The drugs industry is changing. Should you invest in cannabis?

Previously in Exponential Investor, we’ve looked at how the illegal drugs industry is changing. Three forces are driving this change: the rise of “dark web” marketplaces; novel psychoactive substances (NPS); and decriminalisation. Our recent article looked at the first two – and today, we’re going to be taking a deep-dive into decriminalisation.

Why focus on decriminalisation at length? Simple: it’s where all the (legal) profit opportunities are.

This is quite an odd situation for us to find ourselves in – to consider backing something that’s illegal in the UK. Overseas, notably in the US, there has been a recent proliferation of cannabis-centric startups. There doesn’t appear to be any reason why UK investors can’t back these firms, despite our local laws. After all, they’re not doing anything illegal in the countries in which they operate.

So, should you buy cannabis?

By cannabis, we don’t mean bales of the drug, of course, but rather stocks in the firms that have sprung up to service this decriminalised industry.

Let’s take a step back, and see how the situation has arisen.

We’ve grown used to Dutch “coffee shops”, whose main business isn’t coffee. Using an alternative model, Portugal has moved to decriminalise drug users – with a view to using the healthcare system, instead of criminal justice, to deal with them. Even the UK police are starting to see sense on this, and the Secret Garden Party festival recently offered drug testing for visitors. A quarter of the drugs tested there ended up in the bin afterwards – because they were either contaminated, or fake. That’s a great way to get harmful drugs off the street, and nobody gets shot or jailed in the process.

America has been steadily rolling out medicalisation and legalisation for a while. While I fully recognise the medical value of cannabis, the US has seen a messy approach to decriminalisation of recreational marijuana use. In my view, it’s inappropriate and unhelpful to confuse recreational and medical use. I’ve seen many recreational US cannabis users get prescribed “medical” cannabis – and some of them clearly had a serious dependency problem. A drug provided ostensibly to make these people well was actually making them sick, and the doctors involved were either careless or complicit. That approach is bad for the integrity of the medical profession, and ultimately bad for users.

In the UK, we’re taking what may be the first steps towards legalisation. The recent All-Party Parliamentary Group on Drug Policy Reform report on the subject has recommended full legalisation of cannabis – but for medical use only. This might be a small step, but a commercially significant one. Even medical cannabis has to be grown, processed, packaged, and distributed – so there would be a legitimate business opportunity in the UK. It remains to be seen whether medical legalisation would lead to the UK emulating the US muddle. But if this does happen, expect a large legal market to arise eventually. We too could have legions of stoners rushing to their doctors, seeking prescriptions for insomnia, pain – or whatever else they can get away with.

Will cannabis be totally legal in the US?

The US is slowly moving to a fully-legal model for cannabis – typically via decriminalisation and licenced medical use. This is taking place in faltering steps, in a state-by-state patchwork of legislation. Whether this will be followed by similar moves for other drugs remains to be seen. For now, however, it’s seemingly safe to assume that any large, near-term markets will be in marijuana.

This is a major political move, and it’s creating a major industry. What we’re seeing here is seemingly a pending full-scale commercialisation of the cannabis marketplace in the US.

So what kind of drug businesses can you invest in?

In truth, there are quite a few. We can’t possibly cover them all here, but we’ll list a few niches and firms to give you an idea of the variety that’s out there.

Confident Cannabis is a laboratory information management system (LIMS), which’s focused on the cannabis industry. This is all about monitoring quality from various pot growers, and making the results accessible using product labelling and an online database. This approach is highly beneficial to users and the trade alike. One of the key benefits is to enable monitoring of the active ingredients: CBD and THC. Modern, high-THC strains are believed to be associated with the apparently-worsening impacts on mental health among cannabis users (chiefly paranoia and psychosis). Having reliable monitoring, and clear labelling, means that users know what they’re getting. Furthermore, the quality control process keeps purity high – as it’s able to spot any contaminants. It has been reported that Confident Cannabis ultimately plans to offer a marketplace. Other firms identified as wanting to win that particular fight include Amercanex, Cannabis Commodities Exchange, and Cannabis Hemp Exchange.

An alternative business model is based on rapid deliveries. Meadow is doing for dope what Deliveroo and Just Eat are doing for food: making the order management and delivery process work smoothly, so you get a legal supply of pot delivered when you want it. It can even arrange an online doctor to give you a prescription. However, it’s not without competition. HelloMD and Eaze also deal in telemedicine for potheads. Personally, I’d expect that the importance of online prescribing is likely to fall in future, as a recreational model rolls out. Legalisation doesn’t mean that these firms won’t have a future, they’ll just have to adapt. More generally, telemedicine is a great sector to back.

When it comes to software to help run a cannabis business, there are products which are just as dull and sensible as those you might use to run a car garage, or accountancy firm. MJ Freeway is one prominent brand in this space. Alternatively, Baker is addressing the customer-management side of the dope-selling business, providing services like loyalty management. The challenge of remaining legally compliant means that corporate customers are unlikely to have much freedom over their choice of platform – at least until the software market matures, and a wider variety of packages is made available.

If you’re looking to back the actual drug suppliers, take a look at Ebbu. Its approach is to make highly-controlled products, with specifically-designed outcomes. So whether you want to laugh hysterically at absolutely nothing, or just forget a hard day at the office, it’s developing a dope for you.

Just like you can vape nicotine products, you can also vape cannabis. Although smoking cannabis is believed to be much safer than smoking tobacco, vaping is likely to further reduce any residual risks. Popular brands of vape pen among cannabis smokers include Vuber and Ploom. Many users like to light up the old-fashioned way, and a plethora of brands are looking to serve this market. These include Grenco Science, which makes vape-like combustion pens. An alternative hardware approach is the production of fancy bongs from 3D-printed moulds, made by Printabowl.

Even more remote from the drug are the various lifestyle sites that are springing up around this industry. For example, is an Airbnb-style service which allows weed smokers to connect with each other when they travel. It’s currently got eight million listings, aggregated from other sites. This means it already has scale, when it comes to inventory. MassRoots is, by contrast, a social-network-style brand. These peripheral services may even be legal in prohibition jurisdictions – but do take specific legal advice before making any investments, or entrepreneurial moves, in the space.

So, there you have it: a whistle-stop tour of some of the significant sectors and firms in this market.

While the appeal of some of the more novel products and firms are undeniable, my personal preference in this market is to stick to the same sector that I like normally. These are the “boring businesses” of marketplaces, and business software. Marketplaces and delivery services are appealing, because they tend towards natural monopolies – with Amazon and eBay being obvious examples. Software firms are appealing – because they scale quickly, get great revenues, and are very sticky (meaning that users are hard to lure away to competing platforms).

Of course, I wouldn’t overlook the consumer products aspect – although it’s not my area of expertise. If you can develop the must-have vape pen, then this is a way to build a great brand. Apple’s iPod product, a must-have of yesteryear, is a great example of this strategy. The Holy Grail in this regard must surely be an integrated system, where users buy the hardware and consumables from the same firm. For a comparator: think how successful Gillette has been, with its razors and blades.

So in conclusion, do I think this is a promising sector? Hell yeah! The market is emergent, fragmented, and rapidly expanding. There’s a lot of money to be made.

Whether you’re a committed stoner, or a straight-laced business person, the opportunities are clear: it’s an ideal time to buy cannabis.

Category: Commodities

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