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Stacks of Cash: The Perceptions Versus Realities of Investing in the Cannabis Industry



Jeffrey Friedland ( Tel 1 646 450 8909)

A week doesn’t go by without someone saying to me, “I want to invest in the cannabis industry. I’ve seen those stacks of cash on TV. I want in.”

My standard response is always the same. “There are often bigger stacks of cash going out than coming in!”

It’s easy to understand how videos and photos of cannabis businesses with piles of cash have led many to assume that this industry is incredibly profitable and that investments in the industry are a sure thing. I refer to this as the “Breaking Bad Syndrome,” which I named after the TV show’s episodes that showed stacks of cash in a mini-storage facility.

These piles of cash exist for one primary reason. The U.S. cannabis industry generally lacks access to the banking system. With the difficulty of finding a bank friendly to the cannabis industry, depositing the cash is a challenge.

This cash creates an illusion that an investment in a cannabis business will be very profitable. As a reality check, it’s important to realize that stacks of cash don’t indicate that a business is cash flow positive or profitable. The cannabis industry is just like any other business. There are some growers, processors, dispensaries and retailers who are making a profit, but many others are not.

It’s Ultimately All About the Plant

Most individuals investing in the cannabis industry are focused primarily on the plant. It is true that producing a healthy, viable plant is important. It is not true that growing, processing and the sale of cannabis may be the best option for investors.

If you’re considering a cannabis-related investment, it’s vital that you take a much longer term and broader view of the industry. Many of the opportunities in this emerging market offer significantly greater returns and are more lucrative than growing, processing or retail sales.

The Cannabis Industry as an Emerging Market

Why should you, as an investor consider the cannabis industry? Rarely have I seen a new industry generate as much media attention as this one. News about cannabis is frequently in mainstream publications. It seems that a week doesn’t go by without the Washington Post, the New York Times and the Wall Street Journal each publishing stories about cannabis, and the industry is the subject of frequent reports on local and national television.

Before my involvement in the cannabis industry, I worked in “emerging markets” focused on entrepreneurial companies for several decades. My experience in China, Brazil and Southeast Asia allowed me to draw a parallel between the newly emerging cannabis Industry in the United States and these other markets.

The challenges of managing a business where government regulations are written ‘on the fly’ and may change at a moments notice are similar to what I experienced working in China twenty years ago. This familiarity with the fickle and unpredictable business environment in emerging markets provided me with a unique insight into the new cannabis industry.

Emerging markets are risky, but they often provide investors with tremendous opportunities. There are advantages to being on the ground floor of the cannabis industry. Largely because of the illegality of the industry at the federal level, only a few major corporations have started to stake a claim in this new industry. This allows an opening for today’s start-ups and early-stage companies to become tomorrow’s household names.

In some U.S. states, those that I refer to as “advanced cannabis states,” most of which are in the western part of the country, the industry is evolving quickly. However, with rapid expansion comes a host of issues. For example, in Colorado in 2013, when the state only allowed medical cannabis, it was questionable whether anyone in Colorado’s industry was operating profitably. Very few cannabis-related businesses had verifiable track records. Financial statements were rarely available, and internal financial controls were essentially non-existent because of the lack of access to the banking system.

In many states that have relatively recent medical cannabis programs, the industry is at a very early stage. These states include Illinois, Massachusetts, New York, New Jersey, Connecticut, Rhode Island, Pennsylvania, Florida, and Maryland. Many cannabis entrepreneurs in these states are trying to implement business plans or strategies that in other cases have failed in the advanced cannabis states. These entrepreneurs have many of the same challenges that similar cannabis businesses had in Colorado, Oregon, Washington or Nevada a few years ago. If a business model didn’t work in Colorado or Washington, it doesn’t necessarily doom a similar business direction in Maryland or Illinois, but it