Where these 6 top VCs are investing in cannabis

The cannabis market was in the midst of a correction when the COVID-19 crisis hit and could emerge stronger than ever.

After a breakthrough period of growth, cannabis startups entered 2020 with depressed values and an uncertain future. Now, with millions sheltering in place, many companies are seeing unprecedented demand and growth opportunities as many states classified the industry as an essential business.

TechCrunch surveyed top investors focused on the cannabis market to gather their thoughts on current trends and opportunities. The results paint a stunning picture of an industry on the verge of breaking away from a market correction. Our six respondents described numerous opportunities for startups and investors, but cautioned that this atmosphere will not last long.


Three key takeaways

Cannabis is an essential business

Per the investors in our survey, most see the the pandemic as a turning point for cannabis thanks to increased demand and the industry’s designation as an essential business. Sean Stiefel, CEO of Navy Capital, notes that states will look to cannabis to help resolve budget deficits and said his firm is especially excited for legalization in New York, New Jersey, Pennsylvania and Connecticut.

“Cannabis went from illegal to essential in about two weeks flat,” said Matt Hawkins of Entourage Effect Capital. “Cannabis is now listed right alongside hospitals, doctors, grocery stores, gas stations and fire departments as an essential service.”

Cannabis is one of the bright spots in the pandemic

According to our survey, investors are keen on capitalizing while startups look for additional capital to fuel growth while valuations driven by the market correction are still low. Mitch Baruchowitz of Merida Capital Partners said it’s a great opportunity for investors as valuations are down 50% while revenues and momentum are rapidly growing. He notes that this dislocation generally does not last long.

Karan Wadhera of Casa Verde Capital LLC and Matt Hawkins had similar thoughts. Wadhera says “funds with dry powder will be in an envious position to invest in some of the most attractive opportunities in cannabis.” Hawkins points to the cannabis market’s prior cash crunch and says there is not enough liquidity and capital to take advantage of all the current opportunities.

Investors expect cannabis companies to be tech-savvy

Investors are looking to cannabis operators who employ the latest technology. From growing to selling, several investors said they expect operators to use technology to deliver data-driven results. Green thumbs are handy, but data is critical and there are countless ways to utilize the latest technology.

“Because we are effectively building this industry from scratch,” Wadhera said, “almost every part of the ecosystem requires some bespoke/new/unique technology, making cannabis one of the most tech-forward industries in the world.”

Larry Schnurmacher, Managing Partner at Phyto Partners, says he expects licensed growers to use AI and machine learning to increase yields while decreasing cost.


Sean Stiefel, CEO, Navy Capital

What trends are you most excited about in cannabis from an investing perspective?

This is the year the best operators distance themselves from the pack. We are seeing clear bifurcation in the space as winners are pulling away. We are excited to see these businesses gain operational leverage. The combination of single-digit EBITDA multiples, 40-50% margins and 100% top-line growth is incredibly attractive.

How much time are you spending on cannabis right now? Is the market underheated, overheated or just right?

The market has been ignored by institutions for years, which has created the opportunity. We spend 100% of our time on cannabis.

What are you looking for in your next investment?

We continue to believe the East Coast states where companies are vertically integrated are the best marginal dollars right now. States like Pennsylvania and Maryland are great markets with limited players. We want to own the winners in these markets.

Are there startups that you wish you would see in the industry but don’t?

Since there is so little capital available, it’s hard to compete as a startup right now given the high capital costs of the industry. That will change eventually, but right now it’s very hard to get a footing without substantial funding.

How has COVID-19 impacted the cannabis investing landscape?

For the majority of our portfolio we have seen a big spike in March and a remained elevated level since. Cannabis is a staple during the pandemic and the essential designation in every state is a huge step forward. As states look to fill their coffers after the pandemic there will be a lot of movement around legalizing adult use. We are especially excited for New York, New Jersey, Pennsylvania and Connecticut who are being hit especially hard financially and have this lever to pull.

How has COVID-19 impacted cannabis startups operationally?

The industry in general is in a consolidation phase, so startups without capital are being crowded out. As incumbent business models fail and capital returns, there will be big windows [of] opportunity.

What advice do you have for your portfolio companies facing unprecedented surges right now?

Have multiple redundancies, multiple sources and stay focused. Level heads are prevailing and guys that are navigating the world right now with a clear plan are doing great. Focusing on core competencies and businesses that have been built properly are being rewarded.

What part of cannabis do you think is most apt to adopt technology?

Consumer insights will be a massive opportunity, especially if the physical retail experience is disrupted.

Plus any other thoughts you want to share with TechCrunch readers.

