The reggae classic “Smoke Two Joints” advises us to lighten up morning, noon and night to feel okay. Investors in cannabis startups can also add another reason. Because it's better than thinking about portfolio performance.
While investment has declined in many areas recently, the decline in cannabis trading started earlier and has been particularly sharp. Funding for the space actually peaked about five years ago, according to data from Crunchbase. Since then, it has gone up and down, but mostly down.
For perspective, we've charted annual investments in North American cannabis startups over the past nine calendar years. We began in 2016 when Californians voted to legalize recreational marijuana, joining other Western states in what many expected to usher in a boom in venture-fundable entrepreneurship in this space. I was doing it.
As you can see from the graph, the story didn't turn out as expected. Most of the companies that raised the most money during the boom years (including well-known companies like Dutchee, MedMen, Pax Labs, and Eaze) haven't raised new capital in years.
Meanwhile, on the public market, cannabis has become a notoriously underperforming sector. Most marijuana-focused ETFs launched during the boom are now trading at a fraction of their previous highs. Industry leaders like Tilray Brands, known for medical marijuana, and Canopy Growth, which offers branded cannabis products, are both unprofitable, with trading volumes well below their peaks.
There are no shortages of products
Of course, consumers aren't giving up cannabis. With the rise of edibles, vaping, and other consumption methods, the supply of alternatives to the classic two-joint joint seems to continue to grow.
In addition to products containing THC, the euphoric compound marijuana is famous for, entrepreneurs are ramping up the market for other cannabis-based products. This includes startups working with CBD, a non-addictive and harmless cannabis compound that many people associate with an increased sense of well-being.
However, the investment did not go as expected. Dozens of companies related to CBD, which is effectively legal to sell in the United States, have raised millions of dollars in funding over the past five years. But like the broader cannabis sector, funding has slowed, with most companies not raising new capital in the past few years.
divided market
Cannabis investors see further growth opportunities if the U.S. government moves to legalize cannabis. For now, states continue to ease restrictions. As of about a year ago, 38 states allow medical use of cannabis products, and 24 others have laws allowing some recreational use.
Indeed, there is a sense that the political winds are still blowing in favor of legalization, or at least decriminalization. Last week, none other than Vice President Kamala Harris tweeted That is, “No one should go to jail for smoking marijuana.” Several bills in Congress aim to legalize or ease restrictions.
But just because something is legal doesn't mean it will bring enviable profits to venture capitalists. In the case of cannabis, an investment that once looked like it could energize the market has instead caused a huge stir among its supporters.
Illustration: Dom Guzman
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