In our work as cannabis hedge fund managers, we have enjoyed the ebbs and flows of many investment opportunities. We have seen a range of ideas covering almost every conceivable aspect of the industry. At times, it feels as though there is a glut of new companies with innovative concepts. Entrepreneurs are solving unmet needs in the space, or have found ways to create things the industry didn’t even know it needed. Those times can be very exciting.
However, there are other times when the well of fresh ideas seems to run dry. In those times, it feels like the majority of people are scrambling to do a vague iteration of what’s already being done. People get reactionary instead of revolutionary. The industry definitely moves in patterns of winged migration, sharing a collective consciousness, sailing along in orchestrated maneuvers.
There have been swarms of ‘Yelps of the cannabis industry’, ‘Ubers for the cannabis industry', delivery apps, banking solutions, and more. The most recent craze seems to be the ‘farm to bowl’ movement, connecting growers directly with patients. With so many companies utilizing the same plan or solving for the same ‘need,’ competition is bound to be fierce.
Who will build the best mouse trap? In light of the similarity of the competition, how can one decide what company is going to be the winner?
The reality is that almost nothing in this world is completely new. Most things are derived from something else. In cannabis, we see concepts that were applied in other industries modified to fit this space. We're not excluded from this. The fund structure has existed for decades, and we wanted to do it differently, applying it to the cannabis industry. Further, we aimed to take a leaner and more efficient approach to fund investing, keeping our costs low for investors. Also, we work to provide services and support for our portfolio companies--something that is newer to the VC world.
Nevertheless, the creation of something new is truly the holy grail. As investors, a unicorn will likely come from a company that is taking things from 0 to 1.
And sometimes, the world needs a better mousetrap. Let’s face it, the industry has run for sometime with fewer established systems than other industries--leaving tremendous opportunities for those willing to step up to the plate.
Key questions to ask when trying to decide about ‘me too’ companies and whether or not they might be investible.
● Is the team better, deeper, stronger, more experienced than the rest?
● What is defensible? Are they taking steps to protect their IP? What about the IP of the other players?
● What are they doing that the others aren’t?
● Why is this particular team going to take the idea to the next level?
● Where is the market headed and what do people want?
● Which founders and teams seem to be thinking ahead of what people can conceive (that is where you find your 0 to 1)? Note: this is a tricky one.
● How well will their ability to build a brand play?
● Who might want to buy them down the road? Are the founders already eyeing this? They probably should be.
The last question is key. A ‘me too’ might not even exist yet, but may be coming from a massive company who doesn’t yet play in the cannabis industry. They will have the budget and resources to compete very seriously. Keep the last mover advantage in mind. Considering why a company like that might want to buy a start-up rather than just crushing it themselves, is essential.
Founders should be thinking about how they can differentiate themselves from the other players who look just like them. We say this all of the time, but pitching for investors is like performing for short attention span theater. If they don’t get the difference right away, they are moving on.