So you’ve been watching the cannabis industry and seeing amazing projections of multi-billion growth over the next few years. You have about $5,000 or $10,000 or maybe even $25,000 to invest.
Time to jump in, right? Well, before you take that leap, take a long, careful look at the cannabis market first.
Swipe away the hype from companies that are just trying to survive. Take note of some of the recent game-changing news (Bruce Linton canned at Canopy Growth; a lawsuit in Florida by Tampa-based Florigrown) and check the reason for the sudden adult-use holdups in states like New Jersey and New York (social equity issues).
Look at how volatile the cannabis stocks have been. And get a clue – this nascent industry is still trying to find its financial footing, and still scaring off some big investors. Is this really where you want to put your money now?
Debra Borchardt, co-founder, CEO and editor in chief of the financial news publication, Green Market Report, advises caution. “I think a lot of people get caught up in headlines of the big numbers. ‘Oh, cannabis is going to be a billion-dollar business, going up, well, insert the number.’ They buy into that and think that the stock is going to move accordingly.
“It’s hard with some of the cannabis companies to do your research because some of them are small, making it hard to do an apples-to-apples comparison. It’s not as simple as other sectors like a retail or even tech where it’s easy to look at certain metrics and measure them and analyze them,” Borchardt notes.
The only stock she has seen that may be safe is Innovative Industrial Properties, which is a real estate investment, where an investor can get a yield. “I feel like that is a good short term investment because they are able to command pretty good rents, with so many dispensaries and cultivators chasing space,” Borchardt says.
She says that exchange-traded funds (ETFs), with a mixture of investments, are probably the best investment choice to begin with because the group tends to “trade in lockstep.” When a couple of companies report good earnings news, it tends to lift the whole ETF group up. “In the last month, we have had a whole new crop of cannabis ETFs show up. And I think that that is certainly a great place for people to start their investing,” Borchardt recommends.
Borchardt advises that the time for smart people to put their money to work is when there is no hype about the industry – no screaming headlines. “That is when you want to start to buy,” she says. “There is a lot coming up in the pipeline in the next six to nine months — developments in Michigan and Illinois, for example — so, the sleepy summer is the time to get busy.”
Ruth Epstein, partner at BGP Advisors providing strategic financial advice to the cannabis industry, agrees that, in particular, Canada ETFs might be the best option for investors, though some have a strange mixture of companies. “But I am not sure that investing in cannabis can be described as safe under any circumstances,” she says. “It’s very hard for the small investor because your only opportunities are buying a few shares of stock if you only have $5,000. You can’t invest in any of the funds that will give you more insight into what you are buying, which would give you more comfort about the safety of that investment.”
Epstein iterates that the cannabis industry is such a high-risk industry right now that she doesn’t think it is appropriate for a small investor. “The risk of it declining pretty significantly is still so great. The ability for a small investor to analyze an investment opportunity is still really dicey because there is still so little market research coming from Wall Street. But if I had to say where to put your money, $5,000 or so, the safest bet is to make an investment in a multi-state operator (MSO) like an Acreage Holdings, for example, that does have good management in place.”
She says an investor should look at the bigger and better-capitalized companies, and get the research about the management of that company. “There are also some interesting brand plays in the U.S. market,” she says.
An entrepreneur who already took the leap into the industry and established a brand is Giadha Aguirre De Carcer, founder and CEO of New Frontier Data, who in 2014 had $25,000, and was looking for a way to get into the cannabis industry by forming her own technology company.
She started with crowdfunding, then put together a short business plan to show proof of concept – that there was a demand for her data services, and that people would be willing to pay for it.
The next round of funding was to get $1 million to actually set up the business. “I was setting up a technology business which tends to be capital intensive, and [was] also [at the initial phase of] establishing a brand.”
She got in touch with “seasoned professionals” to discuss her idea, turning first to Arcview, who introduced her to potential investors. She got her first million $25,000 per investment. “That was the most gruesome endeavor that I had participated in,” she says. “It was very difficult.”
She made sure to focus not so much on how big data was going to fuel the industry, but on how the investor could make a significant return on their investment. New Frontier continues to thrive today.
It wasn’t until 2017 or 2018 when she began to see the big investors coming into the industry, with more money to invest. That means that the bar to success has been raised, making it harder for smaller investors to get involved. “As an early entrepreneur in this industry, my advice for any investor is to do your homework,” she says. “This is not brain surgery, and it’s not rocket science. Anyone coming into this space today has to have some specialty and some talent about running a business.”
Today’s cannabusiness environment just took a turn as a result of vaping and all the questions about how the cannabis industry fits into that. It’s another reason why any investor, no matter what amount they want to invest, has to keep a close eye on new events in a dynamic industry where regulations are still being worked out, confusion about CBD and hemp still rock the boat, and any positive moves in Congress – especially on small business loans and banking – are slow to develop.