By Tony C. Dreibus
Big money is flowing into the marijuana industry, merger and acquisition activity is increasing, and the legislative environment is improving – all good things for the burgeoning cannabis trade.
But the industry is going through some growing pains as well.
Plenty of startups are mired in debt, many publicly traded firms suffer from poor management, and a fair share of mom-and-pop shops are underfunded, all of which could convince some investors to take their money and run.
So says Scott Greiper, the president and founding partner of boutique adviser and investment banking firm Viridian Capital Partners.
Greiper said that cannabis will naturally continue to draw investors because of the opportunities involved. But only companies that prove they have a sustainable product, strong leadership and the ability to expand and grow will be able to attract big money.
Greiper spoke with Marijuana Business Daily about the investment outlook for 2015, problems facing publicly traded cannabis companies and the best ways for entrepreneurs to land capital.
What type of growth do you expect to see in the cannabis industry this year?
We expect to see significant M&A activity occurring in this space, and it will occur among private and public companies, so we’ll see the emergence of strategic acquisitions.
The reason we believe this is because many companies are acquiring other companies to buy market share to increase their revenue base, their presence in the industry and market visibility.
Companies are looking to diversify – they might be a provider of ancillary products but now they want to be in business software that does tracking or go into lighting systems. Because it’s so early, there are companies saying “let’s spread our bets by offering lots of solutions or services.”
What challenges is the industry facing in terms of financing?
We think a number of public cannabis companies, a good number, are in trouble or are going to be in trouble.
We expect a number of publicly traded companies to go away because of their inability to raise growth capital. Most of the public companies have raised capital in the form of toxic financing structures, meaning as their stock price goes down, the cost of financing gets higher.
As we’ve seen the decline in publicly traded stock prices, we’ve seen a vicious cycle of toxic financing that’s hurting balance sheets, making it very difficult to raise growth capital.
Investors who normally put money into tech companies have recently moved into marijuana, including the co-founder of PayPal. Why is that?
When you think about the cannabis industry, there have been a lot of folks growing their own. Now the legal industry involves legit buyers walking into legit dispensaries, so the pressure is on this industry to bring in technology solutions.
Technology is at the core of every business. Its relevance to cannabis is that marijuana has been low-tech all these years. With the increase in legalization, the industry has to catch up. There’s already a requirement to spend a lot of money on technology.
What will prevent more big money or big industries from entering the cannabis space?
In most cases cannabis companies have inexperienced management teams without a strong track record of building companies, knowing the right model or how to operate a company with proper governance, reporting, standards and best practices.
Investors are focused on business rationale, not just because the market is hot, but measuring and evaluating management depth, the board of directors, the growth strategy of the company and its fundamentals.
Many public companies are not going to attract capital as investors become more discerning.
So how should a cannabis company get in on the big money that’s flowing into the industry?
What always attracts any investor is a great product, team, strategy and business model. Combining the right offering with a team of people who can execute – that’s what investors are looking for.
There are fears that other industries will move into the cannabis space. What’s your take?
We believe this year a strategic investor or acquirer emerges – not a fund or individual investor making an investment, but larger brands.
Whether it’s a pharma company acquiring a stake in a cannabis biopharm company or whether a liquor company or tobacco company acquiring a stake in a vaping or infused-drink company, we expect to see the first acquisitions or mergers of this type this year.
Are there any good ideas left that investors haven’t seen?
One thing tech investors can always bank on is innovation. There’s great ideas coming out of every sector whether its agriculture, security or social media.
There’s always going to be somebody who does something cheaper or better. With cannabis, whether it’s cultivation or biotech or in lighting or compliance or tracking, we are at the 5-yard line going the long way with regards of where we are in terms of technology solutions.
This is the very beginning.
Tony C. Dreibus can be reached at [email protected]