The 2 Most Important Factors You Need To Consider When Investing in Cannabis
Investing in the Cannabis industry is invigorating and is testing all classes of investment capital. Individual non-accredited investors, High Net Worths, Family Offices and Foreign and Institutional money all are operating in significant uncertainty and chaos. A maelstrom.
We believe that investment risk can be anticipated and managed by traditional underwriting practices such as robust financial review, sponsor credibility and evaluating the “at-risk” capital and its recovery/payback mechanism. We also believe that successful investing in cannabis requires an understanding of the industry’s lack of fluidity, general and on-going disarray and a largely untested or proven population of entrepreneurs that seek investment capital. With these ideas in mind, Goldstalk underwrites investments with the following in mind:
Uncertainty in governing bodies
Are there systemic public policy and governmental issues that impede predictable, planned growth? Are local and state laws helping or hurting our investment grow and be fully realized? We are aware that both cities and states enact laws and procedures of conduct that are mostly untested yet impact each cannabis founder’s plan to profitability. For example, enforcement of laws against illegal dispensing activity in Los Angeles is low (There are 700 plus dispensaries with more than 450 operating illegally) In today’s environment, a newly minted fully licensed dispensary is competing with a large number of dispensaries that illegally operate largely with impunity. Until the city has a history and system of successful management of license management and enforcement, legitimate businesses must include these unlicensed operators as “legitimate competitors” in their pro formas and plans for profitability and return of investment capital. It is also important to note that the conversation is different for each investment analysis, depending on the city and county and each license type (Cultivation, Lab Testing, Dispensing, Extraction, Distribution, etc).
Inevitable Failure: In the United States about 20% of traditional businesses fail in year 1 and about 50% of traditional businesses with employees will fail by year 5.
We assume the failure percentage will be slightly higher for cannabis founders due to inexperience in dealing with evolving and often unclear licensing practices, inconsistent margins, and unclear taxation, banking, and accountancy practices. Goldstalk targets founders and investment opportunities that are led by experienced and smart people that are least likely to be a statistic in the failure column and that are making accounting for the tumultuous nature of the industry right now.
Goldstalk remains conservatively optimistic and is careful not to dub the industry’s chaotic nature as bad or good. We believe that all investors should adopt a similar approach when evaluating an investment opportunity that is likely subject to the dynamic nature of the industry. Just knowing how volatile the industry is is useful when negotiating terms for repayment, investment amounts, ROI, and safety levers for managing risk.
Goldstalk was formed specifically to invest in and source high-quality cannabis opportunities for ourselves and investors. More information about our company can be found on our website located at WWW.GOLDSTALK.COM. Call our offices at (310) 400-5599 for information about how to successfully invest in the marijuana industry.