Will Mexico Become a VC Hub for the Legal Cannabis Industry?By Erick Ponce | Fri, 05/21/2021 - 09:02
The story behind what has been fueling the legal cannabis industry for the past 10 years is one worth telling.
An increasingly flexible regulatory framework is gaining ground in the Americas, and while several Latam countries are expected to fully legalize cannabis soon, cannabis legislation is also sweeping across the US. Since 2011, when Privateer Holding acquired Leafly, venture capital investments in this industry has gone from US$0 in 2010 to US$2.5-plus billion in 2019.
The VC race toward the green gold rush has already started in North America, and Mexico is no exception.
To understand the inception and growth of venture capital in the cannabis industry, we need to first understand why traditional venture capitalists couldn’t or wouldn’t invest in this industry.
The provisions of a Partnership Agreement control a fund's operations. The General Partner (GP) and Limited Partners (LP) negotiate these terms, which govern how the GP will spend the LP's money.
They follow an investment thesis, which includes requirements for reporting and enforcement, as well as a moral clause, which forbids funds from engaging in such industries that they consider “immoral” or contrary to their ethos.
As long as cannabis remains illegal on the federal level in the US, and worldwide, such provisions would prevent conventional venture capital firms from investing in the industry.
Adding to this is the fact that the cannabis industry is one of the fastest-growing industries of our generation and that its global value is expected to reach over US$85 billion by 2028. That is the perfect recipe for the creation of many VC funds focused exclusively in the cannabis industry.
The National Venture Capital Association (NVCA) estimates that there are more than 100 cannabis-focused venture capital funds in the US. As the market develops, a number of these funds are becoming more popular. Examples of some of the leading US-based funds that are making the most significant investments are Arcadian Capital, Casa Verde Capital, Poseidon Capital, Merida Partners, Phyto Partners and Tuatara Capital. Each invests in different stages, strategies or sectors within the cannabis industry.
There are also a number of firms that first started as a fund but migrated into holding companies. Canopy Growth Corporation, TILT Holdings and Acreage Group all got their start this way.
According to Pitch Book, 2019 saw 307 deals across 277 cannabis-related companies, totaling approximately $2.6 billion in VC investments at an average deal size of US$2.5 million and an average post money valuation of US$20 million.
So, what does this trend in VC investment in the cannabis industry in the US mean for the recently medically regulated and soon-to-be fully regulated Mexican cannabis industry?
Just like what we’ve been seeing in the US since the 1970s, the process of regulating a prohibited industry like cannabis is not an easy task.
Mexico approved medicinal cannabis, or more precisely, “pharmacological derivatives of cannabis,” on June 19, 2017. After that, nothing much happened until Jan. 12, 2021, when the Medical Cannabis Regulations finally got published.
While we all are eager for the industry to get fully legalized in our country, it may seem that things are moving slowly. This is far from the truth: If we compare the regulation process with the US, it's quite impressive how fast things are moving.
In the meantime, what are Mexican cannabis entrepreneurs doing?
Well, we are getting ready for this to get started! We all know that Mexico’s into this industry will definitely be a game changer, especially for the US. It will soon be sandwiched between two nations with a federal regulation.
With a population of 127 million people, Mexico will soon become the largest country in the world (by population) to legalize cannabis. Hopes and stakes are high for this new market. American and Canadian companies, as well as family offices and VC funds, have been coming to Mexico for the past few months, analyzing and networking with Mexican entrepreneurs.
While some investments have already been made in the Mexican industry, Mexico’s entry into this industry has caught the attention of institutional investors, mainly venture capital funds.
VC fund structures with a focus in Mexico are already being created. Such is the case of funds like The Happy Capital Fund (THCf), a $10M Canadian Limited Partnership managed both from Mexico and the US that is already making some strategic investments, mainly in American companies with future interest in the Mexican market, creating a bridge between the US and Mexico.
As the regulation gets approved and the first companies in Mexico get their operational licenses, we will see an incremental increase of VC investments in this new industry.
Will Mexico produce its first cannabis-unicorn within the next couple of years? We wouldn’t rule it out.