Cato Felán, La Hoja’s managing director and resident expert on finance in the Americas, traveled to New Orleans last week to speak on a panel with Nic Easley of 3C Consulting and William Muecke of Artemis Growth to share investor insights and opportunities in international Cannabis.
Some key points:
The temperament and tone around Cannabis is changing worldwide, especially as it relates to the intersection of health and wellness. A big trend is the expansion of thought from cannabis as a prescription drug to cannabis as an aide in overall wellness. Different formulations will be necessary for different markets as what is accepted as a supplement in the U.S. is not always what is accepted in Europe. The upside is that many international markets (Europe, Asia especially) have long traditions and acceptance of plant-based supplements.
Doctor education is key to changing the worldwide conversation. Many reforms in cannabis laws per country have come from single patient examples of how the plant has treated their condition brought forth by their doctors. That said, doctors generally do not want to prescribe smoking flower to a patient, and so formulations for other delivery methods is a big opportunity, but that field is becoming more crowded.
Insight: For International moves: keep it to medical; have patience that recreational will come eventually. Canada, Uruguay and, more recently, Mexico have legalized recreational cannabis but they are technically in violation of international law by allowing access to a psychoactive substance outside of the pharmaceutical space. Mr. Easley warns that governments may ban medical sales from a company that also engages in recreational cannabis elsewhere. IPO may suffer as well. The takeaway: make sure your company or the company in which you are investing is structured for each set of laws in each country in which they do business.
Europe is a hotspot for cannabis investment and growth right now. Clear regulations and standards coming out of countries like Germany and Portugal boost investor confidence and give Europe a head start on the medical market. Plus it is a huge market: potentially 500mm cannabis consumers by 2026.
Some U.S. investors are reticent about making moves into Latin America based on perceptions of unorganized industry and regulations. Mr. Felán cautions not to let old prejudices color the perception of Latin America: these are educated, sophisticated populations with savvy investors and consumers. Furthermore, as Colombia shines as the potential epicenter of cannabis cultivation, it is important to keep in mind that they have an advanced agricultural industry that has been supplying the Americas with produce and cut flowers for decades.
Better understanding of cannabis in European governments is leading agencies in Italy, Portugal, and the Czech Republic for example, to shut down dubious CBD shops and manufacturers. Expect this to be a trend worldwide and make sure everything is in order with any company in which you invest.
Opportunity: There is a lower barrier for international entry in Cannabis for ancillary companies. Real estate, data, equipment, equipment finance, packaging are all examples of companies that cross borders with less red tape than plant-touching companies.
Choosing the right international partners is important. Mr. Felán points out that bringing your home politics into a foreign country or misunderstanding the political dynamic is a recipe for disaster. Being a good partner means working with all governmental parties, and being very clear on what benefit you are bringing into the country. For example, patient-focused practices, alleviating suffering in the local population, and the potential for export and the benefit to the local economy are all boxes international partners want checked.
Real Life Example: Ballpark start-up costs to produce in Europe. All products/processes need to be up to GMP standards, a higher standard than in the U.S. This means costs and timelines go up. Mr Easley gives a ballpark estimate for a 1 hectare cultivation and manufacturing facility:
€10mm property management for glass GMP greenhouses, extraction equipment, etc.
€2-5mm operational budget including doctor education, lobbying, marketing, branding, international permits, etc.
€2-5mm burn rate for 2-3 years before cash flows.
It is expensive to enter Europe but worth it as these are global standards being put in place, with a huge head start over the U.S. on medical research. Mr. Easley predicts European and Israeli medical products will be imported into the U.S. long before the reverse happens.
Impact Investing: Like all industries, there are a lot of entrants to Cannabis whose primary focus is making money. Mr. Felán and Mr. Muecke stress that their firms of course have this goal, but with a focus on impact investing. Impact investing means directing capital into companies that impact positively either directly or indirectly the need for social justice, the alleviation of the opioid crisis, standardization of ecological practices, compassionate access, etc. They believe that a business model can be for the benefit of stakeholders, (the community, employees, consumers and vendors) as well as for shareholders.
“Build It and They Will Come” is the wrong approach for Cannabis. A lot of “opportunities” in Cannabis are based on a hope and a dream, without much meat in the deck. A good venture capital firm like those represented on this panel, will do the heavy lifting of sifting through what are real opportunities and what are baseless. Good opportunities are those with strong management teams, the full value chain built out, a product or service that meets market needs, agreements with purchasers showing that revenues will be flowing in the future, realistic financials, etc. The days of huge, foundless Cannabis valuations are behind us.