Q&A: Investing in Cannabis Startups; Focusing Your Cannabis Investment

Editor’s Note: Welcome to the Early Investing Mailbag. Each week, we answer questions we think will help you learn about investing in pre-IPO startups and cryptocurrencies. If you have any questions for us, please email us at mailbag@earlyinvesting.com. Just remember, we can only answer your general questions for information and strategy. We can’t offer personal advice.

Q: There are still anti-marijuana laws on the books at the federal level and in many states. Is it legal to invest in cannabis companies?

A: The answer is a qualified yes; it depends on which state. You just need to make sure the company you’re investing in is in compliance with the cannabis laws where it operates.

In most U.S. states today, only medical marijuana is legal. Startups in these states need to be restricted to medical use.

However, in the growing number of states where recreational marijuana is legal (Oregon, Colorado, California, Nevada, etc.) it’s pretty much wide open. The cannabis business is booming in these locations, and there are some incredibly attractive startups raising capital.

Whether you live in these states or not, you can generally invest in these startups. The hard part is getting access to the deals. You’ll need to network within the industry, show that you can add value and/or be able to cut a large check.

This is a unique time in the cannabis industry, because the vast majority of professional investors (hedge funds, venture capitalists, etc.) cannot invest in cannabis companies. That’s because marijuana is still illegal at a federal level.

So individual investors have a window of time here when they are essentially the only funding option for most cannabis companies. If you have the drive and motivation to get involved, you can certainly find some amazing deals.

Here are some quick tips:

  • Be prepared to say no to 95% of deals you see.
  • Invest in experienced entrepreneurs who have built successful businesses before.

Editor’s Note: To our Canadian members, we discovered on Friday the U.S. government is being less than friendly to people working in Canada’s legal marijuana industry. Essentially, the U.S. Customs and Border Protection agency is threatening to prevent Canadians that work in or invest in Canada’s legal and regulated marijuana industry from entering the United States, where marijuana use still violates federal law. In addition to not letting cannabis workers and investors into the country, CBP is suggesting they’ll ban members of Canada’s cannabis industry from the U.S. for life if they try to cross the border. The backlash to this action in the U.S. has been swift and severe. Nobody likes this. Hopefully, the government will back down. You can read more about this at Politico.

Q: I’m really interested in investing in cannabis stocks. Should I focus on companies that grow marijuana or that create marijuana “applications”? Or should I target another part of the cannabis industry?

A: I am more interested in marijuana applications these days. While growing can be very profitable, there is a glut of product coming to market in many states. This is causing prices to dive. In places like Oregon, prices have already dropped more than 50%. I expect to see this happen throughout the country over the next few years.

This is a tough environment for growers. So I like extraction and processing companies, vaporizer products, cannabis beverage startups, delivery businesses and generally the “pick and shovel” cannabis plays.

My best cannabis investment so far is a delivery company called Eaze in California.

There are more scientific companies growing quickly as well. There are cannabis startups that do genetic testing of cannabis to detect specific desirable traits. There are also companies building testing equipment to make sure cannabis is free of pesticides and other contaminants. And that’s just the tip of the iceberg.

Cannabis is going to be a big, big industry. The infrastructure to support it is being built out now. Until we can easily invest in publicly traded U.S. cannabis plays, I will continue to look at the private startup space. And I recommend you do too.

+ Early Investing Co-Founder Adam Sharp