Cannabis Public Offerings Are Lighting Up

A mere decade ago, selling marijuana in America was largely the domain of small-scale dealers operating in constant fear of law enforcement.

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How times have changed. These days, upstart cannabis cultivators, distributors and retailers can select from a cornucopia of angel, venture and private equity investors. Stock exchanges are eagerly adding their listings. And, if a traditional IPO seems too hard, an overflowing pipeline of blank-check acquirers offer a faster, easier path to market.  

This year in particular is shaping up as a bountiful one for cannabis startup exits. Per Crunchbase data, at least a dozen companies in the space have gone public or announced plans to do so. We list them below:

The space got a further boost this week when Seattle-based Leafly, an online cannabis marketplace and content provider, announced plans to go public via SPAC. Under terms of the deal, Leafly will merge with Merida Merger Corp. I, a blank-check acquirer focused on the space, at a target equity value around $532 million.

The Leafly deal is interesting on a number of levels. The company’s CEO, Yoko Miyashita, is a lawyer who joined two years ago with a mission to “navigate complicated regulatory frameworks” and “reinforce Leafly’s compliance first culture,” per the company’s post-deal presentation to investors. 

Miyashita sees the company’s growth potential coming from more widespread cannabis legalization. As consumers ditch dealers to check out dispensaries, there’s “an opportunity to shift that spend from illicit to legal.”

That shift represents an enormous market. Per Leafly’s estimate, licensed cannabis businesses represented a $19 billion market last year. That’s just a fraction of spending in the overall cannabis market, which totaled an estimated $61 billion.

Go east, young cannabis startup

The spread of marijuana legalization to more U.S. regions, including several populous East Coast states, is driving much of the enthusiasm among startups and investors.

The big one is New York, which just legalized recreational marijuana, allowing adults 21 and older to possess up to three ounces of cannabis, or 24 grams in concentrated form. Dispensaries are expected to begin cropping up as early as next year.

New Jersey also signed cannabis legalization into law this year, joined by New Mexico and Connecticut this summer. Marijuana legalization also took effect in Virginia last month, although retail dispensaries are not expected to be operational for some time. 

The newcomers bring the total number of states with legalized recreational marijuana to 18, according to industry trade group NORML. The majority of states, meanwhile, have legalized medical marijuana in some form. Action on the federal level could be coming as well, with Senator Chuck Schumer introducing draft legislation in July to decriminalize marijuana.

Marijuana and market caps

Meanwhile, cannabis-focused public market offerings have been debuting at a steady clip on major exchanges for a few years now. Tilray, a Canadian medical cannabis company, was reportedly the first company in the space to carry out a Nasdaq IPO, in July 2018. Although off its early peaks, it’s still a pretty valuable company  with a market cap around $6.6 billion.

At this point, quite a few pot-focused public companies have hefty market caps, including three — Sundial Growers, Aurora Cannabis and Harvest Health & Recreation — that are each valued around $1.5 billion.

Several more recent entrants that came to market in the past few quarters are trading at lower market caps, including medical cannabis distributor IM Cannabis, cultivator Flora Growth, and Agrify, which provides technology for indoor growing with a focus on cannabis.

From underground to everywhere

According to Leafly’s Miyashita, one of the big drivers for market growth beyond legalization will be consumers’ ability to find a product that works for them.

One of the main barriers to trying cannabis, her investor presentation notes, is that it’s complicated. There are thousands of strains and dozens of form factors — like gummies, drinks, concentrates and flowers — that can make the process of selecting cannabis challenging, if not intimidating. Social stigma and concerns around product safety also persist.

Yet just as wine culture taught millions to appreciate the difference between a fine pinot and a cheap bottle of red, cannabis entrepreneurs are working to foster discriminating consumer tastes in their sector. In the process, they’re bringing in many people who weren’t partakers in the old-school underground pot economy, with Leafly attesting that today women and adults over 60 comprise the fastest-growing consumer segments.

Illustration: Dom Guzman