There’s little denying that investing in the cannabis industry will soon be a major market around the world. As a fairly new industry with significant growth potential, experts have suggested that the cannabis industry could reach $47 billion within the next decade, and there are virtually zero established brands ready to dominate the marketplace and cash in on the industry’s potential.
With a wide variety of startup-like companies currently seeking funding, investors large and small are attempting to enter the industry to lay claim to their slice of what could be the biggest gold rush since the end of Prohibition. Considering that right now the legal cannabis industry is in its infancy, the market’s potential for growth has drawn the attention of both novice and veteran investors as a possibly life-changing investment.
Even for the most established of businessmen, the cannabis industry offers a way to diversify investment portfolios like never before. Rather than sticking with more traditional routes like equities, real estate, mutual funds, and loans, investors looking for a new path to financial success and stability have turned to legal cannabis companies as a high-growth option to take their retirements and vacation funds to the next level.
But as ample as the opportunities for cannabis investors may be, the ones with any realistic shot of returning profit — or even simply repayment — are few and far between. For every successful cannabis business currently in its growth phase, there are dozens of others that will flounder and burn out before ever living up to their lofty financial goals.
Although the risk is assumed with any investment, committing money to an industry (and companies) still in its infancy makes cannabis a particularly challenging investment for anyone without the right guidance. Thankfully, Warren Blesofsky is not only a founding partner of Gladbrook Holding, but also a seasoned expert when it comes to cannabis investing — and he’s more than willing to share some of the common pitfalls and his tips for avoiding them with those willing to listen.
Cannabis Investing in Cultivation is a Risky Business
It’s very difficult to be a successful cannabis business without being able to grow your own cannabis, which means virtually every opportunity for Cannabis investing in the market relies on some form of cultivation. Unfortunately, cultivation is also among the riskiest aspects of the cannabis industry, and it’s one that’s changed more recently than many others.
Considering that cultivation is such an important part of any cannabis-based operation, most companies (and investors) leave it in the hands of experienced growers — much like how you wouldn’t want a stockbroker right out of college handling a portfolio worth millions. But unlike the relatively stable laws, costs, and regulations of Wall Street, cultivation can be a wildly unpredictable and rapidly evolving art form that blends the principles of traditional farming with the cutting-edge science of modern technology making cannabis investing in this space tricky.
One of the most surprising aspects of cultivation for both businesses and for those interested in Cannabis Investing can often be the startup costs involved. Although it may seem simple enough to purchase some land, plants, and a smattering of small necessities, running a successful cultivation operation is no less complex or costly than any other corporate agriculture. By the time all factors are taken into account, even a relatively small cultivation site can cost hundreds of thousands of dollars (if not more), and that’s with a knowledgeable crew banking on nothing going wrong.
Of course, even the best-laid plans of mice and men often go awry. With new laws, regulations, technology, and concerns showing up in the cannabis industry every week, it’s more or less impossible to prepare for every unforeseen obstacle a cultivation operation will face. Every cultivation site is one small legal or health regulation change away from suddenly being unlawful, and there’s no telling when the next round will come down from city, county, or even state governments. Much like building or remodeling a house, a cultivation business dependant on everything going smoothly is likely in for a rough time because some of the biggest threats to growing commercial cannabis come from things far beyond human control.
As any veteran farmer can tell you, not every crop is going to be a winner. Fortunately for the agricultural industry, most of those established farmers have enough diversity (and government subsidies) that a single bad crop won’t end their entire business. On the flip side of that, most companies in the cannabis industry need almost all of their batches to succeed in order to stay afloat.
Although most cultivation sites will be growing different strains and types of cannabis, the plants all share enough in common to be susceptible to many of the same plagues. Too much moisture can easily cause products to mold, while too little will increase the risk of losing an entire site to a fire with just the smallest spark. Insects and other pests can chew through cannabis plants just like any other crop, but many pesticides can have an even worse effect when trying to keep things organic and safe for human consumption. In the end, cultivation becomes an exceptionally delicate balancing act that carries the weight of an entire company.
Even when everything goes well though, there’s still the old saying of “Poverty follows agriculture.” While there is certainly money to be made from cultivation, any type of agriculture is still a very tough business to keep everyone’s wallets full. Making sure that the people taking care of your crops stay happy with their pay is yet another balance to maintain, as a growing market like cannabis has plenty of opportunities for workers in search of a raise, and constant turnover isn’t a recipe for success when looking to produce consistent and reliable crops year after year.
