Although cannabis is banned at the federal level, it remains legal in 33 U.S. States. It served five millennia as a trusted medicinal agent, then eight decades strictly off the books. It stands today as the flag of subcultures, a cultural taboo, as the scent of the 60s, and today as a Schedule 1 drug. In 2019, cannabis companies may just be the next best thing on the Stock Exchange. Thousands of dedicated people like, cannabis investor Nitin Khanna are buying into this rapidly growing industry.
Cannabis is one of the fastest-growing industries in today’s market, offering a vertical that could prove unique for a number of reasons. This is relevant in both medical and recreational crowds, is capable of integrating cloud and internet of things technology, and is fueled by an entrepreneurial generation with a set of limited means. It is an exciting time for cannabis.
This article will walk you through what you can expect investing in the cannabis industry; as well as introducing you to one key figure that has already made a significant mark in the space: MergerTech CEO, Nitin Khanna.
Before getting into the nitty-gritty, let’s set the stage for what the cannabis industry looks like today:
● Sales of legal cannabis within North America alone amounted to nearly $10 billion in 2018.
● This figure is expected to surpass $47 billion in the next 8 years (by 2027).
● Cannabis is legal, for medicinal or recreational use, in 43 US States.
● Over 60% of Americans are for legalizing marijuana — This movement includes 51% of Republicans are in on the movement too.
● THC-free cannabis products, such as CBD oils and topical creams are showing increasingly positive signs in breakthrough medicinal research with some products being praised by consumers who claim to be showing improvements in certain skin conditions, anxiety, chronic pain, Epilepsy, and Parkinson’s.
Read more on cannabis stats here.
All of the above and more are why investor and CEO, Nitin Khanna, and many others, are doubling down on the cannabis industry in 2019. However, it’s easy to get caught up in the hype.
While the potential for growth is exciting, there is also a necessary and real cause for skepticism. The strong influence of government regulations is no minor issue; public and cultural opinion on marijuana as a recreational substance varies, and limitations surrounding the promotion of federally illicit substances on social media remove one of the most influential marketing vehicles from the cannabis ‘brand visibility’ game.
So, where does this all leave us?
Here are some key things to understand about the cannabis industry, some of the most promising potential benefits, some key limitations that may stop them from occurring, and some thoughts from Nitin Khanna, that you may want to keep an eye on in this space.
What You Need to Know About the Cannabis Industry
Cannabis itself needs no introduction, but a little horticultural education never hurt anyone. The cannabis plant is made up of roughly 483 compounds, 65 of which are known as cannabinoids. For most people, cannabinoids are the most interesting part of the cannabis plant–two, in particular, tend to win the most attention:
THC is the psychoactive component of cannabis–it’s what produces many of the familiar effects people associate with recreational marijuana use, such as slower mental processing, feelings of euphoria, profundity, increased creativity, drowsiness, and decreased motor coordination.
CBD or Cannabidiol, on the other hand, is another cannabinoid found in the cannabis plant shown to have promising medicinal use cases. While both THC and CBD are found naturally in most strains of cannabis plants (though in different potencies), it is possible to separate these cannabinoids purely.
Research on pure CBD (in oil or spray form) has shown remarkable results in treating epilepsy, skin conditions like severe dermatitis, as well as a number of anxiety-related disorders. These have been achieved without the cognitive decreases noticed with high THC intakes. Nitin Khanna is one of many who have seen the
The largest obstacle to the cannabis’ widespread adoption is simple: it’s a federally illicit substance.
For the cannabis-faithful, nationwide adoption seems only a matter of time. And when we consider the major movements in legislation over the past decade, with 43 US States now allowing some form of legal marijuana and 10 States legalizing it for all adults aged 21 and above, those true believers may have a point.
However, as it stands, federal regulations have severe consequences which hinder not only cannabis growers, sellers and product manufacturers: but they make the task of investing in cannabis companies directly more challenging.
Legal transportation of cannabis also proves somewhat problematic, with the transfer of cannabis across state lines–even when both states have legalized the substance–remaining illegal. This makes an expansion for any single cannabis company significantly more difficult, again placing real limits on the growth of individual players in this otherwise budding industry.
That being said, ever since the famous Rohrabacher-Blumenauer Amendment (2001), cannabis has begun to get a taste of what legal protection might look like. The Amendment, which prohibits the U.S. Justice Department from spending funds to hinder the implementation of medical cannabis laws at the state level, has also given medicinal marijuana a significant head start over its recreational counterparts.
