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Debt for Emerging Cannabis Companies: No Giggling Matter

What a difference a few years (or few decades) make.  With the legalization of cannabis sweeping across the United States (33 states and counting) and world, in a very short period of time we have witnessed the creation of multi-billion dollar public companies (e.g. Canopy Growth, Tilray), traditional venture capital investors backing companies in the space, and now traditional lenders dipping their toes into providing capital to “ancillary” businesses (apps, technology, services) in the burgeoning cannabis space. 

 

Equity Investment Backdrop

As a well-known institutional investor typically in technology businesses, Founders Fund was clearly ahead of its time in 2015 with its early backing of Privateer Holdings, a cannabis focused holding company which has, through a disciplined strategy similar to LVMH in alcohol and luxury goods, both grown and acquired a diverse array of assets related to the cannabis business, most notably Tilray which went public in July 2018 and has a current market capitalization in excess of $6B.  Fast forward to 2018 – that year equity investors poured in an  estimated $1B into cannabis related businesses.

 

With widespread legalization, particularly federal legalization in the United States, becoming increasingly likely, well regarded traditional venture capital funds such as DCM, Lerer Hippeau, Slo Ventures, and Tiger Global have more recently jumped into the fray and have cautiously placed bets in the tech side of the cannabis industry, ranging from vertical CRM to supply chain logistics to POS.

 

Lender Appetite (US)

As this dynamic continues to unfold, traditional tech lenders have taken notice of the growth and, in some cases, high degree of profitability of some of the tech-oriented businesses in this space.  While still cautious around providing capital to US companies growing, producing, distributing, or selling cannabis products (most banks won’t even hold deposits), banks and private lenders appear increasingly comfortable banking and lending to businesses operating in the “ancillary” segment (technology, services, etc.) which are often utilizing established and successful tech business models and applying them to a large new industry vertical.  Lenders are more apt to lean forward in cases where these companies are backed by well-known institutional equity investors they have already done business with, or which lack binary regulatory risk.  In Canada, where cannabis is federally legal, some traditionally larger conservative banks have become more aggressive as lenders to Canadian growers and producers.

 

Activity Across the Value Chain

 

Capital Efficiency

An interesting aspect of many of these businesses is their capital efficiency relative to their purely tech focused peers, particularly when one examines their capital consumption from launch to reasonable commercial scale.  This suggests, regulatory risks aside, that growth debt could ultimately play a more impactful role vs its role in high burn traditional tech plays.

 

Conclusion

As cannabis businesses continue to scale and expand both domestically and globally, they face the same financing decision points tech businesses have faced for many years – how much capital to raise and at what stage, the optimal mix of debt to equity, whether to expand the board of directors and the associated control and dilution implications of these decisions.

 

With household names such as Joe Montana, John Boehner, and Martha Stewart entering the cannabis space, federal legalization in the United States no longer appears to be a “pipe” dream.

 

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