This is the industry’s breakthrough moment as politicians need to create jobs and tax revenue. The industry has done a stand-up job during COVID and we think the normalization is imminent.


Matt Hawkins, Entourage Effect Capital

What trends are you most excited about in cannabis from an investing perspective?

We don’t need a long walk through history to see that a limited number of strongly-preferred consumer discretionary goods and staples, both of which arguably include cannabis, typically outperform or protect on the downside during a recession. Cannabis went from illegal to essential in about two weeks flat — cannabis is now listed right alongside hospitals, doctors, grocery stores, gas stations and fire departments as an essential service. As we edge close to federal legalization, there is still a large demand for research on cannabis’ medicinal benefits and a lot more opportunities to create cannabis-derived medicines. There is a lot to be excited about in the long term.

We are also closely watching the changing trends in consumables. For example, there are a lot more delivery mechanisms – pre-rolls, tabs and tinctures, beverages and vapes are making a comeback. Unlike nicotine, we have a bunch of different ways to deliver cannabis. The companies that are developing a wide range of products and branding them successfully are ones to watch. Finally, we also expect to see a lot of consolidation after the crisis is over, particularly in states like California, which is a major trend to monitor from an investing perspective.

How much time are you spending on cannabis right now? Is the market underheated, overheated or just right?

We are focused on investing only in the cannabis industry. Since inception, we have deployed more than $100 million into 65 companies with a total of 11 exits through oversubscribed Fund I and II. We have also launched a third fund and if fully subscribed, would bring total assets under management to a quarter billion. We believe strongly in the fundamentals of this market and that it is underheated currently with tremendous potential as we look ahead.

What are you looking for in your next investment?

We’re looking for unique opportunities with new entrants and established companies. Over the last few years, we’ve seen companies grow and there’s a lot of companies that are coming together through M&A activities that are trying to develop scale sooner rather than later. So that’s a strategy. But we do look at new opportunities as well. The amount of cash a company has on its balance sheet now is the biggest predictor of future success. In addition, you need to have the scale to justify that kind of cash on your balance sheet. That’s what we look for in our investments.

Are there startups that you wish you would see in the industry but don’t?

We invest in companies a bit past startup phase — typically their first institutional round of financing.

How has COVID-19 impacted the cannabis investing landscape?

COVID’s impact on the cannabis industry has been two-sided. On one hand, we are deemed [an] essential business and consumer demand has shot up to an all-time high. But, on the other hand, we see depressed values across the board in public and private companies. So from an investment standpoint, it makes a lot of sense to invest right now. When you think about investing in distressed assets, the first things that come to mind are either margin shrinkage or top-line shrinkage. In a lot of cases in the cannabis industry, that’s not the case; those two things are typically in a positive trend. The only thing that’s been impacting the cannabis industry in the negative sense, prior to and during COVID, is the cash crunch. There’s not enough liquidity and capital to take advantage of all the opportunities.

How has COVID-19 impacted cannabis startups operationally?

Due to the surge in demand and a few supply chain issues, cannabis companies have had to adapt to new operating procedures very quickly. There are many opportunities that lie ahead for cannabis companies to learn and navigate during this time – operators will likely need to restructure their way of doing business to address things like a reduction in daily workforce and demand uncertainty. Fortunately, the demand side has been a bright spot and the industry will inevitably rise up and expand after COVID passes.

What advice do you have for your portfolio companies facing unprecedented surges right now?

It’s not advice so much as our perspective on the situation — scale is what matters in putting companies together that can weather this storm. That means a combination of cash, resources and geographic footprint is going to pay dividends for those companies on the other side of this.

What part of cannabis do you think is most apt to adopt technology?

With reduced workforces due to COVID – there are many opportunities for cannabis companies to look into ways to automate certain tasks such as crop-monitoring tools, extraction equipment, telecommunication tech to reach patients, etc. – there are many opportunities to bring innovative tech to the industry to help navigate new and unique challenges as result of the current pandemic.

Plus any other thoughts you want to share with TechCrunch readers.

As we saw with Prohibition being lifted because the government needed access to that revenue, every state’s going to need every single dollar they can get. As a result, once we get on the other side of this, you’re going to start seeing a little bit more willingness to discuss, if not pure federal legalization, then quasi-legalization.

Adult-use states will generate tremendous tax revenue from the increased cannabis sales during the pandemic demonstrating the value of the industry to state and local governments and helping make the case for legalization at the federal level.


Karan Wadhera, Casa Verde Capital LLC

What trends are you most excited about in cannabis from an investing perspective?

