Tech venture capital is keeping a close watch on cannabis – here are four reasons why

It’s an exciting time to raise private capital in the cannabis industry. We’ve seen that the stigma is dissipating, general partners (GPs) are opening up to cannabis investments, and tech venture firms are jumping in. 2018 was a record year for cannabis venture capital, with US$1.5B invested across 208 completed deals according to PitchBook data. 2019 has already surpassed that mark, with US$2.3B invested across 249 completed deals as of October. So, how did we get here?

1. The cannabis industry is diversifying.

In the tech and consumer packaged goods industries, there are sectors such as: logistics, data analytics, and brands. These verticals also exist in the cannabis value chain. For example, Eaze, a cannabis products delivery service, is considered the Uber Eats of the cannabis industry. Headset, a Canopy Rivers portfolio company that turns cannabis retail data into real-time consumer insights, recently partnered with Nielsen and Deloitte to provide cannabis industry statistics and trends. Finally, the cannabis wellness category continues to gain consumer mindshare, and notably we’ve seen the former Co-Founder of the Honest Company become the CEO and Founder of CBD wellness brand Prima. In our view, this demonstrates that the industry is growing in the scope and breadth of its sectors, as it opens its doors to innovative technology and experienced entrepreneurs.

2. General partners are recognizing the business opportunity.

While the early days of cannabis fundraising were fueled by family offices, hedge funds and high-net-worth individuals, the current fundraising landscape sees more participation from tech venture capital firms. Tiger Global, Benchmark Capital, Greycroft, and Lerer Hippeau have all led financing rounds for companies such as: Pax, Hound Labs, Eaze, Prima, and Sweet Reason. Marc Andreesen, the Co-Founder of venture capital firm Andreesen Horowitz, has also entered the sector by backing Vice Ventures, a fund that invests in “vice” industries such as cannabis, alcohol, e-sports, and more. To date, venture capital investors in the U.S. have generally focused on non-plant touching investments, including brands, software, marketplaces, and wellness.

 

 

3. Tech has emerged as a promising category.

Kraft Heinz and Thrive Capital are examples of established companies that have recently entered this space through tech investments. Kraft Heinz made its first move into the sector when its VC arm, Evolv Ventures, co-led a $23.0M funding round for cannabis retail software company Flowhub. Thrive Capital, founded by Josh Kushner, recently led a $35.0M round for LeafLink, an online B2B marketplace for wholesale buyers and sellers of cannabis, marking the firm’s first investment in the cannabis industry. Thrive Capital’s previous investments include: Glossier, Warby Parker, Slack, Instagram, and Shopify. Canopy Rivers has also entered into a joint venture with LeafLink, establishing LeafLink International, which licenses LeafLink’s technology platform for deployment in regulated international cannabis markets outside of the US.

4. Cannabis companies are specializing across the supply chain.

In the past, Canada and U.S.-based cannabis companies generally needed to vertically integrate from seed to sale. This initially happened in tech as well, where companies built everything internally – from server infrastructure to front-end commerce channels – in order to scale. Today, we see increased specialization in the tech industry, with companies such as Amazon, Shopify, and PayPal taking customer-centric approaches in their internal operations and outsourcing the rest. In cannabis, we’ve seen that some companies are good cultivators, but need help with brand building. Others can launch great products but need to outsource the flower input.

We believe cannabis companies are stronger if they specialize in one or two areas and form complementary partnerships to fill in the gaps. Pax, a cannabis vaporizer company, built its consumer roster through hardware technology and branding, but leverages outsourcing and partnerships for cultivation, extraction, distribution, and retail. While vertical integration helps businesses maintain control, we think horizontal integration with other companies across the value chain is key for speed to scale in a rapidly evolving global cannabis market that, as the smoke clears, is starting to look more and more to us like the tech industry every day.

With serial entrepreneurs entering the space, an increase in funding year-over-year, and tech venture capital funds starting to invest in cannabis deals, we think the long-term opportunity for innovation and growth in the cannabis industry looks promising, and we continue to evaluate deals that lie at the intersection of tech and cannabis.

 

This is not an offer to sell or a recommendation to trade in any securities. This information is provided as of the date hereof. This document contains data obtained from third parties that Canopy Rivers has not independently verified. This document also contains forward-looking information within the meaning of Canadian securities law, which is based on certain assumptions. While management believes these assumptions are reasonable based on information available as of the current date, they may prove to be incorrect. Many assumptions are based on factors outside of Canopy Rivers’ control and actual results may differ materially from current expectations. Forward-looking information involves risks, including, but not limited to, the risk factors set out in Canopy Rivers’ most recent Management’s Discussion and Analysis and Annual Information Form. You should not place undue reliance on forward-looking information. Except as required by applicable law, Canopy Rivers assumes no obligation to update or revise any forward-looking information to reflect new events or circumstances.