Many companies are applying a similar investment thesis that is used in the technology sector to the emerging world of cannabis. The idea follows that one company will not do everything. Instead, the sector will be cut up into smaller, more manageable pieces, with firms delegating extraction, branding, and so forth to the relevant specialists. Put otherwise, the value chain will have various interlocking links, each contributing to the others’ success.
The difficulty, of course, is determining which specialists to bet on.
Big bets on technology
Despite only leveraging roughly 4 percent of the broader Internet experience, users are still swimming in choice. The rest is primarily dark web sites, Bitcoin mixing services, and marketplaces for drugs. In this small percentage, however, there is still competition between service providers.
PayPal is the dominant payments provider, but there are others in different countries. Amazon is de facto the e-commerce brand, but Zalando has its following as well. The list goes on and on. Chipping away at a market slice comes down to understanding how each of these companies does what it does.
The scrutiny from regulators, entrepreneurs, and vendors on Amazon, for example, has revealed some of the most valuable business insights in the Internet age.
In early 2019, a viral video of a young Jeff Bezos spread like wildfire. In it, viewers see the Amazon founder standing on the lawn of an office park explaining how he got the idea for his company. His explanation is profound, especially for 1997.
‘Three years ago, I was in New York City working for a quantitative hedge fund when I came across a startling statistic. [It said] that web usage was growing 2,300% a year. So, I decided I would try and find a business plan that made sense in the context of that growth. I picked books as the first best product online.’
Readers may already be familiar with this story, but what’s more enlightening is why Bezos chose books and not another item. He explained that books were the best bet because of an ‘unusual’ feature unique to the item.
Although there are roughly 200,000 different music CDs in circulation, there are more books in the world than any other item in the world, according to Bezos.
In the book space, ‘there are more than three million different books active and in print at any given time across all languages.’ Stocking this many physical items is, thus, highly impractical for brick and mortar outlets. Instead, thought Bezos, these books should be catalogued, listed, and stored within the near-infinite storage space of the emerging Internet.
Instead of housing each book in a warehouse with finite cubic meters, one need only list a few bytes of data in an online repository. Then, Amazon would have to partner up with various book stores, publishers, and wholesale providers to help them supply these listings. This method also cuts costs on paying rent for inventory storage.
Apply this model, one that is constrained by bandwidth rather than warehouse space, to any single item and one can quickly understand why Bezos’ bet on the future of commerce was so far ahead of its time.
Skip ahead to 2020, and Amazon is one of the few trillion-dollar companies in the world. And it has already pivoted to cover a handful of other industries. Absorbing sectors like video streaming, cloud services, and even groceries was only possible because of this initial success.
In fact, moving beyond one’s speciality too early could kill a business. It is this stage, the books-only stage, that many cannabis companies should be focused on according to some experts.
The cannabis craze
For incoming cannabis enthusiasts, the cannabis space both here in Europe and abroad is saturated by hundreds of different brands.
Few, outside of those in Canada, have emerged as dominant names. Already, many have compared the craze to Silicon Valley in the 1990s. For the investment firm Canopy Rivers Inc., a Toronto company focusing on the myriad sectors of the cannabis industry, the comparison is fitting.
In its 2019 investment thesis, Canopy Rivers wrote, ‘in Canada and the U.S., many cannabis companies are forced to be vertically integrated from seed-to-sale. Barring a few exceptions, we do not believe that this has worked particularly well.’
A better bet, much like in technology, will be to focus on the inevitable rise of ‘horizontal integration’. Like Amazon, certain businesses will focus on one aspect of cannabis and then outsource additional services or products to other specialists. The thesis continues with the following:
‘For example, a vaporizer brand will build its consumer roster through its technology and branding, leaving the inputs (i.e. cultivation, extraction, etc.) and outputs (i.e. distribution, retail, etc.) to other players.’
The reason for this thesis is simple. Narbe Alexandrian, the president of Canopy Rivers, was previously a tech VC.
‘There are five sectors that we are focusing on when approaching cannabis’, Alexandrian said in an interview with Strain Insider. ‘These are cultivation, ancillary, consumer-packaged goods, pharmaceutical, and maturation.’
Cultivation refers to the actual growing and tending of the plant. It was in this sector that the swath of Canadian companies earned their windfall. However, these days, entering cultivation isn’t going to yield the same returns. Moving down the line, entrepreneurs should be looking into the ‘picks and shovels’ of the industry, according to Alexandrian.
This includes developing businesses around bio-synthetics and various scientific endeavours that need to happen to the plant.
The third rung on the ladder are the products that users can go out and buy today. High-quality vape pens, teas, chewing gums, salves, beauty products, and so forth. Then comes pharmaceutical, which Alexandrian thinks is the biggest piece, especially when considering developments in Europe.
Indeed, when scanning the cannabis space in the EU, one sees the slow, but steady development of medical cannabis. From Italy, Holland, and France to Germany, top European economies and regulators are considering the impact of cannabis-based medicine.
‘Germany’, said Alexandrian, ‘shows a lot of similarities to Canada. It’s ripe for continuous change and the whole market appears to be shifting over to medical cannabis.’ Despite the latest cannabis craze in Europe, there are still many risks involved.
Many entrepreneurs and investors within Europe as well as those like Alexandrian are hesitant to deploy capital on the continent due to the regulatory uncertainty. ‘Political risk is a large consideration in the EU’, Alexandrian said. ‘Political parties in Germany, for instance, are still very divided on the subject, which makes it difficult.’
Although three of the five most-established political parties in Germany are supporting outright cannabis legalisation, the Social-Democratic Party (SPD) is split on the matter. Others, like the more right-leaning Conservative Party (CDU/CSU) and the far-right-wing National-Conservatism Party (AfD), are strongly opposed to any progress in the German cannabis industry.
Canopy Rivers has, nonetheless, dipped its toes into the European cannabis market via a 2018 investment in CanapaR, an Italian hemp and CBD processor.
Alexandrian’s firm invested roughly €15 million to support CanapaR’s entry into the cannabis and wellness sector. The Italian company boasts more than 1,000 hectares of hemp plantations via a network of farmers, as well as close ties with the University of Catania’s Department of Agriculture.
As for future expectations, Alexandrian explained that, while Europe is still moving slowly, he’s optimistic that the continent will fulfil expectations of being a dominant market in the cannabis sector. He explained that he’s also confident that the EU will implement a blanket cannabis regulation to help stimulate the industry.
This then leads to the fifth step in Canopy Rivers’ investment thesis: maturation.
‘We will inevitably see three or four large companies dominate the market’, Alexandrian said. ‘After that, it will simply be a game of competing for market share.’ This end goal is not unlike what we see in the technology sector either. The cascading success stories are less common now that Facebook, Amazon, Google, and Apple have set up such high barriers to entry and innovation.
In cannabis, this has yet to happen. And this is certainly the case when examining the European landscape.