Hindsight is commonly referred to as “2020”. Vision always becomes clearer when looking backwards. In order to properly sort through the current state of the cannabis market place, we must first understand where we have been and what led to where we are. Is it a coincidence that this is the year 2020?
In emerging industries, we have seen time and time again two major truths. There is an aspect that follows a normal process by which angel investing turns into seed investing, turns into venture capital, and finally opening up institutional resources. This ultimately leads to proper use of a public market. The job for each investor throughout the life cycle of an emerging industry serves a very specific purpose. That purpose is to de-risk the proposition, and prove scalability. The second major truth is that the passion and excitement, which fuels growth in an emerging industry, will foster an environment of hubris, where aspirational valuations and irrational exuberance boils over.
Eventually, markets always figure themselves out. This industry generated $15 billion worldwide in revenue during 2019 according to BDS Analytics, up from $10 billion in 2018. Valuations are falling more in line with fundamentals. They are ripening closer to the point where institutional investors will be more comfortable having exposure to the sector, so long as at a macro level, revenue generation continues to improve.
For example, Canada is estimated to generate $900 million of revenue in 2019. To receive a proper comparison, we can find a comparable brick and mortar retail business in a mature market and apply that to a company in the cannabis industry. From that point, the discussion can be made in terms of valuation and next steps, whether it is a premium or a discount multiple, but we must get to fundamentals. Fundamentals are looking extremely exciting, thankful to the near, medium, and long-term macro growth the world is experiencing.
Mostly importantly, this industry is about bringing the plant’s properties to the world in masses. All of our goals should be for that vision. We should be excited about the real revenue growth, market share, and assets this industry has already created without any real institutional support. We have to keep biting off what we are allowed to chew, and the future could not be brighter.
Matthew J. Nordgren is President of Arcadian Fund Management & Arcadian Capital Partners.