Mirroring California, Canadian Cannabis Growers Accused of Overhyping Their Skills to Investors
Canada-based Tilray, Inc. touts itself as “one of the largest and most sophisticated producers of premium medical cannabis in the world” but now, nearly two years into the country’s legal cannabis experiment, the company is staring down a shortage of the “premium” pot that they’ve been promised.
"If I can go back 18 months, 12 months ago, I would have invested another $100 million, $200 million in terms of Canadian cultivation. That was a — that was a mistake. But we believed, we believed all the hype 18 months ago.”
So says Tilray CEO Brendan Kennedy who expects the Canadian market to suffer through a sea of mid-grade ganja for at least another 18-24 months until their supply issues can hopefully be resolved.
The problem started with heavily exaggerated pitch decks and plans being thrown at investors and moneymen who knew little or nothing about growing top shelf weed, or even what top shelf weed would look/smell/taste like, or what that would even matter to a consumer.
If you are looking to start a new sliced bread company and you are seeking investment, the market that you are looking to enter is pretty well-defined and documented making it essential that your pitch to potential investors be airtight. Common sense and simple internet searches (or even a stroll down the supermarket aisle) keep this process pretty transparent.
But for cannabis, the most qualified “experts” spent the past 10-20 years (or more) shredding receipts, paying cash, recording nothing, and sharing financial info with no one. The illicit marijuana market was (and is) enormous, but there has never been an accurate way to quantify it. Even if you could, we are seeing now that the black market and the legal market are apples and oranges for a multitude of reasons.
So, with no historical precedent to rely on, and would-be investors demanding the standard charts, graphs, and predictions they’d get from the sourdough industry, hopeful cannabis companies just started plugging numbers into pitch decks until something stuck to the wall.
This is a mirror image of what we see happening now in California. You can walk into 20 totally unrelated legal, licensed dispensaries in this states and they will all have the same bland, boring, over-branded bullshit as the last with truly jaw dropping weed being extremely hard to find.
This is because many of the best growers in Cali aren’t licensed by the state to produce their high quality product and they have up until now refused to sell out to some investor in order to get into the game. There are, of course, some exceptions to this rule.
KNOW YOUR WORTH (?)
The problem that Canadian investors have run into, both domestically, and while trying to poach known brands down here in the U.S. is how to come up with an accurate valuation of the company that they are looking to acquire or invest in. Of course, the grower who has ducked the law for decades and holds the SOP to kick out fiery 5-star weed is going to feel that he or she is worth X. The investors, focused solely on the bottom line, will want to offer x.
Enter the phrase “Funded Capacity”.
This term was introduced to the cannabis industry as a measure of how much a target cultivator could grow without any additional capital raise/funding. In other words, if we give you a million dollars, how much can you grow before you’d need more?
According to the Tilray CEO, most of the people who got asked that question either lied about or severely overestimated their ability to operate on that sort of scale. Most have found it difficult to boost production without sacrificing the quality that got them the opportunity in the first place.
Tilray’s stock value has tumbled in the wake of the mids-life-crisis the company finds itself in. The shares (NASDAQ:TLRY) were trading as low as $22.50 last August, then shot up to $300 within a month (cue the “hype” that Kennedy was lamenting about), but now hovers around $44/share.
The company hauled in roughly $43 million in sales in 2018, Canada’s first full year with legal weed. They predict sales to top $360 million next year, however, which would surely secure their spot as a frontrunner in the global cannabis market.
Any new industry will be full of hurdles, pitfalls, and hard lessons. Tilray is learning that multimillion dollar growth in the cannabis industry still starts with a seed and a cultivator who cares.