How Will the Cannabis Industry Grow Through the ‘Terrible Twos’?

In parenting, the “terrible twos” are when babies are just starting to learn what they are capable of doing.

“Hey, look at this—I can move around! Hmmm, I can communicate, and people will be riveted by it. Hey, I think I’m the most interesting thing in the room. Yep, sure am!”

This transition in itself creates a whole host of conflicts—temper tantrums, learning to say no, and a fair amount of general bumbling. As the Mayo Clinic describes it, “The terrible twos typically occur when toddlers begin to struggle between their reliance on adults and their desire for independence.”

 

Cannabis Just Turning 2, In Most People’s Eyes

If you can forgive the rather liberal stretching of the analogy here, there are a lot of correlations between cannabis as an industry and this key stage of human development. Yes, the industry is much more than two years old, but that is the age the cannabis industry looks and feels to a lot of money managers, and frankly to most of the outside world. Why? Because this is year two of legal recreational cannabis in Colorado, and because Colorado is the epicenter of the cannabis universe, and because America seems to be the epicenter of everything else.

Egocentric? Absolutely. But also true. Here in America, we are the tastemakers to the world. We export our culture more efficiently and effectively than any other country, for better or worse. And until California comes online, Colorado is it; it will bring in massively more revenue than Oregon, and Colorado’s model is the one being used the most to create demographic and revenue templates for other areas of the country. And it is pretty hard to argue against Colorado having the most thriving cannabis entrepreneur talent pool in the world right now.

 

Surviving Cannabis’ Terrible Twos

Does the cannabis industry deserve to be treated like an infant? Yes and no. To pretend that all of the recent independence and freedom the cannabis industry has, especially when compared to just 10 years ago, just popped up spontaneously belies the massive work done by braver souls than most of us will ever be, and whose shoulders the industry is walking on today.

But the truth is that most outside observers, large institutional money managers and hedge funds, are locked in a current holding pattern of “casually paying attention,” “half interested,” or “not bothered but concerned” as legal cannabis in Colorado hits year two. They only care about the trendlines and the timetables—the catalysts.

Most money managers, regardless of whether they consume cannabis themselves, see the end market potential. Even the fiduciaries who may ultimately decide not to invest in the space for “socially conscious” reasons have a good sense of how big it could become. But for now they are sitting back and waiting, because in addition to the potential they also see a lot of mismanagement.

The mainline investment community cares about trendlines—How is the growth? Give me the comparables. That is what the guys and gals managing billions of dollars for their clients want to see. It is the exact same trend data they want to see for say, healthcare companies, airlines, and energy companies. They care about the timetables—How long before key breakpoints are hit, like a rescheduling of cannabis or the end of prohibition in key states like California? How long before nationwide polling trends consistently hit above 60%, the rate at which most politicians give up taking hard stances on the opposite side of an issue?

These are what the deep pockets are sitting around discussing right now. These are the questions being asked in the C-suites at places like Pfizer (NYSE: PFE), Kraft Foods Group (NASDAQ: KRFT), and Altria Group (NYSE: MO). Those timetables will determine when those with the biggest long-term vested interests will dive in with their dollars, time, and credibility.

 

Parting Thoughts for Entrepreneurs and Investors

Rather than be upset or offended by the lack of attention some people may be paying out there, cannabis activists and entrepreneurs need to strategize around it. They need to act like they are in it for the long haul, because the industry is being watched as much for its behavior—the way it goes about its business—as is it being watched for the amount of tax revenue it is earning.

For stock investors, we need to remain diligent in our insistence on solid, transparent reporting by companies involved in the space. A lot of the highly publicized problems with penny stocks, SEC inquiries, and diluted equities stems not from from a systemic problem within the cannabis industry but a systemic problem within the stock markets. Vultures and predators prey on fast-growing industries that have a dedicated “fan base” of investors. We see the same things occur in areas like gold mining, development-stage biotechs, and social media stocks with nothing but “monthly active users.”

For the industry to attract the mainstream investment dollars that it needs to become, well, mainstream, it needs to make it through this year without fumbling the ball too many times. No unforced errors. It is new terrain to all of us, but sympathy will not make a stock price go up or a venture capitalist come knocking. Execution and steady growth, however, certainly will. So the fact that in year two, Colorado is generating impressive revenue growth—10% sequentially, over 100% year-over-year—is just about the most important stat on the planet to cannabis advocates, investors, and business owners. In year one there was a built-in market, and we knew that; in year two the industry is growing because of smart business owners, a trend that needs to continue.

The cannabis industry may just be crawling now, but soon it will be walking, talking, and running around. The groundwork the industry can lay now in terms of good stewardship and thoughtful promotion will pay massive dividends down the road if it is done with broader goals in mind. If the industry grows up strong, with good values, it could be a $100 billion industry within a decade. Or, it could end up like that kid down the block your mom didn’t ever want you playing with. The onus is on us, and that should be perceived as a privilege, not a burden.

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