The CBD investment opportunity: four trends to watch

One of Google’s hottest search terms in the back half of 2019, CBD has shifted from an anecdotal remedy to a pharmaceutical and widely distributed consumer product. As a venture capital firm specializing in cannabis, we look at investment in CBD from all angles.  

Currently, backing CBD as a pharmaceutical product requires long lead times, clinical trials, and efficacy studies, and until these take place - a step unlikely to scale until European and U.S. legalization - we think cannabis investors, like consumers, will continue to focus on CBD products. We see these products as having a more conventional risk profile and time horizon, and with a seemingly endless market for these products, the investment landscape is broad. 

CBD interacts primarily with the body’s endocannabinoid system - a complex cell-signaling system that helps regulate certain functions and processes including sleep, mood, appetite, and memory, to name a few.  With wide-ranging effects, and consumer desires for “natural” solutions to health concerns, the market for CBD is growing quickly. Also, CBD on its own doesn’t impart intoxicating psychoactive effects, making it especially attractive to curious “intenders” turning to cannabis and hemp-derived products for the first time. In the US, CBD sales are expected to grow from US$600M in 2018 to $16B in retail sales by 2025, with a 60% CAGR.  

With applications in capsules, gummies, tinctures, topicals, sublinguals, inhalables, and more, there are many formats where CBD can be used as an ingredient. The margins on these products alone make CBD worth a closer look for investment. Cannabis data analytics firm Headset reported earlier this year that average prices of high-CBD products are 60% higher than non-CBD products. 

We view CBD as a greenfield opportunity and are not surprised that all kinds of trends are emerging. Here are some of the top ones we’re seeing.

1. Product standardization is leading to CBD evolving into an ingredient rather than a cannabis product. 

This is good news for companies focusing on the extraction of CBD isolates. In our view, those developing CBD brands will need high quality, consistent inputs to establish and maintain consumer trust. We think there is room for improvement in this area. Recently, Leafly tested CBD products only to find a high inconsistency in the dosage amounts promised on the labels. 

2. With congestion in the marketplace, we think the winners will be brands that have mainstream CPG appeal and demonstrate ability to navigate the big box retail environment. 

Companies that have successfully navigated these waters will have a headstart over the competition. Leveraging distribution relationships, existing brand affinity, and the current retail environment will go a long way in positioning a new CBD product line.

3. The business model matters. CBD companies are taking a page from the playbooks of successful direct-to-consumer (DTC) brands such as Casper, All Birds, Away, and Warby Parker, and controlling the end-to-end supply chain.  

We think CBD brands leveraging more sophisticated customer acquisition strategies will stand out in the long term. What remains to be seen in this space, however, is the openness of platforms such as Facebook, Instagram, and Google to allow DTC CBD companies to use their platform to drive e-commerce sales.

4. International markets present significant opportunities for CBD growth. 

According to many industry reports, the European market represents one of the largest market opportunities for CBD. A survey by New Frontier Data shows that 16% of Europeans have used CBD, representing a potential market of over 118 million customers across the continent. Additionally, the Centre for Medicinal Cannabis, a UK-based advocacy group, recently reported that the UK has over 1.3 million CBD users with a suggested market size of £300M. 

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It’s clear that the current trends around CBD are hyper-focused on the consumer environment. Our focus at Canopy Rivers, though, remains seed-to-sale. Rather than zeroing in on consumer products, our approach to CBD is similar to our broader investment thesis: invest in disruptors throughout the value chain, including hemp and cannabis cultivators, processors, and science-backed biotech companies leading the way in manufacturing biosynthetic cannabinoids. Consumer products appear to be winning in the short term, but we think CBD’s value proposition goes beyond many of the products on shelves today.

For more information on our investment thesis, take a look at the five key indicators that our team uses to evaluate companies, CBD or otherwise. 

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.