Why Investors Love The Market For Cannabis - And What's Next For It?

Many big investors are eyeing the rapidly growing cannabis industry

An increasing number of venture capitalist firms are planning to invest in cannabis startups. Many of these firms have already poured about $1.6 billion into startups in the cannabis industry this 2019. This is an increase from under $1.2 billion in 2018, according to a recent report from the data provider PitchBook.

At the same time, this is a massive increase from the $16 million invested in 2013, when Colorado became the first state in the United States to give a green light to the commercial cannabis industry.

Growing investments in the cannabis industry. Source

For an industry like cannabis that didn't exist legally before 2012 at least, these figures represent some huge growth. Here’s a closer look at some key investments in recent years:

  • In July 2017, Pax Labs invested $420 million in the cannabis vaporizer manufacturing sector and invested $265 million in Surterra Wellness to develop cannabis medical products.
  • New York City-based venture capitalist firm Lerer Hippeau invested in a tech platform for cannabis dispensaries named Leaflink.
  • Greycroft, the firm owned and operated by venerable venture capitalist Alan Patricof, participated in the CBD (Cannabidiol) company Prima’s $3.3 million seed round at the beginning of this year.



Why investors are embracing cannabis?

The most noteworthy thing is cannabis investments are rapidly embraced by Wall Street and other financial districts. In a poll that included 120 senior executives employed with leading private equity, hedge fund, venture capital (VC) and other institutional investment firms, almost 33% of them said that the cannabis industry has witnessed the greatest market growth potential this year.

This significant growth places the cannabis industry at a close second behind the technology industry, according to a leading accounting firm EisnerAmper. The most investments came from hedge funds, with 37% ranking cannabis in first place.

All the investments go into different areas of the cannabis industry. Already, the totaled market value of public cannabis stocks trading on Canadian and United States stock exchanges has increased massively,  to the tune of tens of billions of dollars.

Also, venture capitalist firms made a combined investment of $1.3 billion in 150 cannabis-associated deals in the first half of 2019. This already outstripped the $1 billion in VC money invested throughout the year 2018. Private equity firms also have increased, spending $474 million in 19 cannabis-related transactions during 2018. These firms are investing even more in 2019.

Before 2012, cannabis was illegal and prohibited virtually everywhere in the United States (U.S.). Despite still being federally banned there, the drug is now legal for medical purposes in 33 U.S. states and legal in 10 states for recreational purpose.

Many other states are also moving towards the legalization of recreational cannabis, while some have embraced lax enforcement policies. For example, in New York City, the laws against recreational cannabis go unenforced, and the drug is smoked openly in public.

Moreover, the non-intoxicating chemical in the cannabis plant, cannabidiol (CBD), is being sold increasingly. Much evidence suggests that CBD is a highly-effective health and beauty aid, and an increasing number of mainstream retailers sell it. Unlike CBD, tetrahydrocannabinol (THC) is the intoxicating chemical that remains a federally-controlled substance.



The growth of cannabis technology firms

Cannabis technology firms are becoming increasingly important within the industry. These growing firms support the cannabis industry with their services related to various areas, such as software, hardware, data analytics, and cultivation technologies.

These firms also offer consumer devices -- mainly vaporizers. Since these tech firms do not grow, process, distribute, or sell cannabis products themselves, they technically do not violate U.S. federal controlled substance laws.

Cannabis tech companies such as LeafLink, Headset, and Treez, all have financial backing from a variety of  VC and private equity firms. For instance, LeafLink runs an online platform which is responsible for streamlining the wholesale distribution of cannabis-related products.

Similarly, Headset works with accounting and consulting firm Deloitte, and a market research company Nielsen. It is responsible for providing data analytics for the growing cannabis industry to leading packaged goods companies.

And, another popular cannabis tech firm, Treez designs software for retailers working in the cannabis industry.



Final words

Overall, the cannabis industry is growing, and the number of investors interested in this industry is also increasing. This growth isn’t likely to stop or even slow down any time soon, the business is booming, and investors are very much aware. Perhaps with more interest from the private sector, governments will be pressured into creating a more legal cannabis friendly environment.