According to New Frontier Financials, the cannabis market is expected to jump from $6.7 billion in 2016 to $22 billion by 2020. With all this expected growth, there is sure to be many thriving companies and others scratching their heads’ wondering how they didn’t capture the enormous tsunami of growth that is happening. While the market is growing rapidly, the amount of dispensaries, processors, and producers are increasing at a staggering rate. With this new emerging industry, everyone is trying to get a piece of the action which will result in a massive decrease in the price of cannabis. And unfortunately, the closure of many dispensaries, producers, and processors who can’t generate profit from the price war that is currently happening and that will only intensify.
At Phyto Partners, we see this massive opportunity, and have diligently identified the best verticals to invest our capital into this industry. We want to invest in companies that the government has mandated (lab testing, seed to sale, etc) and/or companies that help dispensaries, producers, and processors be more efficient (agricultural technology, B2B commerce, big data analytics). These are the sectors that will grow in log step with the industry. These entities aren’t dependent on the price of cannabis, supply and demand dynamics, and will grow as long as the industry continue to expand.
For example, a B2B wholesale company that takes a small fee for products transacted on its platform. Instead of being reliant upon the success of a particular dispensary, producer, or processor, the B2B trading company will thrive as the more participants are on its platform and more product is being created, bought and sold. This vertical is one of the best ways to participate in the growth of the industry as we are levered to the entire industry as opposed to individual businesses.
Another great sector in the industry is lab testing, which is a volume-based business that derives a fee for testing the safety, potency, and consistency of cannabis. In Colorado, there have been numerous recalls due to growers using harmful chemicals in the production of cannabis. States are realizing this issue and just recently California passed AB 266, a bill to mandate testing (among other things) for all cannabis statewide. Currently, less than 5% of cannabis is tested in California and that figure will jump 20 fold when the bill goes into effect. With the government mandating lab testing, this will allow testing labs to derive a sizable portion of the industry’s revenue in perpetuity.
Focusing our capital on businesses that benefit from the continued legislative reform, increased acceptance of cannabis as a health and wellness product and as pharmaceutical cannabis medications become researched studied and incorporated into healthcare solutions we think will produce outsized ROI for our partners and investors.