Is today’s interest in cannabis parallel to the California Gold Rush of 1849? Considering what Zachary Venegas has to say about it, some might think so — and some might not.
Venegas is CEO of Helix TCS Inc., a cannabis security and transport company doubling as an intelligence firm for venture capitalists. Helix recently acquired Cannabase, a “seeds-to-sale" cannabis wholesaler that smooths marketing and sales for 72% of Colorado’s licensed facilities.
In 2017 cannabis-related cultivation and retail investments reached $718 million, which helped cannabis agricultural technology, infused products and software to continue to attract investor dollars. This legal cannabis industry is projected to exceed $50 billion by 2022.
According to Venegas, California is the leader: “California’s medical cannabis market is already as big as the total markets in Colorado, Washington and Oregon combined, by most market participant’s estimates. Given the boost from that state and others that could change their laws, the legal cannabis market could reach sales of over $20 billion in the next few years.”
Venegas is bullish, but he also believes investing in cannabis is far from safe and secure. He warns, “No profit-minded professional would prudently ignore such a market, but one must be mindful that this unique sector is rife with complex legal and regulatory risks.”
In talks and speeches, Venegas covers the legal distinctions that separate medical from recreational cannabis; the risks in each industry for producers, retailers and a host of ancillary support businesses; the regulatory environments in U.S. states; the cannabis "frontier market"; and the distinctions that identify becoming a marketer (retailer) or an operator (grower).
The first and foremost concern is the legalities, especially as it relates to Schedule 1, of the Controlled Substances Act, a federal statute that places cannabis in the same forbidden territory as heroin and other narcotics. No matter how many states allow for medical marijuana (right now it's 30, plus the District of Columbia) and no matter how many states allow recreational cannabis use (9, plus the District of Columbia), the cannabis industry must contend with the federal restriction on production, distribution and possession. In addition, cannabis laws among the states vary widely, and Venegas says they, “can vary from county to county or town to town even within a single state.”
Despite the disparity between federal and state governments, and despite the varying legalities among the states, Venegas also says, “For 2018, private and public funds are investing tens of millions of dollars in anticipation of several industry catalysts that will be seen. New Exchange-Traded Funds (ETF) are coming online that are heavily investing in companies in the cannabis industry.” He further notes that by being on the verge of country-wide recreational legalization, Canada can be a big catalyst for investment in cannabis.
Like Dan Ahrens of AdvisorShares, recently covered at Forbes.com, Venegas believes, “if we live with alcohol and tobacco as socially acceptable, cannabis is a no-brainer...More than half of the population of the U.S. lives in states where voters have legalized medical cannabis, and over 60 million live where recreational cannabis is either already legal or soon will be.”
Nevertheless, Venegas reiterates the risks to investors in the U.S. market.
“The federal government could decide to go against popular will and state’s rights and crack down on the cannabis industry, which would obviously be a massive disruptor…were this to occur, there would be lawsuits from citizens, corporations and states that would fight any such action, with resulting litigation enduring for years.”
Another risk to investors has less to do with cannabis and more to do with business principles.
According to Venegas, “Many people assume that having a license to operate a cannabis dispensary is a golden ticket to automatic riches. That assertion is flawed, as profitability and ultimate business success will still be subject to adequate capitalization, sound business practices and, as we are seeing in Colorado, the law of supply and demand…before it can grow and move away from a model that heavily relies on cash, the cannabis industry needs to secure access to financial markets. But due to federal regulations, banks, and even insurance companies stay away…growers, dispensaries and research labs have to secure financing from credit unions or ‘angel’ investors.”
Still, if federal and state regulations ultimately align, what some might see as a replay of the Gold Rush could in fact become a pot of gold for smart, patient investors.
