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Ahh 2019 … the year when you could hardly run an errand without picking up a whiff of cannabis on the street, or being offered a sample of a CBD-infused latte by a friendly barista.
Neighbors and in-laws spoke in foreign tongues, carrying on about hemp farms, cannabinoids and praising the likes of companies like Charlotte’s Web, Aphria, CuraLeaf and Canopy Growth.
Private investors and Canadian day-traders threw money at any and all cannabis operations to help them build market share (never mind whether any of these companies would ever be profitable).
What a difference a year makes
Now all the hype, hubris and hot tips for cannabis investments have been replaced with words like “bubble” and recession.
Many pioneering multi-state operators (MSOs) are bleeding cash as they contend with the industry’s capital crunch, and several top cannabis stock indexes are down more than 12% in the last few months.
To those who believe in the rationality of markets, perhaps this news is somewhat comforting. But truth be told, the current sense of despair permeating the cannabis industry may be just as overdone as all the previous euphoria.
Yes, there can be too much hype around new industries — look at Bitcoin and cryptocurrency, coworking and self-driving cars, as examples — but transformative products and services can emerge, even in a bubble.
And if the recent MJBizCon event in Vegas is any indication, this industry will manifest a lot of clichés, acronyms (e.g. THCV; THCA; CBG; CBN; etc.) and newly coined bits of jargon (e.g. oil cropping; fresh-frozen harvesting, the entourage effect, etc.) -- but much of it will turn out to be right on the money.
Here are three big things the cannabis trailblazers are doing right.
1. It really is a “land grab”
Shaky business models and flimsy paths to profitability mean the balance sheets of many cannabis MSOs will take a while to settle down. But the companies that got in, got land, got licenses and started to dominate have done well over the medium term.
Tracts of farmland and hundreds of licenses have effectively been colonized by giants like Tilray, Canopy Growth and Acreage Holdings during this early bubble, and despite some headwinds, the businesses that got there first are unlikely to be dislodged for a very long time.
2. There’s a “first-mover advantage”
Going after first-mover advantage is risky -- but when it hits, it’s extremely rewarding. Just look at the success of our current Internet giants:
Amazon started out with books, and has now grown into one of the world’s most dominant online retailers. Google moved into search, and has become the only company that actually matters. Other entrepreneurs tried to build peer-to-peer auction sites, but eBay is the first and last one standing.
The practice of launching quickly to get an MVP out in the market has served the cannabis industry’s first-movers well. The second- or third movers in areas like edibles, genetics, distillation, and more are still playing catchup (and they probably always will be).
Luckily with cannabis, the rising tide will be big enough to lift all boats.
3. In the near term, Brand (with a capital B) matters more than cash flow
While strong brands don’t guarantee an investment will be a winner, they do give a company a leg-up on its competition.
That’s because products that develop their own distinct, recognizable brand tend to forge a position above others in the market -- simply because they’re memorable and stand out.
A focus on branding with a “capital B” can add tremendous value to a company’s bottom line and balance sheet -- albeit incrementally.
For example, a strong, well-recognized brand can lend an advantage when it comes to rolling out new products. Let’s say the public has come to recognize a company’s excellence with micro-dose edibles -- then they may be more willing to try a new tincture or pain patch when it launches.
Companies with strong brands simply have something close to an insurmountable advantage when it comes to marketing new products. As an investor, those are advantages that you can take to the bank.
It’s hemp and cannabis halo … not a bubble
One thing that became clear in the midst of MJBizCon’s madness: The cannabis and hemp boom is not a bubble.
There’s definitely a cash influx, and money has been thrown around at ideas and pipe dreams with abandon -- but hey, that’s capitalism. And it has a track record of being wasteful, over-exuberant, and with more wild mood swings than a hormonal teenager.
But the rapid legalization of cannabis and hemp has created a massive halo effect, supporting the growth of thousands of ancillary businesses as well as those that touch the plants directly.
When we look back a decade from now in 2030, there will be some great cannabis businesses and brands that emerged within the bubble -- and investors you’ll probably be kicking yourself for not getting involved while you had the chance.