How cannabis venture capital is evolving with COVID-19
Recent cannabis venture capital and fundraising trends, based on our own pipeline.
Recently we published an infographic highlighting trends in cannabis venture capital during the first three months of 2020. The impacts of COVID-19 were already starting to show, with PitchBook data showing both the number of deals and overall deal size decreasing amid economic uncertainty. Following this, we asked Canopy Rivers’ business development team to dive into our own data to see if we’re seeing any similar trends in our own pipeline.
Q: How has COVID-19 impacted Canopy Rivers’ investment process?
A: Much like we iterated in a late March newsletter, we’re operating as close to business as usual as possible given the circumstances. We’re still seeing roughly three pitches per day. Due to our geography agnostic thesis, 90% of these pitches were already heard over Zoom. Obviously, video conferencing platforms are now our sole platform for hearing pitches, and we’ve been able to adapt seamlessly.
Due diligence has also moved fully online, making raising capital possible for those companies prepared for online diligence. ApplyBoard, a Waterloo-based tech company, recently made headlines with a C$100 million raise where all diligence was conducted online. While we are able to move evaluation online, market volatility and travel restrictions have increased diligence cycles from around 30 days to 60-90 days.
When it comes to the later stages of due diligence, one area that becomes challenging is site visits. After reviewing all kinds of documents related to a business, site visits make an opportunity feel much more real. It’s a great chance to get a qualitative feel for all of the quantitative work done to date, including meeting the team that is hoping to bring an entrepreneurial vision to life. In place of these, we’ve had to make sure that data rooms—the file shares we use for diligence—are stocked with pictures and even videos of facilities, equipment, and operations.
Q: What trends have you seen in terms of deal size?
A: If we use the arbitrary date of March 16, 2020 as our signpost for pre- and post-COVID-19, then we’re seeing similar trends to the data we analyzed from PitchBook for the first three months of 2020. Before March 16, the median deal size we were pitched was typically around US$4 million. We’ve seen that halved since then, with the median ask coming in around US$2 million.
Q: What changes are you seeing from start-ups in terms of their ask?
A: We have seen an adjustment to round sizes and overall valuations. Valuations are decreasing and we’ve heard during pitches that smaller round sizes is not only an effect of current conditions in the capital markets, but an effort from startups to close more quickly and ensure they have enough cash to weather the current storm.
From a venture capital perspective, this means that runway has become increasingly important. We are critically analyzing how long a company may survive on a smaller round, as well as their ability to raise additional capital during or post-COVID-19.
Startups we’ve talked to also appear to be adjusting their use of proceeds. Many cannabis startups, which were originally proposing short-term high growth strategies, are now adjusting to strategies designed for slow, sustained growth.
Q: Have you seen any changes in the types of companies raising?
A: Definitely. In 2020, prior to March 16, the top three deal verticals for which we’d received pitches were consumer products, production and cultivation, and retail and distribution. Since March 16, though, 37% of the pitches we’ve seen have been from software and technology companies. Broadly, software companies have fared relatively well during the economic downturn, and many “pick and shovel” companies—like Shopify in e-commerce—are helping businesses pivot by offloading cost centres to specialists which can help grow their business.
Cannabis software opportunities could potentially be more pervasive post-COVID as they are less capital intensive and could draw more significant investor interest during global macroeconomic uncertainty.
Q: Anything to add? How about one piece of advice for entrepreneurs looking to raise right now?
A: Our work goes on. As cliché as it might be, many great companies have been founded during recessions and we continue to look to invest in companies that are helping build the cannabis industry. We recently invested in Dynaleo, and meet new entrepreneurs daily.
To entrepreneurs, I would say remember that we are all adjusting and learning to work more effectively in these trying times. As always, we would encourage those raising to ensure outreach is personalized and concise, outlining exactly what the business is, the traction to date, how COVID-19 has or may affect the business, what the future looks like, and the capital ask.
Our business development process continues on as usual. We are still evaluating opportunities to invest in what we believe are the next wave of disruptors in cannabis. While there have been changes in the investment process and what entrepreneurs are seeking, many still pursue funding to propel their businesses forward, and those in the software and technology sector appear to be more active than their counterparts in fundraising. Strong headwinds continue to challenge many entrepreneurs, but our work to support them in helping build the cannabis industry of tomorrow remains unchanged.
Are you an entrepreneur with a pitch for Canopy Rivers? Send us your pitch deck or business plan using this form.
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.