Despite the billboards and bubbler of attention for cannabis businesses, Tyler Autera, the co-founder and COO at Cannalysis, thinks it is one of the hardest times to grow a startup within the industry.
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“Regulation and compliance has brought on, in most cases, the need for larger amounts of capital from the start, which can be more difficult to come by,” he told Crunchbase News. “Expenses are higher for legal, licensing and compliance work that is now needed at the onset.”
Regardless, those complexities have brought more mature investment options.
“In the early days, [cannabis investment] was mostly angel investors/high net-worth individuals, small family offices, and small cannabis-specific VC funds,” Autera said. “Now, you see larger and more sophisticated players: large established VCs and institutional capital, coming into the space.” It means there are less people willing to make riskier investments, he added.
In this piece, we’ll get into Autera’s claim of how the investment scene is maturing, and see how that impacts the ever-changing intersection of cannabis and technology.
A Budding Industry
As Savannah Dowling pointed out in our last pulsecheck on this greening industry, a cannabis company isn’t just one that handles the flower or bud; it’s the auxiliary businesses as well. Those include ventures that help with transportation, packaging, regulations, and more. For example, Cannalysis is an accredited cannabis testing facility.
With that nuance out of the way, let’s dive into the numbers.
According to Crunchbase data, funding for cannabis companies has slowed down dramatically from some super giant rounds from 2018. Deal size has also decreased significantly. It is notable that private market reporting lags may account for the quarter-over-quarter decline.
But for a second, let’s turn back to Autera’s point about the rise of cannabis-specific funds. His company raised a $22.6 million Series A from CanLab after fundraising for eight months. He said that beyond capital, the company wanted an investor that “would be in our corner” as the cannabis industry grows and evolves.
It’s worth noting that Snoop Dogg’s venture capital firm led the $1 million seed round in Cannalysis, reports Business Insider.
Another investment fund that popped up recently is Vice Ventures. You can probably guess its focus from the title, but if not, it’s a $25 million fund to invest in untraditional verticals. Cannabis fits into that focus.
Vice Ventures, led by Catharine Dockery, is backed by Marc Andresseen and Bradley Tusk. Back then, we caught up with Kerin Law, the chief scientific officer of LeafWorks, which verifies cannabis products to make sure they are safe using DNA testing.
LeafWorks and Cannalysis are in a sector with blossoming interest; seven recent cases involving hospitalization have been directly linked to “cannabis cartridges purchased from unlicensed pop-up markets,” according to Leafly, a cannabis news website.
Akerna Corp., a publicly traded cannabis company, has even teamed up with an anti-counterfeiting technology company, solo sciences, to protect consumer safety.
“You’re making a good investment because you’re able to get into the cannabis space [through] a genetic test, [and] you’re not facing as much federal scrutiny or uncertainty if you were a plant-touching company,” she told us.
A Greening Path Forward
Torian Capital’s David Kutcher told me that while “risk is inherently higher” if you deal directly with the flower, without companies that do it, “there is no cannabis industry at all.”
Torian Capital is a private equity firm that invests in cannabis companies; the firm claims it is the largest “cannabis-only Private Equity Firm” and has provided more than $300 million to emerging cannabis companies.
“While [auxiliary businesses] may be the first to take advantage of growing interest from outside the industry in funding..there is also the risk that more established companies outside the industry enter their specific market area,” which adds competition, he told Crunchbase News.
When reviewing deals, the firm expects portfolio companies to have a basic plan of execution, but beyond that, they also need a core understanding of cannabis regulations on a state by state basis.
Growing pains, especially as an industry matures, are common. Thankfully a little green can go a long way.
Illustration: Li-Anne Dias