By Eli McVey
In most sectors of the marijuana industry, roughly 50% of revenue-generating companies are either actively trying to raise capital or plan to this year, according to data in the newly released Marijuana Business Factbook 2017.
The underlying dynamics driving businesses to look for additional capital, however, vary by sector and by market, which directly affects their potential return on investment.
Many companies need additional cash after they launch – either to expand or to pay the bills until they can generate enough revenue to sustain daily operations.
Take Hawaii, for example. Most of the state’s eight licensed medical marijuana dispensaries are ready to do business but have been waiting on the Department of Health to approve testing labs.
The delay is a cause of major financial concern for these companies, which remain on the hook for significant expenses like rent and payroll even though they’re not selling any product.
Conversely, marijuana businesses in Nevada that receive additional investments will likely use the funds to expand or increase production capacity, as demand for recreational cannabis in the state has been much stronger than anticipated since the program’s July 1 launch.
Each sector of the cannabis industry faces different challenges and opportunities that impact their funding needs.
Testing labs are unique and capital-intensive businesses that require highly skilled workers to perform specialized testing procedures on technologically complex equipment. Whether a testing lab is looking to upgrade its facilities or just keep the lights on, the financial investment is substantial.
Wholesale cultivators in many markets have been hurt by falling cannabis prices, and additional funding may be necessary for many of these businesses to survive.
Operational efficiency is paramount to success for cultivators, and forward-looking growers are looking to minimize production costs wherever possible.
For this reason, greenhouse grows are becoming much more prevalent in the industry. However, the amount of capital required to switch to or incorporate a greenhouse into an existing grow site is significant.
Declining wholesale marijuana prices and rising popularity for concentrates and edibles has been a boon for infused product manufacturers, another capital-intensive segment of the industry.
Operating costs for these businesses are steep, as the extraction equipment, professional-grade kitchens and skilled personnel utilized by many of these companies do not come cheap.
A number of infused companies are looking to grow their share in existing markets, while some are utilizing licensing deals to expand into new markets.
This is all happening amid a period of intensifying competition, as new players continue to enter the market in hopes of cashing in on surging infused product sales. Needless to say, access to capital is extremely important for these businesses.
Though the market forces acting on businesses throughout various states and sectors of the industry are different, the funding needs of marijuana companies are strong.
And with a rash of new markets set to come online within the next year – combined with the hesitance of institutional investors to get involved with the industry – funding needs will likely remain strong for the foreseeable future.
Eli McVey can be reached at firstname.lastname@example.org