What happens when Cannabis looks too big to fail?
Lack of regulatory oversight, gross overvaluations, increased number and size of investment vehicles, and unprecedented levels of consumer misinformation. This should all sound very familiar, as they were all factors which set in motion the series of events leading to the 2008 financial crisis. While the Cannabis industry is far from having such dramatic economic and cultural implications, these similarities and what they might bring to light should be worth examining.
Seeking Alpha, a finance and investing publication, released an article in February of this year in which they looked at the largest Cannabis companies throughout North America and showed that while they all boast incredible market valuations, they’re income statements have proven year over year that they operate at a net loss. This is not unique to the Cannabis space. New startups and existing privately held companies for years have been trending in this direction steadily over the past decade.
In a recent essay titled: Unicorns, Cheshire cats and the new dilemmas of entrepreneurial finance, the writers looked to examine the effects of the recent shift in the operational tactics and long term growth strategies of firms recently coined unicorns— privately owned companies valued at $1 billion or more. They sought to study the shift in the practice of startups securing massive private funding, which results in enormous valuations of these companies; all with the intent of scaling so greatly and so quickly that it forces existing participants or would-be incumbents out of the industry. The given companies can then, after operating at losses for significant amounts of time, hopefully realize almost monopolistic returns.
With the surge of investment vehicles within the Cannabis space in recent years and with many of these companies sporting positive valuations because of privately secured capital backing, what happens when some or many of them fail to ever realize profitability? Not only can the companies themselves crumble, but their supply chain partners, ancillary contributors, and every other market participant can as well. This in turn can ripple out into the unsuspecting public, with ownership positions in single stocks, ETFs, and any other vehicle with ties to these players.
What will be the economic and social implications if the Cannabis industry, especially the hemp and CBD space, is trained on the same trajectory as myriad other industries in relation to growth, operating profitability (or lack thereof), and intended scalability? How will this trajectory, coupled with often outrageous narrative-driven consumer expectations and misinformation, prove stable enough to be the foundation of the industry?