What America can learn from Canada’s first-mover advantage in cannabis

Snoop Dogg - David McNew/Reuters

When Canada announced plans to legalize adult-use cannabis, the world’s press seized on how it would mark a first among the G7 group of industrialized nations.

But behind that eye-catching headline, an even bigger one is emerging. And it tells the story of how Canada’s progressive approach is helping transform a talented generation of home-grown companies into tomorrow’s global leaders.

Canada’s move to legalize speaks directly to Casa Verde Capital‘s thesis, premised on the belief that the cannabis industry will be among the most compelling investment themes of our generation.

Cannabis is fast-becoming a global market, with Australia, Germany, Israel and other countries legalizing medical cannabis, thus opening up new and big domestic markets fed by international trade.

Israel and Canada have already established dominant positions in the cannabis research sector, grabbing market share with billion-dollar companies in a space where U.S. companies could and should be leading the way.

Bloomberg laments how the United States is effectively “giving away” the medical-marijuana industry, and it’s hard to disagree. How else to describe a situation in which Israel has a government-sponsored medical-marijuana program with well over 100 clinical trials held there to date, while in the United States the entire supply of FDA-approved, research-grade marijuana is limited to a 10-acre plot on the University of Mississippi campus?

Fortunately, America’s missed opportunities in the budding cannabis pharmaceutical space don’t negate other significant gains at home, like the recent opening of the legal cannabis market in California, the world’s sixth largest economy.

Research released this month by Cowen & Co projects that the value of the entire U.S. market will reach US$75 billion by 2030, assuming federal legalization.

Meanwhile, a slew of very recent (and seemingly significant) U.S. political developments could portend a dramatic change in the prevailing prohibitionist headwinds. Consider that the following events all occurred in just the past week or so:

  • President Trump assured Sen. Cory Gardner (R-Colorado) his administration would protect states’ rights concerning cannabis
  • New York Gov. Andrew Cuomo laid the groundwork for statewide cannabis legalization
  • Former House Speaker John Boehner joined the advisory board of Acreage Holdings, a multistate cannabis operator
  • FDA advisory committee approved CBD-based epilepsy drug by GW Pharmaceuticals
  • Senate Minority Leader Charles Schumer plans to introduce a bill to deschedule marijuana decriminalization

While these developments are certainly promising and worth keeping an eye on, for now we’ll continue to employ our ancillary investment strategy.

Our approach already provides us with considerable visibility in our home market. Based in Los Angeles, Casa Verde focuses on companies working exclusively in the ancillary cannabis industry. That’s akin to investing in the picks and shovels during the gold rush.

Karan Wadhera, Managing Partner, Casa Verde Capital
Karan Wadhera, Managing Partner, Casa Verde Capital

This approach means that the companies we invest in can scale quickly across state lines whereas plant-touching businesses in cultivation, distribution and retail can be limited in geographic scope due to the various local license requirements.

That vision has enabled us to build a strong portfolio of fast-growing companies with a national presence.

For example, Green Bits, coming off a US$17 million Series A raise, makes point-of-sale software designed to handle the varied and stringent compliance requirements for sales in retail dispensaries throughout the country. Their terminals have expanded to over 1,000 locations across 12 states, and last year they processed over US$2 billion in payments.

That is the type of scale we are referring to, one unhindered by licensing requirements. Furthermore, having a firm like Tiger Global leading this latest round is certainly a signal that more mainstream investors are on the way.

However, we keep looking at Canada because its legislation has created conditions that enable companies in the industry, as well as investors, to thrive.

The primary reason is that its legislative approach has helped create an open and efficient financial ecosystem, which is essential for helping companies with strong business models and talented management grow. Crucially, it also provides the venture capital industry, including those firms investing in plant-touching companies, with clear and attractive exit options.

That, in turn, creates compelling investment opportunities. In March, we announced that we had taken a stake in Green Tank Technologies, a Toronto company that produces high-end vaporizers purpose-built for cannabis oil. It was our first investment of 2018. And we made it shortly after announcing the close of our first fund.

But Green Tank wasn’t our first investment in Canada: last year, we led a US$2 million ($2.5 million) seed funding round for Trellis, a seed-to-sale compliance software company, which has expanded rapidly since it was founded two years ago in Toronto.

Given the unique market dynamics, we feel that Canadian companies will continue to attract institutional investment from around the world.

In stark contrast to the United States, Canadian cannabis companies are now a regular and accepted feature on the country’s stock exchanges, with the top 20 licensed producers having a combined market capitalization exceeding $20 billion.

While these valuations may be a little frothy, as addressed in a recent Barron’s article, the benefits of being public are clear.

For a start, having large listed companies helps legitimize the entire industry. It is ironic that some U.S. politicians remain stubbornly opposed to the sector despite widespread public acceptance and the fact that cannabis companies adhere to stricter compliance requirements than almost any other industry, including Big Pharma.

Additionally, it provides all companies in the space with access to capital for each stage of their growth. Thanks to Canada’s open and efficient markets, the country’s cannabis companies are able to expand globally with operations in Colombia, Australia and beyond.

On a recent trip to Europe, I saw how easy access to capital was helping the likes of TilrayCronosMedReleaf and other Canadian licensed producers gain a foothold in the Continent’s nascent market through a number of joint ventures and acquisitions. In other words, efficient access to capital is handing Canadian companies a first-mover advantage in an industry that is fast becoming global.

That bodes well for the country’s macroeconomy because it translates into more jobs and more taxes. But it is also good for venture capital because big listed companies provide an engine for the entire industry.

At Casa Verde, we look forward to the day when we can start talking about how U.S. federal legislation is actively attracting investors into its own cannabis industry. Until that day comes, we can, at least, applaud Canada’s lead.

Casa Verde Capital, co-founded in 2016 by U.S. rapper and entertainer Snoop Dogg, closed its debut fund at US$45 million in late 2017. Karan Wadhera, the author of this article, is the firm’s managing partner. A finance professional and investor, he formerly served as a senior executive at Goldman Sachs and Nomura.

Photo of Snoop Dogg courtesy of Reuters/David McNew

Photo of Karan Wadhera courtesy of Casa Verde Capital