European Investment Waits for Green Light Before Entering Cannabis

Despite forecasts predicting Europe’s inevitable dominance of the cannabis markets, a vague regulatory stance in EU member states is still a major obstacle. But, as political leaders put trials in place to better explore the sector, more and more entrepreneurs are waking up to the possibilities in cannabis. From cultivation and ancillary services to packaged goods and so on, the pot space is teeming with business opportunities.

Related: Europe Expected to Lead Global Cannabis Market by 2024

Now it’s time for regulators to wake up to these opportunities.

Seeing through the smoke

Canadian companies have cornered much of the cannabis market thanks to the regulatory advantages they enjoy in Canada.

This means they also have more capital to deploy and support other features of their businesses. They can take on slightly more risk than other, smaller, firms in trying to capture a larger slice of the market. Not only that, but these firms are looking far beyond Canada’s borders.

Already, commentators have witnessed the likes of Canopy Growth Corp. Aurora, Aphria and several others beginning to move into Europe to expand their cultivation ambitions. And, as few companies in Europe are well-placed, cautious government officials are happy to let experienced firms take the lead.

Related: Canadian Cannabis Suppliers Need European Markets

But that doesn’t mean that European cannabis companies can’t profit in this environment.

After cultivation and extraction, there are still all the ancillary services that need to be put in place. In their letter to shareholders, Canopy Rivers, a Canadian investment firm focused on cannabis, described the disadvantages of forcing businesses ‘to be vertically-integrated from seed-to-sale.’

Companies attempting to capture the entire value chain are likely to fail; and, if one looks to other industries, rarely is one firm literally doing it all. The former President of Mexico also iterated these sentiments in an interview with Strain Insider. Vicente Fox said that there will exist only a few large brands, but even the small- and medium-sized businesses will have a place in between.

Speciality services will continue to thrive, much like the beverages, automobile and digital technology industries. Canopy Rivers concludes that:

‘As the industry continues to mature and the cannabis value chain divides into further segments, we think companies will begin to horizontally integrate, meaning that they will specialise in one or two things, while outsourcing the rest of the value chain to other companies.’

Venture capitalists and entrepreneurs, especially those in Europe, should consider what types of speciality services large Canadian brands will need in order to thrive on the continent. These services, plus recognising which markets are legal, will be the driving thesis for those looking to deploy capital.

ACTIVE, a European trade association for cannabidiol (CBD), wrote that there exist three eligible markets for investors. These include:

  • The wellness-centric rise of CBD
  • Medical cannabis
  • And pharmaceutical cannabis

Let’s first break down each of these categories.

For the uninitiated, European hemp cultivators, the primary suppliers of CBD, are allowed to grow their crops as long as they do not exceed 0.2 percent of THC, the psychoactive compound found in cannabis.

Achieving a product which falls below this limit is, in itself, not difficult. But getting regulators to believe that such a product can be packaged, reproduced consistently and sold within a whole country is slightly more cumbersome.

Lauréne Tran, the executive director at ACTIVE, said that ‘although cannabidiol (CBD), the non-intoxicating compound found in hemp, is fully legal inside the EU, the interpretation of the law in some member states is such that CBD may be connected to THC and narcotics law.’

As such, products that include CBD get hung up on one particular regulation: novel foods.

The novel food regulation in Europe indicates that suppliers must earn approval from regulators before stocking shelves with CBD-based products. Foods that fall into this category are those that have not been consumed ‘to a significant degree by humans in the EU before 15 May 1997.’

In January 2019, EU regulators updated that catalogue to include CBD products to the dismay of many in the sector.

So, even in one of the most dynamic cannabis markets in Europe, regulatory uncertainty within countries is still hamstringing potential investors. Currently, Europe makes up 31 percent of the global CBD oil market, commanding €450 million, according to Orian Research Group.

Investors remain sidelined, however, as they worry that any investments will come up null in the case of severe crackdowns on CBD. Still, opportunities exist. One just needs a much more granular perspective.

Germany on high ground

In October 2019, Demecan, a German cannabis producer, closed a historic €7 million Series A funding round from VC firm btov Partners and a German family office. At that time, Jennifer Phan from btov Partners praised both the German market and Demecan’s specific approach. Phan said that:

‘We believe that the company has a first-mover advantage in a highly regulated market environment, especially as it is the only German manufacturing and trading company in the European market.’

It should also be noted that Demecan was the only European firm that earned three of the thirteen grow lots issued by Germany. Aphria and Aurora each picked up five of the remaining lots. This means that Demecan has the opportunity to grow 2,400 kilograms of cannabis over the next four years to help with supply issues for medical cannabis.

This brings us to Tran’s second and third points about investable markets in the EU. Not only is Demecan, a first-mover, an already highly-attractive attribute for investors but the startup has also earned all the regulatory stamps to begin supplying a massively underserved market from day one.

Since legalising medical cannabis in 2017, Germany has faced massive shortages. Niklas Kouparanis of the German firm Cannamedical Pharma, a medical cannabis importer, told Deutsche Welle that there is only ‘one cannabis producer in all of Europe, located in the Netherlands. This producer has to meet the entire European demand for medicinal cannabis, which is almost impossible.’

Related: How Far is Germany from Legalising Marijuana?

Though these opportunities are few and far between, there are still several other places that investors should be monitoring. Specifically, MedTech startups in Europe.

MedPayRX, for instance, is looking to relieve some of the friction between patients seeking medical cannabis and doctors who can prescribe such products. They have also built out an app that connects patients, medical professionals and insurance agencies.

The Cologne-based Cannamedical Pharma is another and has built a successful model within the current cannabis regulations in Europe. They, too, locked in €15 million in a Series A funding round from Orkila Capital LLC in January 2019.

In Frankfurt, Farmako is also pursuing regulated ends in the European cannabis market. They are picking up distribution licences wherever medical cannabis is legal and focusing on developing new products including oils and inhalers for patients. A Canadian firm, AgraFlora, eventually bought Farmako in October 2019 for €15 million and will use the company as its exclusive distribution channel in Germany in Europe.

Playing by the rules

If the Silicon Valley VCs and entrepreneurs have thrived under the motto ‘move fast and break things’, then their European counterparts have enjoyed profits doing exactly the opposite. From just a few of the above examples, one can quickly gather that European cannabis firms must play by the rules. This also means having unwavering patience.

The watershed moment that happened in Canada is likely to take place in European countries within the next few years. But in order to maximise the output, there are still several critical activities that investors need to be doing. Of the companies mentioned, each has found success in the EU because it holds firm to all clear cut regulations.

Related: What Europe Can Learn From Canadian Cannabis Companies

This may be gaining approval from regulators before shelving stores with CBD-based products. This could also be taking the time to navigate various bureaucracies and earn vital distribution licenses. In Europe, unlike in North America, regulators are still major gatekeepers to this industry. But that isn’t necessarily a bad thing; it just means that an investment strategy needs to conform to this feature.

Bruce Linton, a co-founder of Canopy Growth Corp., likely put it best when he said, ‘I started the business because I thought I knew how to not be incompetent in ways that would embarrass bureaucrats.’

Concluding, whether it’s the booming CBD market, medical cannabis or the ancillary services surrounding each, investors and entrepreneurs should spend more time working with regulators and regulations rather than against them.

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