The Buzz Behind CBD
Cannabidiol (CBD), particularly in the form of CBD oil, has caused a significant buzz in select medical circles. Without getting too deeply into the mechanics of it, CBD provides a unique benefit for many individuals suffering from a number of illnesses such as anxiety, depression, epilepsy, and other hormonal imbalances. It does this primarily by means of balancing the body’s natural endocannabinoid system; which, as it turns out, is one of the largest complete systems in the human body.
While many seem to think that CBD is medical marijuana, and THC is the recreational kind, this simplicity somewhat misses the mark. In truth, THC is an active compound in many strains of medical marijuana, while CBD is also a natural component of the recreational plant. In fact, research suggests that strains with high THC potency and not enough CBD can result in unstable highs since the CBD component is an important balancing agent in the overall marijuana high experience.
That being said, the main benefit of CBD is its promise for providing a strain of medical innovations that are free from the THC compound–potentially lending itself to more lenient treatment from authorities, since the negative effects (slower cognitive and motor skills, for example) have not been associated with CBD intake.
While Hemp-derived CBD is legal in all 50 US states, CBD-derived from marijuana plants is not. CBD is, however, legal in all states as a prescription drug for epilepsy.
Types of Cannabis Stocks
Growers: These are companies that produce their own cannabis, then sell and distribute it. In the US, ‘grower’ companies face significant restrictions and therefore have been unable to make any major moves. In Canada, however, some growers have already reached significant market caps by the end of 2018.
Biotechs: These stocks back companies which are concerned with the development of marijuana products, as well as the means of bringing them to market. Even though some of these firms never actually touch a cannabis plant (working with synthetic substances instead) they are still classed as marijuana stocks.
Supply providers: Some companies listed in the marijuana industry don’t ever produce or handle cannabis directly, but provide cannabis companies with what they need to grow it. As a somewhat delicate plant needing lots of attention and care, these companies are major players in the industry’s success. They manufacture and distribute things like hydroponics, fertilizers, and lighting equipment.
Exchange-Traded Funds (ETFs): If you’re looking to get more exposure in your portfolio and spread your reach into less accessible cannabis markets, there are two standouts ETFs in the industry right now:
1. ETFMG Alternative Harvest ETF: This fund tracks close to 40 stocks in the cannabis industry. It covers a broad range, from producers to biotechs; as well as some of the more well-known players like Canopy Growth and Aurora Cannabis.
2. Horizons Marijuana Life Sciences ETF: This ETF is focused solely on medicinal uses of cannabis, consisting of 28 different stocks. For the moment, the majority of this fund’s value comes from its holdings in larger stocks; however, if you’re looking to get in early on some smaller fish in the medicinal marijuana space, this could be a good place to start.
The Dispensary World
Cannabis dispensaries can be either medicinal or recreational, and they can be regulated or unregulated.
Here are a few interesting statistics to note about regulated dispensaries in the U.S.
● The average startup costs for a regulated cannabis dispensary as of 2017 was $775,000;
● Average annual revenue for marijuana dispensaries was $3 million; and
● Average annual operating costs came in at $1.98 million
For some context, just less than 10% of full-time small business manage to generate $1 million in annual revenue; cannabis dispensaries are seeing no shortage of business. And when it comes to the somewhat steep startup costs, a quick look at these dispensaries’ annual profit margins may be enough to bite the $775K bullet.
Unregulated dispensaries tell a slightly different (though not at all shabby) tale:
● Average startup costs come in at just $100,000;
● Annual revenue totals $740,000; and
● Annual operating costs average $400,000.
Modern Cannabis Culture
The statistics are enough to catch most people’s attention, but the dispensary culture is also worth a closer look.
Since cannabis dispensaries were first popularized in the innocuous Amsterdam ‘coffee shop’ format, you might expect these ‘pot dispensaries’ to be layered in a permanent hazy fog. Quite the opposite. In fact, in 2019, modern cannabis dispensaries tend to resemble an Apple Store more than an Amsterdam coffee shop.
With ‘Budtenders’ standing at the ready to educate and inform customers on the latest strains, trends, and products, the modern dispensary leans upon the clean, sleek and professional storefront to attract high-value customers: despite some of its stupor-inducing products.
If cannabis dispensaries are to serve as the mascot for what widespread adoption may look like–this clean, professional look may influence future public opinions.
