VC investing in cannabis surged above $2 billion in 2019, but a year-end slowdown raises questions about 2020

Yeji Jesse Lee

Jan 16, 2020, 00:28 IST

VC investing in cannabis surged above $2 billion in 2019, but a year-end slowdown raises questions about 2020

REUTERS/Blair Gable

Marijuana plants grow at a facility in Smiths Falls, Ontario, Canada October 29, 2019.

Business Insider looked at how much money VCs have put into cannabis, analyzing when investments surged, when they declined, and why.
Though investments declined steeply in the second half of 2019, the year's slowest quarter (Q4) drew almost as much as the first two quarters of 2018 combined, pointing to a still-growing industry
We also talked to some of the top VCs in the cannabis industry about how many deals they made last year and where they plan to put their money in 2020. Read about it here.
Looking at these numbers, one VC told Business Insider that he predicts the first half of 2020 will see a good number of companies disappear, but that this will only allow for a "significant increase" in capital deployed into the industry by Q3
Click here for more BI Prime stories, and subscribe to our weekly cannabis newsletter, Cultivated.

VCs made big wagers on cannabis in 2019, but a slowdown toward the end of the year is leaving investors cautious about 2020.

Venture-capital investors in the US wagered $2.3 billion on the cannabis industry in 2019, a 57% increase from the previous year. But the highs and lows in investment throughout 2019 have prompted some VCs to predict a 2020 with more sensible valuations, in which some weaker companies get bought up.

"The first two quarters of 2020 will be a cautious period to see how things develop," said Michael Gruber, managing partner at the investment firm Salveo Capital. "But it is clear that there will be a lot of consolidation, and there will be a good number of companies that effectively disappear or got absorbed by others as they will not have access to capital."

Gruber said he expects there will be a return to more sensible valuations and a significant increase investments in the second half of 2020.

Investments in the cannabis industry remained relatively steady throughout the first three quarters of 2018, according to data from PitchBook. In the last three months of the year, investments jumped to $874.7 million. That was a period in which multiple states, such as Michigan, Utah, and Missouri, passed either recreational or medical cannabis legalization in the 2018 midterms, and nation-wide legalization came into effect in Canada.

Gruber's said that the "hype" over legal adult-use cannabis in Canada during this period helped both Canadian and US companies, with operations in Canada raise significant capital.

There was "a euphoria with significant valuations that were seen in the public markets," said Gruber.

venture capitalist cannabis spending in 2019

Graphic by Business Insider

A comparison of venture capitalist spending in the cannabis industry in 2018 and 2019

VC investments stood at $463.6 million in the first three months of 2019, in part due to lower than expected sales in Canada, where the legal market has struggled to transition consumers away from the illicit market.

Joyce Cenali, COO of Big Rock, a California-based VC that has made 20 investments in the cannabis sector since 2016, told Business Insider that there has been a correlation between the state of the Canadian market and spending on the part of US investors since 2018, despite the fact that the two markets are very different.

Investment in the second quarter of 2019 surpassed the last quarter of 2018, at $968 million. Pax Labs alone raised $420 million in funding in one massive round in April 2019 that established the company's unicorn status with a valuation of $1.7 billion. By the second half of the year, however, the cannabis bubble burst and stock prices fell, giant mergers collapsed, and thousands of vaping-related illnesses in the US prompted some state-wide bans on the sale of vaping products.

Andrea Hippeau, principal of Lerer Hippeau, told Business Insider in January that though 2019 was a "boom and bust cycle for cannabis," she believes that 2020 "will be the year that the [cannabis] market starts to mature and legitimize as state regulation stabilizes."

Other VCs, such as Navy Capital, Altitude Investment Management, and Poseidon, told Business Insider that they share the same prediction, that 2020 will be the year that will determine the winners of the industry.