There are over 2,500 cannabis-licensed businesses in the state of Colorado and all of them are required to have “Seed to Sale” tracking software. The state government mandates the usage of seed to sale software to ensure the government can track all cannabis from when it is planted (seed) to when it is sold at a retail outlet (sale). This enables the government to guarantee all cannabis products are being sold in the legal market instead of being sold out the back door for the illegal market in Colorado and in other states.
To open a cannabis business in Colorado you need to be 21 years old or older, a Colorado resident, and have no past felonies. With those relatively easy guidelines, it’s no wonder there are more dispensaries in Colorado than Starbucks and Subway! There are ~600 dispensaries (900 licenses; some dispensaries have both a medical and recreational license) in the state of Colorado and that number doesn’t seem to stop going higher. With each new business entering the space, whether the business is in cultivating, processing, or dispensing, all companies in the industry must use seed to sale software.
This presents an excellent investment opportunity, as investors are able to be agnostic to a certain dispensary, producer, or processor as the software company can be in all of these segments. With the massive amount of people looking to capture a portion of the massive profits of the industry, this will cause an oversupply problem that will impact pricing and the profitability of those businesses that ‘touch the plant.’ Seed to sale companies operate with a SaaS business model and receive a 1 time setup fee of $500 – $2,000 and monthly recurring revenues of $200 – $2,000 depending on the size of the business. If we were to use conservative numbers and use $300 as the monthly subscription price, that would equate to monthly recurring revenues of $750k (2,500 licensed businesses * $300) and $9 million in annual recurring revenue… and that’s only in Colorado! Washington has 819 cannabis businesses and that state equates to ~$270k in monthly recurring revenues and $3.2 million for annual recurring revenue for seed to sale companies.
Many new states drawing up legislation will mandate the use of seed to sale software, which increases the Total Addressable Market (TAM) for seed to sale companies immensely. Unlike Dispensaries, Producers, or Processors, seed to sale companies can enter a state with ease as they make changes in the software to abide by the differences in cannabis laws from one state to another. Once a company has made a seed to sale solution, the product is able to run but has to be monitored for regulatory changes in the state where the software is operating. This translates into a high margin business that is easily scalable and is a pure play on the growth of cannabis businesses. As more and more states allow for medical and/or recreational cannabis, the more seed to sale software installations will need to be completed.
While the state government mandates the usage of seed to sale, these seed to sale companies are beginning to offer much more than just tracking the plants so businesses can be compliant with government. They are helping dispensaries understand their patient’s consumption patterns and which products are selling and those that are not. It helps processors and producers keep track of their grow so they can focus on growing cannabis instead of walking around with a pen and paper analyzing their grow which is time consuming and inefficient. What once started as a government mandate to have seed to sale tracking has now turned into a self-imposed business mandate to ensure they are running their businesses optimally.
Phyto Partners is focused on ancillary companies in the cannabis industry that are necessary for the cannabis industry to operate. In the case of seed to sale, all state governments seem to be mandating the implementation of seed to sale tracking which should enable the TAM of recurring revenue to increase significantly as more states enact medical/recreational cannabis programs. This vertical is an excellent way to play the growth of ‘cannabusinesses’ that provides investors with steady recurring cash flow growing at a very fast rate. If you are interested in learning more about cannabis investing or are looking to invest in the industry please visit https://www.phytopartners.com\//dev.