INVESTMENT STRATEGY
CANNABIS INDUSTRY
Green Rush Risk Management INVESTORS IN THE CANNABIS INDUSTRY MUST CAREFULLY EVALUATE ALL FACTORS AFFECTING THEIR TARGET MARKET TO MINIMIZE RISK.
By David Jacobs
T he California Gold Rush of the 19th century is an ideal study in risk management. The lure of unimaginable wealth and the romanticism of the American frontier pulled hundreds of thousands of fortune seekers to the soon-to-be state, each with their own schemes to tilt the tables of fate in their favor.
tap into the legal cannabis market successfully, and an analysis of overlooked risk factors is the first step toward a successful venture.
and due diligence in favor of quick profits. Profitable investment in the cannabis industry requires careful risk management and evaluation of all factors affecting the target market. Construction Risks. One of the largest risks to a successful cannabis venture, particularly one focused on cultivation, lies in the construction stage. Although this initial construction risk is typical across many industries, it is particularly burdensome for the cannabis industry. There are significant equipment costs, restrictions on development locations, and specialized knowledge required for proper installation of cultivation systems. Many states have adopted policies that allow cannabis cultivation, processing, and sales but limit the locations where these activities may be performed. For this reason, cannabis sites are often constructed in more remote locations, which may suffer from less efficient supply chains and a smaller pool of contractors to choose from. Even after investing the capital to procure necessary land, facilities, and equipment, developers can see their cannabis projects come to a halt if the available contractors do not have sufficient experience for the
WHAT ARE THE RISKS? The start of the Green Rush can be traced to the 2012 legalization of recreational cannabis consumption in Washington and Colorado. In the intervening decade, recreational consumption has been legalized in 20 more states with an additional 16 states allowing some form of medical usage. For real estate developers in the U.S., this represents a lucrative but risk-laden opportunity to tap into the multibillion-dollar legal market. Anyone who has performed basic due diligence on the cannabis mar- ket knows the largest risk factors are the lack of federal legalization and the inability to access traditional financing options. Although these factors certainly pose a challenge and have given rise to creative funding solutions, investing in the cannabis industry carries additional, more subtle, risks often overlooked by eager investors. Like those that sought to make their fortunes in the gold rushes of the 1800s, many cannabis investors forgo traditional risk mitigation
Many of these entrepreneurs succeeded in their quests and
established themselves as economic cornerstones of the fledgling Golden State. For most, however, the reality was far bleaker, and the results of their headlong rush included rampant criminal activity, degrada- tion of the local ecology, and the devastation of the native population. These diametric outcomes—feast or famine, elation or devastation—are by no means unique to the California Gold Rush. In fact, they can be observed in the Green Rush of today. As investors and entrepreneurs have surged into the cannabis market to try to capture a portion of the cur- rently estimated $13 billion industry, many have been relegated to the same fate as the less-fortunate gold seekers of the 19th century. As in any rush into a new industry, proper risk management protocols are often cast aside in an attempt to catch the initial wave of high profits. There are certainly opportunities to
38 | think realty magazine :: july – august 2023
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