.
The green rush gained popularity around 2012 when cannabis became recreationally legal in several U.S. states. Since 2016, some of the largest and most popular marijuana stocks have delivered gains upwards of 2,000%, 3,000%, and even north of 7,000%. And while it’s true that many of these numbers are continuing to rise, the overall allure of investing in cannabis has begun to take a sharp, downward turn. And for good reason.
As cannabis’ legality has grown across the U.S., cannabis businesses have fought to be the first into new markets, often opening multiple retail stores in a previously untested market. As sales and company culture often fail to translate into new geographies, cannabis companies are finding themselves upside down on valuations and sliding down a slippery slope of survival.
Investors, in turn, have begun to take note. As many of the largest cannabis companies begin to “go under,” investors are shying away from the “sexiness” of the investment and are beginning to look at cannabis investments based purely on current valuation and growth strategy. According to data from Viridian Capital Advisors, companies in the space completed just two capital raises worth only $5.6 million the week ending on March 27 — the lowest level of activity this year, which compares to 17 capital raises worth $169 million for the same period in 2019.
Amidst the madness of the green rush, many cannabis companies’ exaggerated valuations and swift, large-scale expansions have them now in a sticky situation, some going as far as bankruptcy. In an industry with such potential, and a newly-earned “essential” status, why are so many canna-giants facing extinction?
Undoubtedly, the biggest mistake many of these companies have made is scaling at an unsustainable rate. In business, it’s important to manage cash flow, inventory and sales channels and only expand when it makes financial sense for the company. Instead, the lure of the cannabis industry has put many business owners in a dangerous situation as they’ve expanded too much, too fast. The old adage “built to last” comes to mind here, as we note that many of these cannabis companies were, in fact, only “built to flip.” This dangerous model has begun to fall apart, leaving investors high, dry and nervous about making future investments in the space.
Another major mistake many cannabusiness have made is a general failure to explore the new markets that they’re entering. Because cannabis is state-regulated, businesses must explore all regulations and opportunities across the new geography. Instead, many companies simply set up shop. In any other vertical, you’d be hard-pressed to find a business expanding into new locations without the proper research. These cannabusinesses, however, are often adding multiple new locations in new states as soon as they become “legal,” causing a detrimental pattern of overexpansion.
As the market begins to settle, business owners and investors alike are beginning to realize the mistakes of moving too quickly. There is no such thing as a “foolproof” investment, and cannabis is no exception. The companies that grew too quickly are beginning to fall behind while the ones that were built on a foundation of strong business principles are staying steady in the race to the top. It’s important for investors to recognize the signs of strong cannabusinesses and make their decisions based on the merit of the company rather than the allure of the vertical.
This is still an extraordinary time for cannabis. Beyond being deemed essential, the plant is now legal either medically or recreationally in the majority of the U.S. Much like the cannabis movement itself, companies who are succeeding in today’s environment have taken a slower, more focused approach to growth. While the “green rush” might be slowing significantly, the overall cannabis vertical is making its biggest strides ever. Some things just take time.