We are most excited about trends in the ancillary space, alongside consumer brands. Both share a key trait: scalability, which is ultimately at the core of our investment thesis. More specifically, we’re keen on sourcing opportunities in both data/analytics and compliance, among other areas.

How much time are you spending on cannabis right now? Is the market underheated, overheated, or just right?

We are a cannabis-focused fund, so 100% of our time is spent on the industry. If anything, the market is underheated at the moment. Last year, we began to see a massive pullback, first in the public markets and then eventually in private names as well.

What are you looking for in your next investment?

We look for three main attributes:

  • Fantastic founders with relevant experience, great energy and versatility
  • Focus on building long-term value by addressing structural aspects of the industry — not just solving a short-term issue
  • Ability to scale a business quickly with an asset-light approach that is unencumbered by regulation

How has COVID-19 impacted the cannabis investing landscape?

It is important to remember that the industry was already seeing depressed valuations and tightening liquidity ahead of the coronavirus outbreak. COVID is simply exacerbating the issue. Therefore, funds with dry powder will be in an envious position to invest in some of the most attractive opportunities in cannabis.

How has COVID-19 impacted cannabis startups operationally?

We’ve seen cannabis sales spike over the past 6-7 weeks, with a number of states deeming cannabis as an essential industry. As such, many companies are thriving, but like other essential businesses, cannabis operators are also faced with similar challenges around social distancing and employee health & safety.

Businesses like Dutchie, which help facilitate online ordering, have seen tremendous growth (650% increase in order volume, equating to $2.1 billion in annualized sales through the platform) as various dispensaries shift to an e-commerce and delivery strategy.

What advice do you have for your portfolio companies facing unprecedented surges right now?

Grow responsibly. There is an urge to solve problems quickly, which can often lead to sloppiness. We all want to meet the increasing demand we are seeing, but not at the expense of operational excellence.

What part of cannabis do you think is most apt to adopt technology?

Because we are effectively building this industry from scratch, almost every part of the ecosystem requires some bespoke/new/unique technology, making cannabis one of the most tech-forward industries in the world.

Plus any other thoughts you want to share with TechCrunch readers.

We think the private cannabis markets will produce the most compelling returns in the years to come. The majority of (investor) attention, to date, has been on the public market, which is largely made up of U.S. & Canadian operators. We find that to be rather limited and does not yet give investors access to the most attractive companies in fintech, compliance, SaaS, marketplaces and other scalable segments of the cannabis ecosystem


Larry Schnurmacher, Phyto Partners

What trends are you most excited about in cannabis from an investing perspective?

The capital flows are starting to come to the ancillary businesses that support the licensed operators; that’s where the bulk of the capital has been invested and unfortunately lost.

How much time are you spending on cannabis right now?

All my time is spent sourcing new investments in the cannabis industry.

Is the market underheated, overheated or just right?

The market is unwinding the bubble in the licensed operators that started in 2016 and boomed in 2018 only to bust in 2019. Much if not all of that capital was invested into licensed operators, growers and retailers operating in Canada mostly and some U.S. MSOs. That was overheated massively; it is now mostly washed out. Outside of the licensed operators, there is relatively limited investment activity. I think that will change in a big way.

What are you looking for in your next investment?

We focus our attention and capital on businesses that solve critical problems for the licensed operators. Adtech and digital marketing is a focus of ours. Also anything tech-related and has a data component. Cannabis industry is in desperate need for data in order to understand the market and the consumer. [Companies] that can collect that data and deliver actionable information will be very valuable.

How has COVID-19 impacted the cannabis investing landscape?

Capital flows have been halted and it has created opportunity to pause and reevaluate deals, mostly from valuation standpoint.

How has COVID-19 impacted cannabis startups operationally?

Most have had to cut costs and adapt to the operational challenges of social-distancing protocols.

What part of cannabis do you think is most apt to adopt technology?

The licensed growers need to get more technological, use AI and machine learning to grow better and cheaper, use less resources and in the supply chain, need technology to smooth out the logistics.

Plus any other thoughts you want to share with TechCrunch readers.

I think the COVID-19 crisis, both the health pandemic and the economic devastation from the shutdowns, will end up being positive catalysts for the future prospects of the cannabis industry and the businesses operating in and around the industry. Cannabis is now deemed an ESSENTIAL business, how can the federal government continue to classify it as illegal and harmful? And cannabis is showing itself to be recession-resistant and is not impacted negatively by economic downturns.


Mitch Baruchowitz, Merida Capital Partners

What trends are you most excited about in cannabis from an investing perspective?