Lack of Operator Oversight by Managers
Even when the cultivation operation is running smoothly and the business side of the company appears to make sense, there’s still plenty that can go wrong when investing with a seemingly stable cannabis venture. One of the most common weak links in the generally flimsy chain between the cannabis growers and the financial experts is the investment manager.
Considering that the cannabis industry is still largely in its infancy, finding a reliable manager for your Cannabis investments is akin to finding a needle in a haystack. With many investors entering the cannabis industry for the first time, they’re learning — often the hard way — that the managers they’ve trusted with their money aren’t quite as dependable or knowledgeable as they may have hoped.
Realistically speaking, it’s not easy to find an investment manager with significant experience in both cannabis and business, and there are more than a few who don’t know enough about either. Whereas investors can see a manager’s track record in industries like real estate, banking, and the stock market, the incredibly brief history of the cannabis industry means that many investors are devoting their money to people based on their word alone. Without even taking corruption or intentional deceit into consideration, that’s still a lot of faith being placed into a possibly inexperienced manager running a complicated business.
For one thing, it’s not uncommon for the managers to be severely out of touch with the folks running the daily operations. If the cultivation site is in a rural area of Central California or Northern California — as many are — and the manager lives and works in Los Angeles, they’re probably not directly interacting with the operators as much as they should be. Sure, cell phones and emails can make up for some of the communication deficiencies, but they don’t replace the benefits of actually being onsite and building relationships with the operating team. At the same time, a manager who lives in Humboldt County could have a much tougher time getting advanced knowledge of what’s trending and which direction is next for many of the biggest dispensaries and businesses in Southern California unless they already have a solid network of trustworthy connections.
The other piece of the puzzle to consider is that even well-established cultivators can jeopardize the entire operation if management doesn’t keep a close enough eye on them. Given that no one has decades of experience growing legal cannabis under today’s laws, some operators have been known to cut corners and attempt to skirt the industry’s new regulations in an effort to keep costs down or lessen the amount of work for themselves. Although that may have been effective for them in gray or black market operations, the cannabis industry is still in a new enough position that one stray operator could sink an entire company. As we’ve seen already, the growth of the industry is leading to much stronger enforcement of the laws and regulations surrounding any and all cannabis-related operations — and they’re only going to get more severe as the market booms in the coming years.
Without managers and operators holding each other accountable, companies and investors are always at risk of losing everything due to a poor decision or simple unprofessionalism. While this figures to potentially work itself out as the industry becomes more established, investors looking to enter during its infancy should carefully consider the people running and managing the operations as much as the business plans and projected returns themselves.
Illicit Cannabis Investing Operations are Always a Gamble
Why does the staff in a cannabis operation matter even more than in other industries? Well, because with one wrong move, an investor could be funding an illicit operation.
Despite the legal cannabis market going through a tremendous growth phase, the unlicensed gray and black markets for cannabis are still drastically larger — as in 5 to 10 times larger — than the legal operations in California. Many of these businesses have done their homework and put on a front feigning full compliance and legality for their investors, but they’re actually existing in spaces that have no regulations yet or going against the rules completely.
With cities, counties, and states all using their own regulations (and don’t forget that cannabis is still illegal under federal laws), some cannabis startups are doing their best to dodge law enforcement by using an address in an area where it’s legal while doing business in other cities. Although this can be short-lived and tough to do for an actual storefront, delivery services feel they can get away with it a little easier because of their mobility and flexibility. Unfortunately for them, as California’s Marijuana Enforcement Division becomes more established — and better funded through the taxes on legal cannabis — maintaining legality and profitability for any amount of time is going to become more and more challenging.
Already, we’re seeing that many of these illicit opportunities are having to cut short any of their long-term plans for generating revenue, as constantly having to dodge the authorities doesn’t allow for much distant planning. As with any new industry, the long game is eventually where the most significant money will be made. Investors may be able to pick up a quick return by guessing right on a crapshoot of the illicit operations, but none of them offer the kind of potential and stability that can help fund a retirement or amass a fortune.
