September 13, 2021
2024 © Poseidon Investment Management, LLC.
Disclaimer
Two weeks ago, Poseidon held its first ever virtual GreenShoots(™) pitch forum. The event brought together 80 accredited investors to preview five hand-picked cannabis companies chosen by our team to represent areas of opportunity in the industry.
The primary goal of the event was to connect investor attendees with real, vetted deals. During the application process and event itself, our team identified a number of important trends. Below is our breakdown and takeaways from our cannabis-specific pitch event.
Over 60 companies applied to present their businesses to the GreenShoots Pitch Forum investor attendees. We received a wide range of applications including, but not limited to, licensed cannabis, ancillary and hemp verticals across all stages of development, with some represented more than others.
THC- containing brands and ancillary software technologies were the most represented in the applicant group. By contrast, vertically integrated licensed cannabis companies and licensed cannabis dispensaries were the least represented.
The five companies chosen to present at GreenShoots included:
Each company presented a 3 minute pitch, followed by an 8-minute Q&A with judges Emily Paxhia of Poseidon, Andres Navia of Poseidon, Javier Hasse of Benzinga, Andrew Albert of TVC Capital and Gavin O’Reilly of Cowen.
The judges rated each company, selecting Drop Delivery as the winning company. As a prize, the team won 1 hour of consulting time from each judge, 3 months of membership in the Poseidon Mastermind program and a spot to pitch their business on the Money Stage during MJUnpacked in Las Vegas October 21–22.
On the investor side, more than 80 accredited investors registered to attend the event, representing a range of angels, family offices and VC firms. Investors were engaged in the chat, asking for additional business information and contact information from the presenting companies.
The application process and event demonstrated some key fundraising trends in the cannabis industry.
Of the total applicants for this pitch event, 32% were pre-revenue and 41% were in the early stages of generating revenue. Additionally 75% of applicants’ last funding came from pre-series A rounds, with another 14% having never raised capital previously. Considering Poseidon’s focus on early stage investing, our data set may be biased by our reputation.
The five companies chosen to present also represented this trend, with all 5 currently raising pre-series A rounds.
We believe capital is flowing into Series A and later fundraises, leaving many early stage cannabis startups with limited options. Savvy investors who understand the rapidly changing cannabis industry and are willing to offer support have a significant opportunity to invest during a time when supply & demand forces have depressed valuations.
THC containing brands and SaaS Technology represented 17% and 16% of all applications, respectively. This underscores what Poseidon has been seeing in the market.
On the THC brand side, we believe there is a trend toward “asset-light” approaches which often require partnerships with cultivators, manufacturers and distributors to produce and sell the brands. Many of these brands do not have — or need to have — state licenses for cannabis, significantly lowering the barriers to entry. These models also allow for a quicker nationwide expansion plan, which requires more capital. There are certainly pros and cons to these models; one con being revenue sharing agreements in the 7–12% range typically. As well, in some markets — like California — fractured supply chains and lack of consumer loyalty have made things more difficult for these models. Still, the number of brands in cannabis is growing with no end in sight.
On the SaaS technology side, we believe the rapid expansion of the cannabis market has left gaps in technology for many scaling operators. The first generation of ancillary technology companies launched early in the industry’s legal market development, satisfied an immediate need at the time. Today, white space still exists in the technology landscape, leaving opportunity for new solution providers, often founded by former employees of the first generation companies. Additionally, headline-grabbing fundraises by cannabis tech firms have caught the attention of experienced technologists and entrepreneurs who see that the winners in this vertical have yet to be chosen, despite the dollars raised.
The two verticals least represented in our application process were vertically integrated operations (cultivation through retail) and standalone retail operators. These two groups touch consumers, the most valuable aspect of the plant-touching sector. Retail is the highest profile sector of the industry. Retail licenses are some of the quickest licenses in the supply chain to begin generating cash, while also benefiting from wholesale price compression and rapidly growing consumer sales. On the public front, most consumers’ first formal engagement with legal cannabis is at a dispensary and they are physically accessible for local angel investors. It should not be surprising that dispensary operators failed to register significantly in our application process.
Vertically integrated operators have full vertical control with dispensaries, cultivation and manufacturing together in one business. Because of this, we believe these operators can actively manage rapid changes in wholesale pricing and new market related supply chain interruptions — while still maintaining sustainable profit margins. They can also actively engage in tax strategies, shifting expenses between entities to maximize their COGs, reducing their 280E tax burden.
During the event, investor attendee members were active in the webinar chat and Q&A. The top asked questions were around sales and valuation, indicating that investors are concerned about pricing of these deals. Though investor FOMO remains strong, perhaps the pullback in publicly traded cannabis stocks is teaching the retail investor a lesson on valuation. Of course, this trend also tracks for Poseidon — verticals, industry trends and changing regulations are all important factors to consider when making investments, but at the end of the day, the goal of investing is to maximize returns. And pricing matters.
Poseidon Investment Management (the “Company”) has prepared this presentation solely for the purpose of providing an opinion. The information contained in this presentation is not to be used for any other purpose. This presentation does not constitute an offer to sell or a solicitation of an offer to buy any securities. The Company makes no representations or warranties about the completeness or accuracy of the information contained in this presentation or of information obtained from participants in a Greenshoots pitch forum, and the Company expressly disclaims any and all liability for any such incompleteness or inaccuracy. Certain of the information contained herein includes forecasts, predictions, projections and other such forward-looking statements, which involve particular risks and uncertainties since they depend on assumptions that may not prove to be accurate and could cause the actual results to differ materially from the predicted results.
The Company does not receive capital introduction fees, or any other consequential fees, for companies presenting at a Greenshoots pitch forum or for investors attending a pitch forum. The Company is not a registered broker dealer with FINRA or the SEC.
Cannabis remains illegal under federal law. The Federal Government does not recognize cannabis to have any medicinal values. Cannabis cultivation, possession, consumption, sales, and distribution are illegal under federal laws and also certain state laws. Please note that there are differences in cannabis laws from one state, county, or city to another.