Betting On The Picks & Shovels

Software is eating the world, and it's actively transforming the cannabis industry

Dec 11, 2020

Friends,

Peter Lynch who is one of the most successful and well-known investors of all time famously said:

“During the gold rush many miners lost money, but the people who sold them picks, shovels, tents, and blue jeans made a nice profit.”

How is this relevant to the cannabis industry?

The transition of cannabis from the illegal market and into a legal framework is undoubtedly one of the greatest business opportunities of our lifetimes, and there has been no shortage of entrepreneurs seeking to get in on the action.

First came the producers.

Indeed, we have seen an enormous amount of capital flowing into this vertical of the cannabis industry here in Canada and across North America over the past three years.

Now, though, it seems that the luck of these pioneers has run out.

Many producers made it their mission to produce as much cannabis as possible in order to capture the elusive demand, sacrificing quality for quantity in the process - a fatal mistake.

This may have been a viable short-term strategy, but, two years since cannabis was legalized in Canada it’s becoming abundantly clear that this strategy has run its course.

As things stand today, it’s estimated that the supply of legal cannabis in Canada exceeds consumer demand by a factor of 10, and this number continues to increase month to month, resulting in more and more producers being faced with no other alternative but to “write off their excess inventory.”

Why? Simply put, consumers have no interest in purchasing low-quality cannabis.

Cannabis Content For Cannabis Professionals

⚡ The picks and shovels

In spite of the surplus of cannabis in many legal markets, vast opportunities remain for businesses to provide the services that support both retailers and producers—and investors are starting to take notice.

Yesterday, Founder Fund, one of the most prestigious venture capital firms in the world (with investments in companies like SpaceX, Airbnb, Stripe, Facebook, and Spotify, to name a few) made its largest investment into the cannabis industry to date by leading startup LeafLinks $40 million series C round.

In a statement to TechCrunch, Fund partner Napoleon Ta said:

“The U.S. appears to be on a path to full federal legalization over the next few years. We believe we’ll start to see some massive success stories in the cannabis space as regulations change and that LeafLink will be one of the winners.”

(📸 / LeafLink)

In addition, U.S. cannabis technology company WeedMaps announced yesterday that it will be going public in the coming months via a SPAC that values the company in excess of $1.5 billion USD.

This transaction will make WeedMaps the most valuable cannabis technology company in the entire industry—at least on paper, as I personally think Dutchie has built a much more valuable tech stack.

Four PM Fact: In November 2010 WeedMaps was acquired by General Cannabis Incorporated for an undisclosed amount, however, in February 2013 General Cannabis sold all cannabis-related businesses, including WeedMaps, back to the original founders

🌿 Is this the future of cannabis?

It’s worth noting that cannabis is still illegal in over 90% of the world, and there remain some huge opportunities in the industry to build successful companies outside of just building technology solutions.

Whether this is building brands that matter or providing education services to this ever-expanding industry - building a technology platform is by no means a necessity to succeed.

That said unless you have the ability to produce some of the highest quality cannabis in your region for the next decade I personally wouldn't be rushing to start producing cannabis any time soon.

Four PM Rundown… 👇🏽

1️⃣ Canopy Growth Continues To Retreat: Canadian Cannabis producer Canopy Growth is shuttering more facilities across Canada amid a fresh round of layoffs in an effort to streamline operations and improve margins, the struggling company announced Wednesday. Read more...

2️⃣ Cannabis Legalization In Mexico Is Delayed Once Again: Mexican lawmakers are requesting an extension to their December 15 deadline to pass a cannabis legalization law. The deadline which was set in 2018 has been asked to be extended until February 2021. Read more…

3️⃣ Is Change On The Horizon For Cannabis In California? With California’s licensed cannabis retail stores still struggling to compete with the illicit market and facing the new challenges of COVID-19, a state panel that advises regulators on cannabis sales recommended Wednesday that several restrictions be relaxed to give legal businesses a better shot. Read more...

4️⃣ Jay-Z Officially Launches His Own Cannabis Brand: Shawn “Jay-Z” Carter the billionaire rapper and global business mogul behind a multitude of successful companies including streaming service Tidal and entertainment firm Roc Nation — can now add premium cannabis brand Monogram to his portfolio. Read more...

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