Top cannabis investors reveal where they're placing bets, but say there's 'pain to come' in the crowded CBD space
Courtesy of Altitude Investment Management
- Some of the world's top investors in the cannabis industry discussed the trends they're chasing - and what they're skipping - at a conference in downtown Toronto last week.
- The investors, who all manage industry-specific private equity and venture capital funds, said they're focused on industrial hemp, life sciences, and opportunities in international cannabis markets.
- They see the CBD space as overvalued and built on hype. Many expect to see a correction as more stringent testing requirements are rolled out for CBD products.
Some of the world's top cannabis investors gathered last week at downtown Toronto's Fairmont Royal York Hotel to discuss some of the challenges - and the opportunities that investing in the booming sector presents.
The investors, who spoke on a panel at the Benzinga Cannabis Capital Conference, see a lot more upside to the private side of the industry rather than in public cannabis companies where the stocks are volatile.
"I'd be scared to death about managing a hedge fund right now," said Matt Hawkins, a managing partner of Cresco Capital Partners, a Dallas-based private-equity firm that invests in the cannabis industry. Hawkins said at this early stage in the cannabis industry, it's "nearly impossible" to pick winners and losers.
But on the private side, the "dearth of capital" presents an opportunity, said Hawkins. Because marijuana is federally illegal in the US, institutional money managers have so far steered clear of the industry. That's opened a window for smaller, sector-specific funds to capitalize on lots of deals that bigger funds can't, or won't invest in.
"There are still very few organized capital groups on the private side," said Hawkins.
Yutong Yuan/Business Insider
Yutong Yuan/Business Insider
Investing in management teams
Because the industry is so new, investors have to use their gut and bet on management teams as there is little historical data to go off of, said Jon Trauben, a partner at Altitude Investment Management, a New York-based cannabis fund.
Altitude is raising a $100 million fund, Business Insider previously reported.
"Management teams are the toughest question," said Trauben. "It's the hardest to underwrite, the hardest to do due diligence on - and the hardest to take a bet on."
To Tahira Rehmatullah, the managing partner of the cannabis-focused Hypur Ventures, she looks for companies run by a mix of seasoned finance and consumer packaged goods veterans, but who also are able to "handle turmoil."
"Do you understand how to work in crazy environments that are regulated to the nth degree?" said Rehmatullah. "How are you going to react when shit hits the fan?"
And to value cannabis companies, Rehmatullah said she borrows from her experience in the broader tech sector outside of cannabis. "Valuation is such an art not a science," she said. "They're always moving targets."
Most of the investors agreed that the opening of cannabis markets abroad, including in South America and the European Union, will be one of the most important areas to invest this year and next.
"The North American playbook is largely set," said Trauben. "All the European markets are going to develop their own rules in their own way."
And, said Trauben, there are fewer investors competing for international deals. "The big Canadians [publicly traded marijuana companies] aren't going to own everything," said Trauben. "There's going to be a lot of local companies developing - we want to support them."
Turning cannabis into a commodity like corn
To Narbe Alexandrian, the president of Canopy Rivers (the venture capital arm of Canopy Growth), the potential of cannabis to disrupt the pharmaceutical and life sciences space is a major trend on his radar.
"There's so much we don't understand about the compounds in the cannabis plant and how the affect the human body," said Alexandrian. "We can find neat IP because everyone is focused on cultivation."
To Alexandrian, cannabis has a long way to go before it becomes a commodity like soy or corn. And wrapped up in that is the science - and the resulting IP - from figuring out how to increase crop yields and reduce pesticide use.
Alexandrian said that his firm is looking to enter into a joint venture with mainstream agriculture and life sciences companies - like a Syngenta or Bayer - to further develop the science.
Skye Gould/Business Insider
'There's pain to come' in the crowded CBD space
One area where the investors agreed valuations - and hype - are getting out of control: CBD.
"There's pain to come in CBD," said Rehmatullah. "Right now, a lot of it is becoming snake oil."
Rehmatullah said there will likely be a correction to come, as regulators ramp up their testing requirements for CBD products. In the CBD space, valuations are "1000% absurd," said Rehmatullah. "Everyone's a $100 million company, and they haven't even started extracted CBD yet."
Business Insider previously reported on a study from CannaSafe Laboratories, a testing company, that found only 15% of popular CBD products actually contained what the labels said.
But to Rehmatullah, industrial hemp - a variety of the cannabis plant that contains negligible amounts of THC, the chemical compound responsible for the plant's intoxicating effects - is a long term play. "There's so much opportunity there, from clothing, to building materials, to hemp as a substitute for graphene," said Rehmatullah.
Industrial hemp farming was legalized in the US late last year by the Farm Bill.
'Information is the most valuable commodity'
Because the cannabis industry is moving so quickly, all of the investors said that being in the flow of information was crucial to getting deals signed.
Hawkins, of Cresco Capital, said he deliberately takes advisory positions in as many cannabis startups as he can. "We've invested in north of 50 companies - and we're proud of the ecosystem we've created," said Hawkins. "We rely on them to feed us deals, and we're extremely strategic of what we capitalize on."
Trauben, of Altitude, put it this way: "The most valuable commodity in this industry is the information we share. You're either in the information flow, or you're not."
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