Many people ask me how things are going in the hemp and high potency cannabis industry. I recently did a question/answer session with someone in LinkedIn and found the dialogue worthy of sharing as our first blog post on our brand new website. Here you'll find my opinions on the industry, given the current economic and political landscape, with how the COVID-19 pandemic has affected our industry. How do I feel about the industry? I am very optimistic, but I say this with a word of caution... this is no easy industry for the faint of heart. Here you go!
HOW IS THE HEMP/CANNABIS INDUSTRY CURRENTLY DOINGS? WHAT IS THE STATE OF THE INDUSTRY?
De-scheduling or rescheduling cannabis is still a hot issue. Cannabis suffers from an unproductive Federal government that is either incompetent, legally influenced (in certain areas from legal lobbying forces) or purely inefficient. I believe we suffer from all three to certain degrees. I believe no one is at fault specifically, and the fault mostly lays on our Federal government and a few State governments who simply have become their own worst enemy. I have spoken with key Federal/State officials who ask never to be referenced, who agree… but nothing continues to get done here. The result is an extreme inefficiency in R&D, allowing other countries to advance, and allowing for the contraband market to thrive. Who suffers here? We do. We can collect plenty of tax revenue here and rapidly accelerate a global industry. But that's still not happening, but I do believe it is around the corner.
Has COVID-19 affected the industry? – The short answer is yes. A friend recently told me he has a large group of Congolese immigrants who found no surprise in COVID-19 and all the protective measures they have in place due to Ebola, which has an effective mortality rate of 70-80%. This pandemic seemed to have helped the cannabis industry solidify itself in the medicinal and recreational high potency market but not so much within the hemp industry (cultivation and production in the low THC market). I’m actually appreciative that high potency cannabis got some traction here, otherwise this industry would have taken several steps back, and lost years of productive legislative efforts by many people and groups.
WHAT SPECIFIC FORCES ARE KEEPING THE HEMP AND CANNABIS INDUSTRY FROM THRIVING?
# 1 - Cannabis is still suppressed by the banking system. Let’s face it… banks are lazy. They should be the ones lobbying for cannabis reform. Talking to a banker is kind of like talking to a robot: zero risk tolerance.
To this day many banks and merchant processors do not accept cannabis transactions of any sort unless it falls into the high-risk category. This is pure marketing and fiction that has been developed and produced by the inefficiency of the banking system. As such many transactions are still cash transactions. Where there is cash, there is the potential for risk, loss or theft. That risk attracts bad actors. Bad actors include operators using secret locations to sell unlicensed, illegal or black-market goods. This is fact, not fiction.
Not all bad actors are thieves. Some bad actors are just bad businessmen. Investors who claim to be strategic are not strategic at all, they are simply sharks. Sharks aren’t smart. They smell blood with advanced sensors and they are efficient hunters. Cannabis investors are no different. Cannabis investors dump money into 10 places, hope one of them is the unicorn that pays the fund back, one will give a healthy return (but not 10X) and the rest will die. Rinse and repeat. The difference here is that historically this space prior to 2019 had no institutional investors, opening the door to private equity or VC’s sharpening up those razor teeth by implementing egregious funding packages that gave operators no choice but to go big, sell fast or go public, or go home (fire-sale or shut down). The term loan-to-own didn’t start in the cannabis industry. This started a long time ago, and in my short 20 years as an entrepreneur/investor, it began in the hard money lending industry. It continues to be modus operandi within the cannabis private equity market. This too will change.
# 2 - Recently (pre-Coronavirus) I attended a VC conference where big cannabis attended and presented. I asked a question in a public setting to a few C-levels who could not answer (some spun it around) very basic questions regarding their involvement in shaping cannabis policy within the United States specifically. It bothered me substantially that no one had the right answer because those who are deeply entrenched in the Canadian or California markets know what works and what does not work from a regulatory standpoint. What these “C-Level” execs do not understand is that it is way more cost effective to shape law, than it is to change it. This is especially true when there are counter forces who are lobbying to oppose deregulation. For a large cannabis company to not actively participate with the FDA and/or USDA to shape regulation for a healthy marketplace is mind-boggling and poor from a top-level execution standpoint. This tells me that in many cases, the wrong people are in the driver’s seat… still to this day. We spend a lot of energy working with regulatory agencies to help push this industry forward, and we believe that the leaders in this effort are more life sciences, medical and academic institutions.
# 3 - Lastly, take the private equity, venture capital, and institutional investors who build financing structures that equate to hard money lending. Then combine that with the growth-at-all-cost factor. The result? You reduce the window when a company spends, optimizes and finally realizes profit. Knowing that endless cash is available creates chaos…or organized chaos at best. Founders and Financiers are both aligned on the concept of a successful exit or liquidity, and both are aligned on raising vast sums of money in the shortest possible. Where they are not aligned is in using public offerings to raise money to get healthy. Historically fewer companies win big at that game. Going public is traditionally used for healthy, growing companies who want to grow even faster and offer liquidity to shareholders. The result here is a loss control, opening the door to shady accounting practices designed to boost analyst confidence, or worse, misappropriation of cash or straight up breach of fiduciary duty. The greatest downfalls of this industry is the lack of patience and greed. We practice neither and we remain focused.
WHY ARE YOU OPTIMISTIC ABOUT THE HEMP AND CANNABIS INDUSTRY WHEN YOU SEE SO MANY PROBLEMS?
First, I will say that I love to fix things that are broken. A solid start-up team excels in the creation of jobs and the overall health of our Company. We have this Team and we see the opportunity clear as day.
I am also optimistic that the overarching hemp industry (agriculture), and separately the medical cannabis industry (essential businesses) both have an advantage in that they lend credibility to the industry where shortcoming prevail.
At minimum they face less scrutiny from activist investors from what I have seen. My fundamental excitement is the mental health aspect. I have spoken with many veterans and people afflicted by cancer who have benefitted from cannabinoid therapy. We human beings have an endocannabinoid system within ourselves. It is well understood that as humans get older or as our body chemistry changes, our CB1 or CB2 receptors very well can be affected much like our hormones or testosterone levels that decrease energy levels or cause pain, anxiety or even postpartum depression. How can we study the potential benefits when we can’t study them in the USA? That makes me angry, and when I get angrier, I work harder…until I succeed. In our case, we succeed as a Team.
I am optimistic that this industry will thrive in short order… but there will be some big casualties and hard lessons learned in the process. Much like the tech boom of the early 2000's.