Cannabis investors are opening their wallets to a wider variety of cannabis businesses as a reduction in the stigma surrounding the plant, expanding markets, and increasingly successful operations convince investors of the viability of the industry, according to trends identified by KEY Investment Partners.
When cannabis was legalized for adult use by the states of Colorado and Washington 10 years ago, few investors were looking seriously at cannabis businesses as a solid investment choice. The stigma around the plant, concerns about a federal crackdown, and skepticism of early operators kept many investors at bay.
However, as the industry has expanded into new markets and profitable ancillary businesses have emerged, more investors began to take notice. Most recently, an accelerated rate of market expansion and a growing consensus that federal legalization is inevitable has motivated investors to broaden their perspective toward the industry. The historical fears around plant-touching businesses are subsiding, according to KEY Investment Partners, which has seen a polar shift with the vast majority of its investors. Today, greater than 90% of KEY investors are becoming more comfortable with plant-touching businesses in addition to their ancillary investments.
"After a decade of growth and development, the cannabis industry has demonstrated its longevity and potential, and investors are noticing," said Tiby Erdely, Founding Partner at KEY Investment Partners. "Of course, this is not to suggest there aren't still challenges for the industry to overcome. But some of the big issues that generated early concern – like stigma and uncertainty about the federal government – are subsiding. The growing acceptance of cannabis products among mainstream Americans is also making an impact. Today, we recommend shifting to a more balanced approach between ancillary and plant-touching businesses."
Consumer behavior has gone a long way toward increasing investor interest in plant-touching businesses. Annual sales figures of cannabis continue to break records year after year, with global sales revenue in 2022 projected to reach more than $35 billion, according to BDSA, a KEY portfolio company. Despite challenging economic conditions, the largest MSOs are still performing well in 2022. Driven primarily by expansion into new stores and new product launches, year-over-year Q1 revenue for Green Thumb Industries, Curaleaf, and Verano increased 25%, 20%, and 67%, respectively. Big players in the tobacco, alcohol, and pharmaceutical industries have bought into the cannabis industry in recent years. All this activity is precisely what hesitant investors were waiting to see before embracing plant-touching investment opportunities.
"We are no longer in completely uncharted waters with regard to cannabis investment," said John Martin, former CEO and Managing Partner for Antares Capital. "Many investors perceived the risks in precisely that way even five years ago. Today, the robustness of the industry cannot be denied, and investors are seeing opportunities in the industry more clearly without the fog of stigma and federal interference."
For more information:
KEY Investment Partners