Emerging technology putting Canadian cannabis industry at the forefront

Investors need to balance the extremely high valuation of larger, more liquid companies against the survival issues of  startups, says Kevin O’Leary.  supplied  

Investors need to balance the extremely high valuation of larger, more liquid companies against the survival issues of  startups, says Kevin O’Leary. supplied  

Canadian entrepreneur, financier, author and television personality Kevin O’Leary is well known to Canadians through his appearances on Dragons’ Den, Redemption Inc. and four-time Emmy winner Shark Tank. In his keynote presentation at the upcoming Grow Up Conference & Expo in Niagara (Sept. 7-8), he’ll draw on his experiences to offer insights to Canadian cannabis investors and entrepreneurs. 

 

Can you please share some tips for people who are already investing in the cannabis industry, or who plan to invest? Are there any red flags to watch for?  

Don’t bet on one company. You need diversification. 

Number one, are you investing in a low-cost provider? Number two, does the company have any brand protection? Number three, and this really matters: there is a tremendous number of people coming into the industry who have no experience on the logistics of growing or distributing marijuana. They will likely all fail. There is lots of weak management involved in this space. I would say that only about 20 per cent of the management in this sector has the skillsets to survive long-term.

The risk with larger, more liquid companies is that valuations are extremely high. With startups, you have the survival issue. But I would add that I’ve often looked with envy at this space because I would love to invest. I’ve been told multiple times by the lawyers who issue my securities in jurisdictions around the world to stay away from this sector because of the U.S. regulatory issues. But if I were able to, I would have at least 10 positions, three in startups and seven in investment-grade public companies. That would be my portfolio position, and it is one that makes a lot of sense for others to think about.

 

From an investment perspective, what do you see as the current outlook for the Canadian cannabis industry?

I think the industry is going to go through a consolidation soon. There are still a lot of entrants coming in, but over the next two years, we will begin to see the bigger players start to acquire the smaller ones that look like they will survive. There is a tremendous amount of excitement as we move through the legalization process, but in the end, low-cost providers survive. Companies that are able to build brand survive. Everybody else goes out of business or gets acquired. We’ll see this playing out over the next three years.

 

In your view, what are the main challenges for investors in the sector today?

Institutional money is not yet in the cannabis industry for one main reason: cannabis is a “Schedule 1 Controlled Substance” according to U.S. federal law, so in Canada, we have only a couple of institutions that have made the plunge. 

The Canadian cannabis industry is in a marvellous place – all of the technology they’re developing, and all the skillsets they’re creating, puts them at the forefront of the sector. 

However, in terms of U.S. and global institutional investment, it may one day be compliant, but it isn’t now. For Canadian investors, it’s important to understand the risks and timing. 

 

What needs to change in order to unleash the sector’s potential for investors?

I’ve talked to multiple sovereign funds about what they want in terms of investing in cannabis and they all said the same thing. They would like to see U.S. regulators make medicinal cannabis and derivatives legal.  There are a lot of reasons to think that will happen first, so that medicinal cannabis would become a controlled but legal substance in the U.S. If that were to happen, hundreds of billions of institutional investment dollars would be freed up. That’s where the big opportunity is. 

My message to the industry is to start thinking about a way to bifurcate into two parts: recreational for those states and provinces where cannabis is legal, and medicinal for those regions where it isn’t and for global investors. 

 

Do you believe that companies with a strong focus on organics, for example The Green Organic Dutchmen, and CSR have an edge in this competitive market?

As in the food industry, to a certain extent, “organic” is marketing. The regulatory environment for growing marijuana legally already addresses the quality concerns, so organic and CSR become part of a company’s branding. We certainly see it with alcohol – with any commodity. 

Niche things that people associate with a brand because it has a cool model or mandate will work on a regional basis. There may be brands in one province or one state with which people become comfortable, but those companies will eventually be consolidated into a larger company. It’s very much like the craft beer space in that respect.