As a product that appeals strongly to millennials and younger generations, the marriage between tech and marijuana isn’t surprising. Companies such as WeedMaps and Leafly are innovative tech companies that focus on servicing cannabis consumers.
Whether that’s by helping them locate the closest dispensary, or educating freely on the latest strains, products, and trends, there’s no denying that the cannabis industry is fueled by a particularly entrepreneurial spirit and crowd. Largely determined by the demographics of major target markets and the novelty of legislation surrounding the substance itself, this is a uniquely youthful industry.
Main Opportunities: A Quick Recap
So, in case you missed it, here’s a quick summary of the major potential benefits for investors in the cannabis industry:
● In 2017, the global cannabis market grew by 37% and is expected to reach roughly $64 billion by 2024: when it comes to emerging markets, this is the crème de la crème
● Cannabis ETFs allow you to have your hand in stocks from medicinal to recreational to biotech;
● Cannabidiol (CBD) has shown promising results in medicinal research surrounding severe case conditions of epilepsy, anxiety, and depression–as further regulations are eased, the spread of CBD products to ‘dietary supplements’ could grow rapidly;
● In just 10 years (from 2008-2018), public opinion polls show a major shift surrounding the legalization of marijuana, from 35% almost doubling to 62%;
● This shift has been reflected in legislation, with 43 States currently allowing medical marijuana and 10 States legalizing cannabis for all adults over 21;
● In line with the behaviors of a younger audience, cannabis companies tend to bring an entrepreneurial, tech-savvy and ‘genius bar’ tone to the marijuana scene. Things have certainly changed since the 60s.
Risks and Limitations on Marijuana
It isn’t all upside for the seven-pointed leaf. While federal legislation is undoubtedly the largest barrier to widespread adoption, another major obstacle comes in marketing ‘federally illicit substances’.
While almost every other industry is benefiting from one of the most powerful marketing tools in human history, social media, cannabis (for the moment) isn’t able to get in on the targeted marketing activities. Facebook, Instagram (same company) and other major social media platforms have strict regulations surrounding the promotion of illicit substances.
Namely: no paid advertising.
Since this is where most companies are able to do their most effective marketing (Facebook lets you target your audience to within a 1-mile radius, filter based on interests, demographics, behaviors and much more), this is a huge blow. However, some cannabis industry faithful believes that this challenge offers a unique opportunity for long-term growth.
With significant marketing restrictions in place in the short-term, will cannabis companies be able to overcome these barriers to innovate new ways of reaching their audience? Already dominated by a younger generation of ambitious startups and entrepreneurs, it seems unlikely that a social media ban can hold back one of the most culturally-accepted substances in (much of) American society.
Perhaps the question, then, is this: Which will succumb to the wave of social opinion first? Social media companies, or the federal government?
And if either of these pins were to fall either, could that signal the beginning of a major shift in a cannabis market poised for growth?
There has been a major debate about when and how the United States will legalize cannabis in all 50 states and how it will be regulated. Regardless, investors around the world are agreeing that the growing market may be worth the risk as the industry continues to rise.
A Cannabis Investor: Nitin Khanna
In an industry with significant potential and risk, some key players are showing more than just verbal support. Nitin Khanna, CEO at MergerTech, has a successful history in the cannabis industry already–having grown Cura Cannabis to one of the world’s largest cannabis oil providers in his time as CEO–and is looking to embrace further solutions in this exciting space.
“I am not the kind of person who would build a Facebook, so I don’t tend to do idea-based businesses,” Nitin Khanna explained in a recent interview.
“What is exciting about cannabis is that it’s also not an idea. It’s a very traditional, old school business that was recently legalized, so I knew that the winners in the space would be those who could outperform others,” he added.
Nitin believes that execution is what will dominate this budding industry–not brand new ideas or subtle differentiators. And when you consider the tens of thousands of available strains trying to differentiate from the rest with a unique-sounding name [9 Pound Hammer, Sour Tsunami and Island Sweet Skunk for starters], and a funky packaging concept: he may have a point.
As a key investor in one of the fastest-growing industries in the world right now, Nitin Khanna is looking for businesses that have more than an idea: he’s looking for plans that can be executed. With plenty of noise and hype to distract you from the fundamentals, Nitin Khanna’s voice is a welcome breath of sanity in a very promising space. Khanna is now the CEO of Mergertech, a mergers and acquisitions firm for tech companies claiming it can assist technology companies with a “passionate sell-side representation of technology clients who expect a sale price of $10MM-$200MM.”