Beyond the limited financial ceiling, investing in illicit operations comes with some huge risks even if they don’t get caught by law enforcement. In the event of a robbery, dispute, or any other emergency situation, a questionably legal business won’t be able to call the authorities for help. In a similar manner, many cannabis operations struggle with finding secure banking and money management solutions that don’t quickly flag, freeze or close their accounts as soon as their industry is disclosed. Although the hope is always that no major setbacks occur in these situations, not having the safety net of police or major banking institutions is unsettling at best for many investors, as even a small issue can become a catastrophe without the proper handling.
Hopefully, the banking options will open up as the cannabis industry expands and Cannabis Investments become more mainstream, but a more regulated and established market will almost definitely hurt the majority of illicit operations rather than helping them. As previously mentioned, cannabis law enforcement will only continue to increase in the coming years, and the abundance of legal alternatives will soon push the gray market into a smaller and undesirable niche. Much like how illegal versions of other medications aren’t threatening the profits of pharmaceutical companies — and the liquor industry isn’t exactly concerned about bootleggers — today’s illicit operations in the cannabis industry will end up as a mere history lesson in the bigger picture. If you wouldn’t fund your neighborhood dealer, you probably don’t want to invest in an illicit cannabis operation.
Cannabis Investing: Little to No Diversity within Cannabis Companies
As tends to be a problem with many new businesses, the vast majority of young cannabis companies are using a very narrow scope when creating their business plans. Although it’s always good to carve out a niche in the market, a business that puts all of its eggs in one basket is often just one downturn away from serious trouble.
For investors, diversifying your portfolio is a simple, smart, and safe way to guarantee that the unpredictability of the marketplace never threatens your financial wellbeing. Whether the returns on investments are a primary source of income or just covering your retirement, vacation fund, and other niceties, there’s a reason that spreading your money around a number of different industries is almost always recommended. That way, if the stock market crashes or real estate bubble bursts, you’re not left with an entire worthless portfolio.
Unfortunately, most cannabis companies that one can invest in don’t have that luxury. Considering that many of the businesses are already dealing with high startup costs and limited resources/experience, most cannabis investments are focused on a single product line, cultivation operation, or distribution idea (such as a dispensary or delivery service). While that may be perfectly effective for the time being, the cannabis industry’s current state of fluctuation means that no aspect of the market is ever really safe.
Even the largest and most established dispensaries and cultivation sites are merely one zoning meeting away from being removed from their current locations, and the crackdown on delivery services could come at virtually anytime. In the same way, new regulations — or even just a shift in consumer preferences — could kill the market for investments in legal cannabis oils, infusions, edibles, or any of the other sectors that many businesses are looking to specialize in.
Of course, it wouldn’t even require an external force like that for a singularly focused company to end up going under. A simple dispute fueled by creative differences over branding or future plans could be enough to derail or delay a product’s success, and when that product is the entire business it can snowball into a catastrophe very quickly. Compounded by all of the other risk factors that go into cultivating, processing, and distributing cannabis products, a company relying on only one source of revenue is cutting their margin for error very thin and lowering their chances at surviving drastically.
Every company is sure that the niche or singular product line they picked is going to be the future of the cannabis industry, and one or two of them will probably end up being right. But for every brand name that becomes the next Starbucks, there will be hundreds that become empty money pits. As any experienced investor knows, the future is nearly impossible to predict, and things become even murkier when talking about a brand new industry that’s still taking shape. Investing in any brand with a singular focus is a risk, but doing so in the cannabis industry is similar to playing a slot machine. Even as bright as the future of cannabis looks now, things can go sour for just about any individual company at any time — just ask all of those cryptocurrency millionaires from last year about how that feels.
No Clear Path to Repayment in Cannabis Investing
One of the most challenging things for investors getting into the cannabis world is the lack of contractual paperwork between the investors, cultivators, and other managers. For many of the cultivators who have been growing in possibly illicit operations, many of the guarantees come in the form of a handshake deal. Even if there is paperwork and signatures involved, it’s unlikely that the experts in the cannabis industry have dealt with too many formal business contracts in the past.
Aside from the guarantee of how much money you’ll be getting back, there’s usually not a date set in stone for when you’ll start to see returns on your investment. Considering that the company’s finances are largely dependant on their crops, many cultivators offer their investors a cut of the profits from their future harvests. But while that might sound like a high ceiling to many investors, there’s rarely an exact date or dollar amount tied to a single harvest — partly because of the time and effort it would take to accurately track it. That’s not to say every cultivator is looking to rip their investors off, but when everything is done in ballpark figures, it’s a pretty good guarantee that they’re not going to jeopardize their own profits by overestimating their investor repayments.
