High Stakes: A Call for Caution in Cannabis Investment

As often happens, the expectations of a “revolutionary industry,” be it a new technology, a newly created vertical in an existing market, or new types of products that promise to solve a long-lasting problem (more often than not, problems we didn’t even know existed), it attracts a broad spectrum of “investors” drawn by the potential for substantial, and often-expected, quick profits.

However, when it comes to industries, such as the legal cannabis market, whose complex regulatory environment and market volatility require more than just financial investment, there exists a demand for profound understanding of the unique challenges at play. Unfortunately, a troubling trend is the influx of inexperienced investors, namely, people with some money under their name, and those seeking quick financial gains without a real grasp of the industry’s intricacies, investing in companies, old and new, that desperately need such financial backing.

The allure of the Green Rush, as it’s often called, is clearly understandable but deceptive (I have often said that one of the most interesting, yet challenging, facts about cannabis is that just uttering that word will almost inevitably invoke an emotional reaction). As industry leaders, whether that is a founder of an up-and coming venture, or someone who has years of experience in the field, we must insist to these people willing to risk their money that we are not talking just about another investment opportunity, but a highly specialized field that combines complex regulatory frameworks and significant operational challenges. 

But it’s not only a potential issue of the financial self-deception that may mislead eager investors that can be a real problem; in my years of experience in the legal cannabis industry, I’ve often seen the results of accepting investments from those with little to no experience in the industry that have been particularly perilous for the very same companies that accepted such an investment. As mentioned above, beyond the initial mismatch of expectations, the long-term implications can strain the operational dynamics and decision-making processes within the company. 

In a very specific scenario, more frequently than not, I’ve seen such unqualified investors, understandably to a certain degree, seek to secure a measure of control as a condition of their investment, such as demanding a board or advisory seat in the company. If, for example, these investors, in the name of safeguarding their investment, push for quick returns without consideration of the mid- and long-term impact and without understanding the complexities of the cannabis market, they can significantly influence company strategies and direction, and not in a good way. 

Imposing these short-sighted strategies focused on immediate gains, rather than the sustained growth necessary in such a regulated and complex market, is undoubtedly a recipe for chaos. Investors might push for aggressive expansion or other risky ventures without a realistic appreciation for the slow burn of ROI that typifies the cannabis sector, or prioritizing sales and marketing expenditures over quality assurance or customer service. 

As it stands, the reality is that these occurrences are more and more common, and decidedly have an overarching impact on the industry as a whole. With such high levels of expectations, a clear lack of understanding the intricacies of the industry, and the increasing necessity of liquidity in the industry for capital and operational expenditures, we are seeing an seemingly endless cycle of companies being created and later failing to prove their worth in the market, and eventually drying up their financial reserves.

It’s important to point out that I believe our industry is just as challenging for those who are new to investing, as well as for more experienced investors from other industries. Even those experienced in venture capital, as well as business management, can struggle to relate and respond to the specific demands of our industry, such as keeping up with frequent regulatory updates, understanding licensing processes and times, as well as ensuring product compliance. Hence, overlooking a correct investor profile when raising capital in lieu of a quick check can result in poor overall decisions that do not align with the best interests of the business, potentially jeopardizing its viability.

A good example is compliance, which requires ongoing attention and significant resources that go beyond financial liquidity, including, correct counseling and clear operating guidance. Without these, even the most promising cannabis venture could falter. The lack of proficiency with these laws and regulatory frameworks, be it because of naivety in the space or a quick-profit mentality, can lead to severe consequences, including legal violations and financial penalties, which will cripple a business, both in credibility and operation.

We must face the harsh reality that, while the legal cannabis industry offers significant opportunities, it is not suitable for the uninformed or those looking for quick financial gains. It requires founders and investors who are not only financially savvy but also thoroughly knowledgeable about its specific requirements and challenges. To have a truly healthy industry, it is crucial that these companies seek out investors who understand and are prepared to engage with the market on its terms and not theirs. Thoughtful and patient collaboration between well-informed investors and cannabis companies is crucial to mitigating these risks and ensuring a stable, profitable business trajectory for a company and the industry as a whole.