We think medical research, new form factors and the continuing stability/safety of the legal market will attract cannabis patients and consumers to really drive the next leg of growth in the industry as they accelerate the cannibalization of the black market.

How much time are you spending on cannabis right now? Is the market underheated, overheated or just right?

We only invest in cannabis, ancillary companies and cannabis-related or adjacent companies.

What are you looking for in your next investment?

We look for an asymmetry in information, behavior or an undiscovered/emerging subsector as first gating factors. Couple the opportunity with a company with the mindset/professionalism to adjust on the fly in order to take advantage of that with deep expertise on the specific opportunity, and we start to really get excited.

Are there startups that you wish you would see in the industry but don’t?

Not really — it is all happening very quickly in the cannabis industry. As of right now, the entrepreneurship and pioneering spirit is a wonder to behold. There are an incredible number of entrants in every vertical in the industry and many of them have a creativity and innovative spirit that makes portfolio selection an art and science.

How has COVID-19 impacted the cannabis investing landscape?

We just put a piece out about this — we think it will be a huge catalyst for good by driving changes in the consumer/patient to want more certainty and safety in the products, and governments have made a wide variety of adjustments to show that they are finally taking the industry seriously in every way. We don’t know if the investing landscape has ever been this good for investors — many companies see valuations down 50% or more from the highs and the revenues and general momentum have never been growing this fast as spending gets more rational. That dislocation just doesn’t last very long in the market.

How has COVID-19 impacted cannabis startups operationally?

It has forced them to put a great deal more value on liquidity and access to capital. Companies are far more investor-friendly than they were a year or more ago as they realize that capital is what keeps growth moving forward unless you are throwing off strong cash flow, which only a few companies do so early in the industry’s life.

What advice do you have for your portfolio companies facing unprecedented surges right now?

Focus on building rock-solid foundation and think through what the return is on every dollar deployed, because you cannot un-spend money. Make sure if you are increasing headcount or spending, that revenue capture achieves something like profit, reduced burn, etc. Basically, don’t distort your vision or operation to chase shiny objects.

What part of cannabis do you think is most apt to adopt technology?

Cannabis is a tech-savvy industry. I think companies are starting to use data in innovative ways and as critical mass of consumer data builds, the area of business intelligence is about to go on hyperspeed in the industry


Morgan Paxhia, Poseidon Investment Management

What trends are you most excited about in cannabis from an investing perspective?

Over the last several years, we have seen quite a bit of investment capitalizing and exacerbating a fragmented ecosystem of cannabis. The industry’s capital crunch is forcing efficiency, what we (Poseidon) refer to as the “Darwin Phase” period. We think this period will thin the herd and better position the industry for its next phase. As a result, we are excited about specific U.S. markets, where we are focused on scaling strong operations and consolidating where attractive opportunities exist.

How much time are you spending on cannabis right now? Is the market underheated, overheated or just right?

100% of our time is managing our existing portfolio and looking at new opportunities in cannabis and industrial hemp.

The market is “underheated” from a capital flow perspective. Our industry is 27 months into a capital recession that was further impacted by the pandemic. Investor sentiment is at one of the lowest points we have seen since we started Poseidon, and we think this is a great contrarian moment in time.

What are you looking for in your next investment?

We are looking for synergistic investments whether they are plant-touching (grow, process, retail, distro) or in ancillary plays like technology and industrial hemp (not CBD). We are generally more growth-stage investors.

Are there startups that you wish you would see in the industry but don’t?

Not at this time but that could change very soon as we get a better sense of the post-COVID shelter-in-place world.

How has COVID-19 impacted the cannabis investing landscape?

Most U.S. cannabis markets were deemed essential and have continued operations through this time. For example, one of our portfolio companies just hit a new record high of sales this past week (per headset data).

Valuations have continued to trend lower, and took a leg lower in the pandemic, as investment appetite has been very low. We are starting to see greenshoots as investors are realizing that our industry is showing growth in a world that is otherwise in a very deep recession.

We were fortunate that we were mostly done raising our second fund, which was closed to outside capital on March 31st. However, many of the other cannabis funds had to shelve their new fund raises that were planned for 2020.

How has COVID-19 impacted cannabis startups operationally?

With less capital flowing in the space, we have seen startups pursuing capital raises that are much lower rounds and fewer successes at getting capital. We are OK with this as we have seen a lot of “me too” startups the last couple of years.

“In the midst of chaos, there is opportunity.” — Sun Tzu

What advice do you have for your portfolio companies facing unprecedented surges right now?

