Cannabis company valuations are reaching dizzying heights, which is what often happens to valuations before they fall.
5 min read
Opinions expressed by Green Entrepreneur contributors are their own.
When you’ve had a front-row seat to an industry boom and bust — it sticks with you. I worked in institutional equities in the early 2000s, and I saw the rise and fall of the young internet. Today, I’m the chief operating officer at a major cannabis company. From where I sit, it’s easy to hear some disturbing echoes of the overheated dot-com days in the current cannabis market.
Just since July, we’ve had a couple billion dollar-plus cannabis deals, and plenty in the hundred million dollar range as well. Just like in the bad old days at the turn of the 21st century, everyone is looking to either buy or sell.
Back then, a big part of my job was to sell IPOs and secondaries. Just like today’s legal cannabis scene, it was a brand new industry that few people really understood. At first, many investors just watched from the sidelines. The new companies didn’t conform to the old ways of building value, so the plain vanilla mutual funds stayed away. Why invest in a business that didn’t plan to show earnings for the first five years? Instead, scrappy hedge funds bought into a lot of those early dot-com deals and became very, very wealthy.
Pretty soon, people were going crazy for anything that said dot-com. Everyone had two to three deals per week. But realistically, that’s too much for any firm. Eventually, we saw a lot of deal fatigue set in as exhausted investors, lawyers, bankers and entrepreneurs pushed to make more and more deals happen.
The parallels to the cannabis market are eerie. Cannabis today is also a pretty misunderstood industry. Too many people still think of the stereotype of a guy who used to sell weed out of the back of his sedan. Future earnings are hard to forecast because the patchwork of regulations make the industry particularly complicated.
But the reality is that today’s cannabis entrepreneurs are sophisticated business people who are successfully navigating a market where the main product is legal in two-thirds of the states but illegal at the federal level. That disconnect means big companies haven’t descended on the cannabis industry in big numbers — yet. But it’s only a matter of time, which is a big part of the reason M&A activity has heated up.
My gut feeling — based on what happened then and what we’re hearing now — is that we’re going to have some level of cannabis deal fatigue set in within the next six months. Fortunately, we’ve been through this before, and hopefully we’ve learned a lesson or two. Here are five lessons cannabis entrepreneurs and investors should keep in mind to make sure they avoid the mistakes of the dot-com era.
Good companies can get lost in the shuffle.
I saw plenty of solid companies implode because they waited too long to sell — misreading the tea leaves that showed the market was about to overheat. Timing is everything and the time is now. There’s going to be a lot of big companies coming into the market and a lot of money all over the world looking to jump in. Get moving.
If you’re an investor, assume cannabis stocks are going to be incredibly volatile for a while and act accordingly. We’re going to be looking at companies going up and down 10 percent per day. If you don’t have the stomach for that, now is not the time to get into the game.
Don’t screw around with pricing.
I’ve witnessed companies get too cute and miss out on much bigger opportunities. Your company is probably worth what investors are willing to pay for it. Don’t hold out for some magic valuation that you know doesn’t actually reflect what you’re selling.
Keep costs down.
When a market starts to look like a shark feeding frenzy, it’s tempting to throw money at bells and whistles that don’t actually add to your bottom line just to differentiate yourself. Avoid that trap. Investors are smart — they want to see financial discipline, not a bunch of excess.
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Don’t dismiss a merger opportunity out of hand.
Assume everyone is talking to everyone right now. People are really just trying to figure out if different companies are a fit, personality wise. The right chemistry can create a new company worth far more than what you could sell for today. There’s something to be said for being part of a billion-dollar conglomerate.
By knowing our history, we have the luxury to not repeat it. The cannabis industry is still young and exciting and growing fast. We don’t need a dot-com-type boom to show the real value in these new companies.
Published at Mon, 24 Dec 2018 19:00:00 +0000