Tight funding environment weighs on marijuana companies still seeking profit

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cannabis business funding, Tight funding environment weighs on marijuana companies still seeking profit

Which came first? Poor paths to profitability for North American cannabis companies or limited funding for them to build their businesses?

The reality: It’s a bit of both.

Funding opportunities for marijuana firms do exist, but investors are increasingly unlikely to lend if cannabis companies cannot meet their revenue and profitability targets.

Therefore, cannabis businesses trying to find a way forward are under increasing pressure to cut costs and make money – or face fallout. We’ve already seen:

  • M&A deals have either been renegotiated or canceled amid declining stock prices.
  • Some top executive suite shake-ups have occurred.
  • Hundreds of layoffs in the United States and Canada were announced.

“Stock market conditions continue to press companies to reformulate their growth, spending and acquisition plans and to pivot from unfettered growth to more judicious deployment of capital and focus on the path to profit,” said Craig Behnke, equity analyst at MJBizDaily’s Investor Intelligence.

Executive firings, canceled deals, job cuts

A previous focus on unfettered growth was perhaps best illustrated in July, when Canada’s Canopy Growth fired co-CEO Bruce Linton.

New York-based alcohol giant Constellation Brands, a 38% shareholder in Canopy, was unhappy with Canopy’s lack of progress toward profitability.

Since then, the industry also has seen failed M&A deals amid the changed market conditions, and other previously announced deals are being renegotiated amid the poorer outlook for stock prices in the industry.

While Chicago-based Cresco Labs is nearing completion of its acquisition of Canadian distributor Origin House, it has also admitted the deal is subject to “mutually agreeable” terms – an indication the transaction might be renegotiated.

In addition, Massachusetts-based multistate operator Curaleaf is revamping its planned acquisition of the Select brands business owned by Oregon-based Cura Partners, potentially slashing the value of the deal by approximately 70%.

The industry also has seen recent layoffs involving several well-known marijuana firms, including Canadian-based cannabis producer Hexo, California-based companies Pax Labs and Weedmaps as well as a handful of others.

Data supports funding slowdown headlines

While capital investment in the cannabis industry in 2019 hit $10.4 billion through Week 40 – a 40% increase over 2018 – the previously hot investment activity has cooled in recent months.

It’s now running at what analysts see as a more “normal” pace of growth.

Less money, for example, was raised in October 2019 than a year ago, and the number of completed M&A deals is also slowing, according to recent data supplied by Viridian Capital Advisors.

Only two raises were completed during the last week of October – a historic low since Viridian began tracking cannabis deals.

cannabis business funding, Tight funding environment weighs on marijuana companies still seeking profit

The story in M&A activity is a similar one – with only two deals completed during the week ended Nov. 1.

Again, the slowdown in activity could indicate a sign of growing maturity for the marijuana industry.

“Investors being more judicious and pressing companies to focus on profitability is actually a sign of a healthy, rational capital market,” Behnke said.

cannabis business funding, Tight funding environment weighs on marijuana companies still seeking profit

Longer-term outlook more rosy?

There appears little doubt that the cannabis industry is here to stay in North America even if federal legalization in the United States proves a ways off.

Increasing state legalization means the big players – Big Pharma, Big Alcohol, Big Tobacco – continue to eye the space with a mixture of concern and anticipation.

Some, of course, have already made the jump. For example:

The current slowdown in the industry is unlikely to deter them, said Danny Moses, adviser at New York-based investment group Merida Capital Partners.

“With alcohol sales dropping, these companies are doing this as a defensive move. They are going to continue to see cannabis as a threat to them,” Moses told Marijuana Business Daily.

As for pharmaceutical companies?

“You can be pretty sure that any of the negative rhetoric in Washington is financed by the pharmaceutical industry,” Moses said. “They are very nervous, but they want to figure out how to be involved.”

Long term versus more immediate outlook

For now, the industry is beset by the cooler outlook, and companies are going to have to navigate a tricky period of low stock prices and difficulties getting funds if they are to continue to thrive.

Some companies just grew too fast and too quickly, which could result in a period of reckoning, said Melissa Diaz, CFO and co-founder of Rebel Rock, a Scottsdale, Arizona-based accounting and consulting firm focused on the cannabis industry.

“We’ve seen these massive valuations for a handful of early movers only to see them go through the IPO process and not perform as well as expected to justify such a large valuation,” she said.

Cannabis companies also need to be aware of a potential economic slowdown in the not-too-distant future, which could make the current environment even more challenging, Diaz added.

“If that does happen,” she said, “cannabis companies need to understand that landing investment may tighten up or even become far more difficult than it is now.”

Nick Thomas can be reached at nickt@mjbizdaily.com

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