Business Ideas for Those Who Don't Want to 'Touch the Plant'
In the last few years, as states have begun to legalize medical and recreational cannabis at a rapid clip, the focus for traditional investors often has been on businesses intimately tied to the plant and its derivative products: cultivators, processors, distributors, and dispensaries.
And yet the picks and shovels of this modern gold rush -- the ancillary marijuana businesses that don’t “touch the plant” -- continue to thrive. These companies are an undervalued investment opportunity for those seeking a lower-risk gateway to this exciting new space.
From Software to Hardware
In my M&A scouting duties over the past decade for General Cannabis Corp. (OTCQX: CANN) as well as other industries prior to that, I’ve stayed on top of the business needs of emerging markets -- and, of course, ancillary businesses are present just about everywhere you look. Just think about the developers of seed-to-sale compliance software like METRC or BioTrackTHC, the packaging for products from dried flower to concentrates, the providers of cultivation equipment and supplies such as Scotts Miracle-Gro subsidiary Hawthorne Gardening Company, and the point-of-sale software and analytics firms like Baker and BDS Analytics.
Clearly, there’s room for more businesses that can figure out complex data analysis, customer loyalty, and online ordering technologies.
Less sexy -- though still important-- other ancillary companies thriving within the cannabis industry include human resources professionals, lawyers, and accountants. Real estate businesses owe a lot to the cannabis industry as well, even if they don’t work directly with these marijuana companies, because of the uptick in industrial property values. There have been substantial spikes in warehouse and commercial property values in cannabis-legal states and now marijuana-minded real estate investment trusts (REITs) are finding a foothold.
And other ancillary opportunities somehow defy categorization. For example, the company Eaze appears to be a plant-touching business, but a quick look at their careers page reveals that their actual focus is technology and logistics -- a sophisticated online platform that helps dispensaries sell online and deliver to their customers.
Fewer Legal Hurdles
And there’s a reason in-the-know investors are drawn to these opportunities, namely the countless advantages ancillary businesses maintain in the current legal climate.
There are fewer issues with trademarking and taking intellectual property to other states. The interstate movement of non-cannabis goods is legal, and these products and services aren’t subject to the tightly regulated cannabis business environment. It’s also a more diverse playground. In these still-early days, there are seemingly thousands of unmet needs, and that’s the gap ancillary businesses can fill.
Ancillary businesses hold additional allure when it comes to due diligence because they tend to come with more realistic valuations tied to more grounded financials, along with the ability to draw comparable data from parallel mainstream industries.
With a multitude of opportunities to find their niche, ancillary companies with vision have an advantage over most businesses that produce cannabis products, where there is high competition, razor-thin margins, and bigger roadblocks to getting a piece of the pie.
Several of these areas are primed for growth. Seed-to-sale compliance software is a big one, as no one has truly cornered the market on this vital tool for producers, distributors, and dispensaries. Anything involving automation on the cultivation and compliance end (I’m thinking of Simplifya) could also thrive now that operations are larger and leaner.
The market has also seen an uptick in industry-specific staffing companies and recruiters, speaking to the need for specialized and experienced talent in an industry where few people have more than a few years of experience.
But because of that lack of experience, especially in emerging markets, consulting is another big growth area. When my colleagues and I at General Cannabis were looking to acquire another ancillary company, cultivation and business operations adviser Next Big Crop stood out. The management team had extensive expertise in designing, building and operating large-scale operations in Colorado, and we appreciated how their business model centered around helping others with maintaining regulatory compliance, which should be a keystone for any cannabis company that wants to make it in the long term.
The Rise of Finance Services
It is worth noting that even hands-off companies face potential problems. Storage solutions business Stashlogix had its Chinese-made cases stopped at customs and held as “paraphernalia.” From insurance and employee benefits to banking services, traditional institutions often look at how cannabis-related businesses derive their income, and even marijuana industry lawyers and advocacy groups have seen their bank accounts closed.
Many of these issues should soon be resolved, but in the meantime, banking and financial services could truly expand, especially if startups and established businesses are willing to take a risk while the federal government’s approach to cannabis remains in limbo.
The truth is, the cannabis industry would not be where it is today without the ancillary businesses around to help grow infrastructure. They fill a necessary role and deserve to be considered as serious players in the market.