Investing or Buying a Cannabis Business

Nov 15, 2017

IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses.  The following blog article has been provided by S.A. Swanson:

 Angels Hold Cannabis in High Regard

Investors get comfortable with cannabis as a commodity

S.A. Swanson | November 2, 2017

Cannabis

Founded in 2010, angel investment network The Arcview Group offers a window to gauge investor interest in legalized marijuana. Arcview’s network has invested $125 million in 157 cannabis-sector companies since 2013; membership in the network starts at $2,500. It plans to launch its own venture fund by the end of 2017.

Arcview hosts weekly webinars featuring video-recorded pitches with Q&A sessions that enable potential investors to glean additional details from cannabis-sector entrepreneurs. The group also hosts five yearly conferences, where about a dozen entrepreneurs take the stage to pitch their ideas to about 400 investors.

During the past three years, the number of investors in Arcview’s network has roughly doubled to more than 600. “Interest overall has continued to skyrocket,” says John Downs, director of business development.

Although high net worth individuals represent about 85 percent of would-be investors, Downs has seen interest grow among investment firms, as more investors get “comfortable with cannabis as a commodity.”

Investors appreciate the vertical integration permitted in Colorado and some other states, which allows cannabis businesses to both grow and sell their product.

“We see a lot of investors clamoring to control supply,” he says. “You look at (CEO) John Lord and what he’s been able to do at LivWell, and there’s a sense that he can better control his own destiny.” LivWell grows and sells marijuana across 14 retail dispensaries in Colorado; Middle Market Growth profiled the company in its fall 2017 issue.

Policy Overhang

Since the start of 2017, however, Downs has seen investor enthusiasm dampen somewhat.

While he can’t blame one specific factor, he points foremost to a prohibitive Drug Enforcement Agency announcement that affects cannabidiol (CBD), one of dozens of chemical compounds unique to marijuana. Unlike THC, the compound in cannabis responsible for the drug’s psychological effects, CBD does not have psychoactive properties and is used to treat symptoms of epilepsy, among other ailments.

LivWell founder John Lord (second from left) with members of the company’s leadership team

In December 2016, the DEA introduced a new administrative code specifically to track marijuana extracts—previously, such codes had only existed for marijuana and THC. At that time, the DEA also stated that all marijuana extracts, including CBD, are classified as Schedule I controlled substances. Although this surprised many industry observers, the DEA has said it does not represent a policy change, noting that marijuana extracts have always been considered Schedule I under the Controlled Substances Act. (The DEA’s rules and regulations from December 2016 state that marijuana extracts “will continue to be treated as Schedule I controlled substances.”)

Other investors have backed away due to concern about former Alabama Sen. Jeff Sessions’ appointment as U.S attorney general. Sessions has said, “Good people don’t smoke marijuana,” and he wrote a letter to some members of Congress asking for removal of federal protections that prevent the Department of Justice from prosecuting medical marijuana patients, growers and sellers that adhere to state laws.

But Downs sees an upside to the recent industry trepidation. “In the long run, this might actually be a good thing for investors, because this market was starting to feel a little frothy, even though it’s tremendously early,” he says.

“It’s good for investors to be given time to pause and reflect. Many folks have taken an accounting of the risk and chosen to move forward. It’s a benefit for those investors, because it compresses valuations and means there’s more value in the marketplace because that risk is being priced in.”

S.A. Swanson is a business writer based in the Chicago area.  Additional information on Ms. Swanson can be found at  http://www.saswanson.com/  The article originally ran in a publication distributed by Middle Market Growth (http://middlemarketgrowth.org/)

 

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