While having a trustworthy and prompt local cultivator is great, it’s not just the smaller names that seem to have trouble paying their investors back. Despite becoming massive success stories, major industry players like MedMen have often had their own share of problems paying investors back in the past. As the companies look to continue expanding with the rapid growth of the market, they’d rather sink their excess capital into moving forward instead of repaying the people who got them there in the first place. Sure, some of the people involved will eventually reap tremendous rewards, but dozens of investors will be burned for each person getting a giant payday.
Then we get into what happens when a cannabis investing in a company like MedMen goes public — which they’ll likely do in the coming months — and the founders and faces of the company make a ton of money off of it. Those initial investors aren’t going to get paid back directly from that, so now they end up with more stocks that they’ll need to sell off at the right time in order to turn a profit. Most investors aren’t getting into the cannabis industry with a desire to play the penny stocks just to get a decent return on their investment, yet that seems to be the best possible scenario for some of the most successful companies in the industry.
On the other side, repayment doesn’t get any better when considering the state of most other cannabis companies at this point. While most of the industry will promise their investors unbelievable rewards and make comparisons to the California Gold Rush, the truth of the matter is that a lot of those gold miners went home with little to nothing.
Aside from the cultivators’ questionable timeframes and amounts as noted earlier, investing in the cannabis industry isn’t all that different than the venture capitalists throwing money at tech startups in Silicon Valley. For every Facebook or Google that gets funded, there will be numerous social media sites and search engines that are dead before they ever hit the internet — and that’s in an industry that isn’t still technically illegal under federal law. When investors start to consider that the best chance at success for many companies comes from a name like Philip Morris buying them out as part of its new cannabis brand, it becomes apparent just how few of these startups are actually going to be viable investments for years to come.
Much of cannabis investing in the cannabis industry isn’t used to dealing with Cannabis investors or finance professionals, which means even the most structured deals are still going to hit a fair amount of bumps in the road. Long before legalization, the cannabis investing market was thriving on handshake deals, estimated numbers, and loose schedules. Just because legal businesses have been formed and the industry’s professionalism is on a sharp upswing doesn’t mean that every investment opportunity is going to be ready or accustomed to repaying investors in a timely and accurate manner.
Cannabis Investing: Another way.
For many investors — particularly among the younger crowd — the cannabis industry represents the first opportunity to truly get into a market during its infancy. Although this means accepting greater risks than in an established market (as there are essentially no “safe” investments to make), it also means there’s potential for fortunes to be made beyond what’s possible in most alternatives.
In situations with such a high risk-reward factor, dodging as many financial landmines as possible can be the best way to secure your returns both for the present and the future. At Gladbrook Holdings, we’ve done our best to avoid as many of these possible pitfalls as we can. From making sure that we’re not reliant on a single cultivation site and diversifying our own offerings, we’re taking a more sensible and business-minded approach to investments in the cannabis industry. As investors ourselves, we know the type of risks other companies and industries come with these days, and we’re committed to minimizing those as much as possible.
Coming from backgrounds in real estate and business, we’re not strangers to dealing with contracts and investors expecting to be paid back, so you don’t have to worry about when you’re going to see repayment or how much it’s going to be. Although we’re probably not the only company with experience on the business, pharmaceutical, and cannabis sides of things, finding someone who can truthfully explain and operate all facets of a cannabis company is no small feat — and we think it’s what sets Gladbrook Holdings apart from many of the other brands within the same space.
From the realistic business plans to the professionals who we hire, Gladbrook Holdings was founded as an integrated partnership rather than a single person’s wild dream. Responsibility and improvement are at the core of everything we do, and being able to teach both investors and the public about investing in the cannabis industry is one of our main goals.
Of course, no matter how much you learn, there’s no perfect investment in any industry no matter what you do. Certain risks come with the territory, and there’s not much you can do about that in the long run. Simply put though, there are plenty of things you can look for — whether in Gladbrook Holdings or any other cannabis investing venture — that can make you feel a little bit safer about investing your money.
Disclaimer: This guide contains the opinions of the writers only. It was not compiled by attorneys or accountants and should not be used as professional advice by anyone.