Has The Cannabis Bubble Burst? Experts Weigh In

The Green Rush seems to be stumbling into a crawl. What does this mean for your business?

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Has The Cannabis Bubble Burst? Experts Weigh In
Image credit: Sd Photography/500px | Getty Images
7 min read
Opinions expressed by Entrepreneur contributors are their own.

When Whoopi Goldberg and Maya Elisabeth started their cannabis company Whoopi & Maya in 2016, everything was looking up. They had the star power of an Oscar-winning actress, the experience of a veteran cannabis industry expert, and a well-designed medical brand that catered to women experiencing menstrual discomfort.

But they didn’t anticipate that the regulations, taxes, and competition from the illicit market in California would take its toll. This month, the two-state brand is closing shop. "The market was swallowed by the over 21. Suddenly you had to work in that venue," says Rick Cusick, co-founder of the company who says that Whoopi & Maya originally and clearly marketed as a medical product. "The regulations kept changing, there was never a good place to land. We were on a solid upward path, slowly but surely to become a cash positive company, but then the mishegoss in the industry slowed that ascent."

"Originally, it was not a friendy playing field," says Cusick. "The regulations and the government were not a friendly playing field, and cannabis is usually a very friendly playing field."

RELATED: California Cannabis Company MedMen Co-Founder Adam Bierman Steps Down As CEO

What’s happening to Whoopi & Maya is indicative of a trend sweeping the cannabis industry. The optimistic (some would say irrational) exuberance that has accompanied the Green Rush over the past few years has collided with the harsh reality of an oversaturated marketplace suffering the effects of high taxes, stringent regulations, competition, overvaluation, bad press, inaccessibility, and myriad of other factors that have made operating in the cannabis space a significant, sometimes fatal challenge.

Similar to the dot com boom and bust, many of the "firsts" in this industry have unfortunately paid a huge price. 

Eaze, a heralded cannabis delivery service that Silicon Valley hopeful investors eyed as the "Uber of pot," changed CEOs amid a round of layoffs cutting 36 employees. And an Eaze rep recently told Tech Crunch more layoffs are to be expected. MedMen's self-assured co-founder and CEO Adam Bierman is stepping down, and the company's attempt to renegotiate payment terms with vendors by using equity for those payments has raised serious concerns with investors.  Pax laid off over 100 employees in the fall of last year, blaming the cuts on "premature planning" and "revenue miss." Other companies reporting layoffs due to financial challenges include CannaCraft, Grupo Flor, and Lowell Farms. 

For the first time, Leafly's 2020 Jobs Report showed the states of California and Michigan lost 8,600 jobs in the legal cannabis industry. This is due to a regulatory "sunsetting" move from old systems of caregivers and medical companies into recreational licenses, without enough licenses to go around.

The public market plummets

Despite investor excitement around the cannabis industry, especially after Canada went nationally legal in 2018, the stock market madness of a few years ago has begun to crash and burn. The top five Canadian cannabis companies' stock prices have gone down 40 percent since August, as investors are showing lots less confidence in the public market. Early last year, several high profile mergers failed to materialize as a result of this concern.

What's going on?

"Investors have ratcheted up the pressure for these companies to become profitable or at least show that they are on the way to becoming profitable. And the industry hasn't been able to do that as quickly as they wanted," says Bill Peters, a reporter for Investor's Business Daily. "Because it's a new industry and it's tough to forecast, it's been harder to manage investors' expectations. Add to this the combination of overpromising and overdelivering, expanding into international markets that were too small, and more concerns about the protection companies in the U.S have regarding bankruptcy in a federally illegal market, and you have a bubble that seems to have burst or is still bursting."

Small companies feeling the heat

And it's not just the big public companies that are hitting the iceberg. Smaller companies across all sectors of the business—both plant-touching and nontouching—are dropping out of business. 

"It's a bloodbath," says Jigar Patel, President of NorCal Cannabis. While his company is doing well, Patel says that he is getting more and more requests from struggling companies to "take the keys," adding, "While we love to help everybody out, it's also understanding how they'd fit into our platform. And what really makes sense for them." 

Jon Avidor, Executive Chairman of The Shryne Group, one of the largest cannabis brands in California, echoes the concerns of many currently in the business.  "We're certainly owed money by all the major players, and some of that's net 30 money and some of that's you know now 90 days outstanding." 

Comparisons to the dot com bubble

Many see what's happening to cannabis now as analogous to what happened in the dot com industry in 2000. 

"Valuations went through the roof due to retail investors' irrational exuberance," wrote Ross O'Brien, founder of Bonaventure Equity, LLC, in a private, internal shareholder's letter. "Companies were going public prematurely and without fundamental metrics like revenue and profits. And just like in 2000, investors saw the potential of the internet and the rush to invest validated that it was here to stay. This Klondike mentality, however, lead to quick hits and even quicker failures. And just like the dot.com bubble validated that the internet is not an investment cycle but actually a technological advancement that is here to stay. Investors are validating that cannabis is not going anywhere."

It's not all doom and gloom

While most industry analysts saw the dip coming, they did not anticipate it happening so quickly. But now that it's here, they believe cannabis is about to enter a new, more mature phase.

Call it Cannabis 2.0. 

"This is an emerging industry," says O'Brien. "Failure is just part of the game. We shouldn't be running around like the sky is falling because companies are failing. If anything, this is the kind of growing pains that give us confidence that the emerging businesses that are managing through this are durable, sustainable enterprises for the long term."

Kim Kovacs, President of The Arcview Group, a leading cannabis investor organization, also sees light at the end of the tunnel. "I think the exuberance was an anomaly.  A lot of investors actually felt reluctant to get in the space," she says. "Because nobody was doing due diligence. There was no financial acumen. But people were throwing money anyway because it was that exuberance investment, and they wanted to be in the space. Those times are over."

Kovacs says that many Arcview investors were waiting for that first wave of excitement to go through. "Now what's happening is that if a company is not going to pass due diligence, our investors are not going to spend time on them. We're going to tell those companies this is what they need to go do and then come back."

This kind of tough love will separate the strong companies from the weak. "The companies that have the money and have the means to go and get there because they've been running leaner, or they've been looking at things from a profitability perspective, they're gonna be able to step in and buy those devalued companies. So I think there's gonna be a massive market for acquisitions. I think there's going to be a massive market for net new companies coming in and taking market share from those that aren't doing well."

In the next edition of our new series "Surviving The Crash," we'll talk to industry experts about what your cannabis company can do to avoid taking a hit. 

 

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