We were active early in the pandemic with our portfolio companies. We were encouraging revamp of 2020 budgets and another close review of their balance sheet. These active discussions were prior to cannabis being deemed essential, so we were taking a cautious approach. Many Poseidon companies were very thoughtful in repositioning their companies, reducing costs and extending runways into 2021.

There has been a lot of progress since the early weeks of the pandemic. Sales are improving but are still lumpy yet the cannabis system is seeing higher friction. Banking reform, such as SAFE Banking, would go a long way to improving the stability of the system, and the health.

What part of cannabis do you think is most apt to adopt technology?

Retailing has come a long way with technology tools from point-of-sale, data analytics, to today with most sales transacting over a website for pickup or delivery. We think retail will see continued changes to meet the needs of the post-COVID consumer behavior.

What will stick and what do you think won’t?

We will likely see some of the long-term winners survive and thrive through this time, a testament to strong management.

We think pre-rolls are likely a long-term category given their cost and convenience. We also think vape, edibles like gummies, are also sticking around for some time to come. Beverage is a category to watch. It has not had mass adoption for many reasons, but we are keeping an eye there.


Emily Paxhia, Poseidon Investment Management

What trends are you most excited about in cannabis from an investing perspective?

I am excited to see how the importance of having a good tech suite for cannabis is paying off. Operators are seeing the value of having true retail management platforms such as Flowhub to increase efficiency of the sales process and the seed to sale chain. Further, the data that is being collected and normalized across the industry through technology like Headset is becoming critically beneficial to the operators who are adjusting frequently as the markets evolve and mature.

How much time are you spending on cannabis right now? Is the market underheated, overheated or just right?

We spend 100% of our time on cannabis. This is a great industry with significant growth of over 30% year over year. The industry has traditionally been undercapitalized and this is still the case, so there is a tremendous amount of opportunity to lean in and participate in the growth. Cannabis has been deemed essential during this pandemic and so has largely remained open for business, this bodes well for the future of the industry.

What are you looking for in your next investment?

We are vetting dozens of opportunities at this moment. We are still very interested in supporting technology that improves operational efficiency of these businesses and increases the momentum of growth of the industry.

Are there startups that you wish you would see in the industry but don’t?

I don’t currently feel there is a gap, there is a lot of activity and plenty of deal flow. That said, we are always in search of the right teams. We are looking for those who have a mix of cannabis experience and who bring talent from adjacent industries in tech, CPG, wines & spirits or coffee. Cannabis is not easy, it requires grit, humility and attention to complex regulatory systems.

How has COVID-19 impacted the cannabis investing landscape?

In the beginning of March, we saw a serious retreat of capital, as investors fled to bolster existing companies or thier public portfolios. This has left many companies in desperate search of capital. However, the strong companies continue to obtain investment, so this might be a critical moment of separation of some of the winners of the space.

How has COVID-19 impacted cannabis startups operationally?

The startup scene has not been as impacted from operational standpoints, most quickly pivoted to working remotely, which is fairly streamlined by all of the  supporting tech platforms that are used outside of the industry. Most of us already used Slack, Zoom, etc., so  remote working continues seamlessly. We activated the downsizing of physical office spaces as this continued to better fit the new preferences of employees to feel safe. On the plant touching side, many operators like Sparc started manufacturing their own hand sanitizer and rapidly implemented safety measures (masks, gloves, sanitizing stations, glass dividers) to protect their staff and the customers. It has been a process, but they were quick to adapt and grateful to be open for business. Most retailers also shifted mostly to delivery or curbside pickup to minimize contact.

What advice do you have for your portfolio companies facing unprecedented surges right now?

Stay sharp, stay humble and be judicious with resources. COVID has taught us the world can change rapidly and not for the better in the short term, so it is good to be nimble and swift in challenging decision making scenarios. Our companies are surrounded by incredible advisors, so they have really worked with their knowledge sources to help navigate and to draw on the wisdom of those who have been through other macro crises.

What part of cannabis do you think is most apt to adopt technology?

Retail is going to become increasingly competitive both in brick and mortar and online, so they will need the platforms that improve their marketing strategies and shopping experience. Branded products will also need technology to inform new product development, branding strategies, sales channels decisions, etc. Data will drive all of this and with the market growing and evolving so quickly, they will need solid and adaptive technology.

What will stick and what do you think won’t?

Cannabis has the ability to continue to drive the economy forward, it is much more complex and fascinating than I think people understand at first glance. Technology will continue to contribute to the efficiency and precision of cultivation, the evolution of retail and the development of entirely new form factors for consumption. There is an incredible amount of momentum and building this industry is a part of the bigger picture of how people approach wellness, creativity and fun.