2019 was the year the cannabis bubble burst. We talked to more than a dozen top cannabis execs about what's next.

Jeremy Berke

Dec 20, 2019, 02:02 IST

2019 was the year the cannabis bubble burst. We talked to more than a dozen top cannabis execs about what's next.

wealth management firms cannabis stocks 4x3

The cannabis bubble, propped up by a thriving market for reverse takeovers on the Canadian Securities Exchange, has burst.
Business Insider spoke with over a dozen top CEOs and execs about the industry's prospects. They said that while the shakeout is here - and some companies will likely fail - the business will turn around.
The current period of low valuations provides an opportunity for savvy investors to put money to work, and for stronger companies to buy up their rivals, executives said.
Click here for more BI Prime stories, and subscribe to our weekly cannabis newsletter, Cultivated.

2019 was the year that the nascent legal cannabis industry crashed directly into the floor.

A year that began with a flurry of multibillion-dollar deal announcements, companies going public, and shareholders getting rich on paper ended with thousands of layoffs, deals canceled or reduced in scope, CEOs fired, and capital-markets turmoil. "Dot-com", as in the crash that ended the tech boom of the 1990's, has become a common refrain in countless conversations with industry insiders.

"I think it's exactly what happened to tech as far back as the eighties and nineties," Green Growth Brands CEO Peter Horvath told Business Insider in an interview last week.

In other words, over a dozen cannabis CEOs and C-suite execs Business Insider spoke for this story said that there wasn't a shakeout coming - the shakeout is already here. For the companies that survive, this era of crashing stock prices will be seen as a small blip on the path to global domination, they said. They said that while some companies will fail, the current period of low valuations provides an opportunity for savvy investors to put money to work, and for stronger companies to buy up their rivals.

Curaleaf, a cannabis cultivator and retailer, was forced to reprice a near-billion dollar deal to acquire the Select Brand of cannabis products from Cura Partners, and its other marquee deal, an acquisition of Grassroots Cannabis, is expected to close "early next year," CEO Joe Lusardi said. The company's stock changed hands for more than $11 a share earlier this year, though it's now trading for half that, around $5.35

Still, Lusardi said that 2019 "was the best year in company history."

In an interview on the sidelines of MJBizCon in Las Vegas, he pointed out that more people are coming into stores and buying cannabis legally every day in the US and around the world, and said the US is "on an amazing growth trajectory."

He blamed the company's stock gyrations on the fact that Curaleaf, like other companies that cultivate and sell THC-containing products in the US, trades in Canada, and is being weighed down by disappointing financial results across the sector.

Lusardi said he expects to see even more consolidation among smaller players in the industry, in a push to survive a tough market.

"I think you will likely see companies banding together because in this case, being big and having scale is helpful and you can spread your costs over a bigger operating base and be more efficient," says Lusardi.

And while Lusardi said the past few years were focused on making acquisitions, securing licenses, and building out infrastructure, "2020 we'll be focused on building a proper CPG [consumer packaged goods] business."

US consumers expected spend 30 billion cannabis next 5 years chart

A classic tale of irrational exuberance

To Green Growth Brands CMO Jann Parish, cannabis in 2019 is a classic tale of market exuberance, pegged to the attractive story of taking what was once a demonized, illegal drug and leveraging the wheels of capitalism to turn it into an upscale consumer product.

"I think that there was a kind of irrational exuberance when the business of cannabis became relatively more mainstream and you saw the markets open up," Parish said.

Steve White, the CEO of Harvest Health & Recreation, said there's a "mismatch" between the fundamentals of his business and share prices in the wider cannabis industry because many big investors can't own shares in cannabis firms.

"Large institutional investors can't play US cannabis," White said on the sidelines of MJBizCon in Las Vegas last week. "You're going to have an imperfect market determining the price of shares when you have an artificial constraint on demand. It's a simple supply-and-demand question."

While White sees the M&A among cannabis companies slowing next year, he says there will be an opportunity for companies to scoop up distressed assets in the industry.

"It's hard because when your share price is down, you can't use stock as currency the same way you could," White said. "The flip side of that coin is you'll find some distressed assets that are available and I think people will take advantage of those opportunities to the extent they can."

Shareholders and investors have gone from unbridled excitement to wanting to see concrete results, execs say

Cannabis, by nature, is a capital intensive business. So once analysts and shareholders started looking at companies to actually generate returns, and not just spend money to acquire licenses and build out cultivation facilities, operators found themselves in trouble, Horvath said.

"The narrative has moved from, 'Who can accumulate the most assets,' to 'Who can make the most money,'" he said.

More than one executive brought up, in some form or another, the Gartner Hype Cycle of emerging technologies, and pointed out that we've slid well past the "peak" into what's known as the "trough of disillusionment," where a slew of negative press, supply chain issues, and capital constraints weighs on share prices in any new industry, whether its software or cannabis.

From here, things are only going to get better, Green Thumb Industries CEO Ben Kovler told Business Insider in an interview last week in Las Vegas.

"Companies that are focused on their stock price are focused on the wrong things. We view this as a long term game," Kovler said. "Next year, it's all about execution, execution, execution."

In terms of capital markets, Kovler said he's not surprised at what he's seeing. "If we can continue to put up good numbers, the stock price will ultimately find the right level, but we can't worry about where it goes now or the next month - or the next three or six months."

Andy Grossman, a hedge fund veteran and Green Thumb Industries' head of capital markets, sees a slew of missteps on his competition's part.

"The companies around us are running out of cash," Grossman said. "They're doing deals - they don't have cash for them. So you're seeing deals break, you're seeing things get cut. We operate very differently and we have to pay attention to it."

'There's pain to come', but the market will get more efficient in 2020

When asked about his predictions for cannabis in 2020, Kush Bottles CEO Nick Kovacevich said there will be a shakeout on the private side as well.

"There's a ton of companies and the majority of them are raising money and they need money," Kovacevich told Business Insider on the sidelines of MJBizCon in Las Vegas. "And there's just simply not enough active cannabis investors to support the sheer amount of capital needed."

What will happen, says Kovacevich, is that some companies will be forced to shut down, benefiting the stronger companies that remain, he said.

To Chris Walsh, the incoming CEO of Marijuana Business Daily - an industry intelligence platform that hosts the MJBiz conference and has an editorial department as well - the long term outlook for cannabis is great.

"But there's pain to come," he said. "To survive, you're going to need a good source of funding, a realistic understanding of the market, and set reasonable growth targets."

That being said, Walsh sees lots of companies that will "end up being victims of circumstance" and lots of room for distressed asset sales.

Tim Leslie, the CEO of cannabis information site Leafly, said he isn't worried about the cannabis market. Leslie, who took over as Leafly's CEO earlier this year, was forced to pare back expenses at the company but said that things are on the right track for 2020.

"I think coming into 2020, you'll actually see more investment dollars," says Leslie. "Investors will take losses for tax purposes, but they'll come in with a clean slate. And valuations - many of which were too high to begin with - will fall."

Reduced valuations, at least in the private market, might provide a new entry point for venture capital investors, Leslie said.

The same can be said for the public markets, said Beth Stavola, the chief strategy officer of iAnthus Capital, a New York City-based cannabis company.

"If you have the capital, and you haven't lost your shirt in the markets yet, it's a screaming opportunity right now," Stavola said. "I just think that there's a lot of scared money right now, but those that are actually going out there and deploying capital are going to make a ton of money for their investors."