With the cannabis industry booming in many U.S. states and federal plans to reschedule cannabis well underway, it’s no surprise that it’s caught the eye of investors—and not just stock market investors looking for public companies.

Whether you’re an entrepreneur seeking investors or a U.S. investor seeking opportunities in the cannabis industry, there’s plenty to learn before committing funds.

Let’s look at the most essential aspects of the cannabis industry that potential investors should be aware of…

What are the investment opportunities with cannabis?

The opportunities available for investing in private cannabis businesses will excite most potential investors.

The cannabis industry represents a growing opportunity for investors of all experience levels as the changing regulatory landscape unfolds at both state and federal levels. For the first time, there is overwhelming bipartisan support for a more relaxed legal framework for cannabis, removing many of the obstacles and downsides to investments.

Accordingly, the projections are for major growth for the cannabis market in the U.S. and beyond in the coming years. For instance, a 16 percent compound annual growth rate (CAGR) is predicted for the global market between 2021 and 2026.

In many states, it’s still early days for the cannabis industry and years of development lay ahead—which could be attractive for long-term investors.

Types of opportunities for investors

Multiple opportunities exist to invest in public and private cannabis businesses operating in many sectors of the market: cultivation/production, manufacturing, retailing, testing, and so on.

Some of the big corporate names in cannabis have already been floated on the stock market for years, such as Tilray and MedMen.

Other smaller businesses provide private investment opportunities. The state laws and cannabis licensing processes differ from state to state but businesses often specialize in one area of the cannabis market or form “microbusinesses” that both grow, produce, and sell the end product.

Many attractive opportunities exist with “closely held” cannabis businesses, owned by individuals or small groups of shareholders, who may even be members of the same family.

For investors with significant capital to invest in long-term investments, small and micro cannabis businesses or “vertically integrated” companies may present the best opportunities. 

These types of cannabis businesses are becoming increasingly common in states that have legalized adult-use cannabis. When the business controls the process from “seed to sale”, cultivating, processing or manufacturing the plant into products, and operating retail dispensaries, this can attract investors.

The challenge for such companies is in raising the significant capital necessary to start up. Entering the cannabis industry is not cheap. This is where the opportunity may lie for investors who can handle some degree of risk for favorable terms and potentially great rewards over the long term. Investments in microbusinesses can be anywhere from around $50,000 to $500,000 or $1 million+.

What should cannabis business investors look out for?

Like with investing in any business, investors should seek companies with solid business plans, good management structure and people, and unique value propositions. These businesses will usually offer the most promising chance of survival, success, and growth potential.

Investors should look for business owners who are not only experienced in cannabis production, manufacturing, and/or retail but also with clean backgrounds and a solid business track record, i.e. a strong management team.

That may not be easy as. sometimes, the most knowledgeable cannabis experts are not the most business-savvy individuals—and vice versa. Such individuals must surround themselves with others who cover for their deficiencies to operate successful cannabis businesses.

The cost of setting up a compliant cannabis business varies from state to state but never comes cheap. Significant startup funds are required and business owners do not currently have access to the type of funding avenues that are available to other types of businesses—because of the current federal cannabis laws.

Cannabis businesses usually finance their business by self-funding (borrowing against assets), friends and family, angel investors (where you might come in), and private equity or venture capital.

Another major factor to consider when weighing up whether to invest in a cannabis business is location. Even with different areas within cities, local municipal laws vary and may restrict business activities with cannabis. Before investing in a business, ensure its compliance with state and municipal laws. 

Also, check the number of cannabis business licenses issued by the state. If the number of competing licenses is limited, that could be better for business.

How to protect against the risks of investing in cannabis businesses

Investing in small and micro cannabis businesses can be highly rewarding but is not without risk. For instance, with federal laws currently at odds with state laws, federal taxes tend to be much higher for cannabis businesses than other types of businesses because the standard deductions do not apply. Funding opportunities are also more limited.

Because the industry is relatively new in many states, “best practices” for running cannabis businesses are still developing. The regulators in some states are still devising the legal frameworks by which the industry will run. Maintaining compliance with these laws can be a constant challenge.

Investors should be wary of investing in businesses that are poorly run or not getting the right advice. Do they have experienced cannabis business operators leading the way or at least the right legal advice about operating a cannabis business in that location?

Because of the risks involved, investors should be able to negotiate favorable investment terms that protect against the possible downsides while maximizing returns. For instance, by taking security in a company’s assets via liens on company equipment or mortgages on the company’s operating facility. 

If in doubt, seek legal advice from a seasoned cannabis lawyer who is familiar with the laws and business opportunities in the preferred state in which you want to invest.

For informed advice on the cannabis industry anywhere in the U.S., call 866-329-0729 for a consultation at Cannabis Law Solutions.