2022 Cannabis in review and 2023 opportunity outlook
The cannabis industry - both domestic and international in scope, and comprised of two substantial subsectors: marijuana and hemp - started last year off strong.
Namely, with a splash of high-profile M&A activity in January and February. There was tremendous promise for growing the market.
As we entered second quarter of 2022, the hope for a fruitful Q2 faded. By Q3, it was full-fledged retreat, with many of the industry investment conferences refusing to even consider seminar presentations or panels regarding workouts, receiverships or other proactive measures designed to protect or mitigate the poor economic conditions surrounding the industry and many of its operators. There was a concerted effort to “keep it positive” after the industry had been called “recession proof” and designated as an “essential business,” while enjoying record high sales numbers and revenues. Things were good — until reality set in.
I have always argued that the cannabis industry is unlike other emerging industries and that analogies and analytical methodologies often miss the mark. Friends and colleagues suggested comparing cannabis to the dot-com boom of the 1990s. I did not necessarily see those parallels, so I decided to study the issue.
Like the cannabis industry, the tech sector is, and was, comprised of numerous subsectors. Just like there are software and computer companies, there are various technology, scientific, finance, and service-based businesses that attend to and facilitate the emerging global cannabis market. From the 1990s onward, the technology sector had a dynamic history of expansion and contraction. Its first high growth period lasted from 1990-2000, traditionally thought of as the “dot-com bubble.” In the commercial regulated cannabis industry, we are effectively ten years into the so-called regulated dispensary system, which began to accelerate rapidly in 2010 and 2011. Like the disruption created by the commercial cannabis industry, the tech bubble also created a decade of enormous disruption, as the old world ended and a new one began.
The early movers in the tech space acted on FOMO (Fear of Missing Out), succumbed to absurd pre-revenue (or early stage) valuations, and made uninformed decisions for equity investment with little due diligence. Operations were undisciplined and, most often, lacked sound business modelling. Revenue generation was not the primary focus of investors or their operators. Investors were getting rich off unprofitable stocks with soaring prices and price/earnings ratios. After about ten years — where we are now in the commercial regulated cannabis industry — inflation spiked dramatically, and the equity markets turned on the tech sector. Stocks sunk. Companies folded. Fortunes were lost. Sound familiar?
Following a decade of disruption, the tech sector was rife with tremendous, often insurmountable, economic problems. In early 2001, the tech bubble effectively burst, and sector employment declined rapidly, experiencing significant net job losses for several consecutive years. Investor fervor and corresponding activity tightened and/or disappeared — where we now are in the commercial regulated cannabis industry. The similarities are uncanny and tremendously instructive.
Yet, the tech sector did not disappear. Instead, it evolved even stronger. Remember, many of the tech titans we know today (e.g., Amazon, Google, etc.) were not even on our radar during those first ten years. Rather, companies like Yahoo, Blackberry (RIM), and Ericsson dominated. There will be an Amazon or Google of cannabis, but it does not exist now. The industry will survive, thrive, expand even further globally, and prosper. But like the tech sector, consolidation, liquidation, and a return to business fundamentals are essential in the cannabis industry.
There’s room for winners in this space, but first will come pain. How long the pain will last is the only question. Companies that fail to recognize economic reality or resist alignment, partnership or merger will suffer. The sooner these things are faced head-on, the better chance of survival and moving toward the creation of the Google of cannabis.