The fast growing cannabis sector is set to become much more interesting – and lucrative.
Here’s the thing. The industry is raising money by leaps and bounds as cannabis enters the mainstream and is set to become a $150 billion global industry.
And I’m forecasting that we will see far more than the mere handful of marijuana stocks trading on major U.S. exchanges in as little as a few months’ time.
After all, pre-IPO funding is moving at a frantic pace. New data by Veridian Capital Advisors shows that private funding in just the first five months of this year has more than doubled to $1.9 billion.
And this is where my background in Silicon Valley’s venture-capital world comes in handy. It gives me a leg up in separating the winners from the losers once the stocks go public.
It’s one of the reasons why over the last several years, I have handed readers of my paid services 192 double or triple digit wins.
With that in mind, today I am going to share with you three venture capitalist (VC) tools that can help you find winning investments. Before everyone else jumps on board…
Building My “Hot List”
Besides serving as an advisory board member to the VC firm Sensei Partners, I also worked as a strategic consultant to a dozen high-tech startups.
It’s no exaggeration to say that I’ve been following private funding for more than 20 years now. It’s one of the ways I build my investing hot list long before these exciting firms go public.
Consider the case of Sequenom. I advised that firm on its operations more than 20 years ago and knew it would be a winner.
When the biotech company went public in 2000, shares rose 200%. In 2016, it got sold to Laboratory Corp. of America Holdings (NYSE:LH) for $371 million.
Now you know why I like to tell investors that if you want to make big money in cutting-edge fields like technology or cannabis, think like a venture capitalist.
So, you can imagine how excited I was to get the recent cannabis funding report from Veridian.
The data shows that in the first five months of this year, there were 91 private funding deals. That equates to 32% of the $6.5 billion in cannabis funding for the period.
In other words, marijuana is set to become a target-rich environment for savvy investors.
In fact, I’ve been asked to moderate a panel on cannabis investing at the MoneyShow San Francisco, an event that runs August 15-17.
With that in mind, today I want to share with you three VC tools for cannabis investing. Take a look:
Cannabis VC Tool No. 1: Seek Expansive Markets
There’s a very good reason why this tops the list of VC tools.
Fact is, VC firms look at hundreds of potential deals a year. Few get funded, in part because the sector they seek to disrupt is just too small or growing too slowly to justify the risk.
Focusing on a large potential market serves as a quick filter to determine if it’s even worth reading the rest of the pitch. The smaller the sector, the harder it is to get other investors interested as well.
Please don’t gloss over that last item. We are after all looking for a successful exit in the form of an IPO or corporate takeover.
It’s a lot easier to get others involved in the deal if the market is worth North of $10 billion and growing by double digits every year. Ideally, we want to know that the addressable market will double in a decade or less.
Here’s out it works out mathematically. Let’s assume our startup is looking at only a $10 billion segment of the cannabis industry that is growing by 15%, with a 20% market share in mind.
That gives us potential annual revenue of $400 million five years out. All other things being equal, this is definitely worth pursuing – there are plenty of publicly traded small-cap growth firms that have yet to hit that sales threshold.
Cannabis VC Tool No. 2: Focus On Scale
Investing in a startup is a bit like buying a yacht – it has the potential to suck gobs of cash down the drain for many years.
Growth firms require massive investments in personnel, marketing, distribution, technology and sales. It adds up quickly, which is why so many startups need millions in several funding rounds before ever going public.
Scale is important because it means that once the company has built out its franchise, its costs fall sharply and profits start to really take off
A classic example of this comes outside of cannabis. Facebook Inc. (Nasdaq:FB) was able to turn a profit about five years after its founding. Today, it has massive scale, with 2 billion average monthly users.
It’s unlikely we’ll see anything of that scale in cannabis. But we still need to keep this principle firmly in mind.
Let’s say a well-run dispensary is seeking VC money to fund its expansion. If the firm only wants to remain a niche regional player, it’s not likely to payoff.
There’s just not enough upside in a cannabis market that will be worth roughly $150 billion by 2025.
On the other hand, a startup that offered cloud-based supply-chain management software would be onto something.
Just facilitating 10% of that segment gives us a $15 billion target with the kind high profit margins that the cloud almost guarantees.
And of course, it’s not just the cloud. Take 5G cellular technology.
The tech is projected to turn into a $12 trillion space. So you can imagine why there are literally hundreds of 5G firms vying to beat the competition.
You’ve got the big guns – firms like Apple, Qualcomm, Samsung and the like. They’ll probably do ok from 5G.
But we’ve found one company that could be a future household name thanks to their patented “small cell” technology that’s an essential component in nearly every 5G network being built across the country.
They could be on the verge of a breakout, yet their stock is trading at just over $5.
But that’s not likely to last for long.
Cannabis VC Tool No. 3: Hire Visionary Leaders
When you’re funding a firm, you’re basically hiring its leaders to execute their business plans, and give you a profitable exit.
By definition, evaluating leaders is the hardest thing to actually quantify. There’s no real formula for measuring those skills.
But they’re vital. A startup needs to work along many parallel tracks at the same time, like marketing, product development and sales.
At the top of the list, of course, is hiring skilled personnel without which no startup can grow. The “soft skills” required to succeed here means our execs need to know three main things:
- How to spot talent.
- Have the resources to hire great workers.
- The personality and incentives to keep them on board and fully engaged in the mission.
Those are really just what I call the “mechanics” of dealing with personnel. And to some extent they can be learned.
What’s difficult to teach, however, is the most important soft skill of all – the Big Vision. We’re looking for leaders who have a messianic view of the company’s role in the cannabis industry.
We want executives who get out of bed every day looking to disrupt the status quo and change the world around them.
These kinds of leaders inspire great loyalty that can make the difference between a mediocre firm and one so successful it’s like they’re actually printing cash for their investors.
Strictly speaking, I don’t confine these tools to private companies alone. I use them all the time when selecting stocks for members of my monthly newsletter the Nova-X Report.
That’s because using these tools keeps me thinking like a venture capitalist.
And it’s a big reason why we have an 86% win rate on all open positions.
So, if you’d like to greatly improve your net worth, you can subscribe to Nova-X by clicking here.
You quickly find out just how valuable my three VC tools can be.
Cheers and good investing,
Michael A. Robinson