Is Bigger Better?

IS BIGGER BETTER in the cannabis industry? It’s a question a lot of entrepreneurs are asking themselves, as large cannabis companies continue to bleed enormous sums of cash.

In recent years, corporate players convinced investors that the only way to make a nice profit in cannabis was to get yourself some serious “scale.”

Today, many billions of dollars have been invested and lost, markets are in free fall, share prices have plummeted, hundreds of millions of grams of cannabis have been destroyed with over-production, and the industry is not even profitable as a whole.

Shortly after the 2016 elections that legalized adult use in California, Nevada, Massachusetts and Maine, the thinking was, “If you build it bigger, they will come.” But they did not come—or at least they haven’t yet.

Investors are upset (to say the least) and almost every stakeholder in the legal cannabis industry is in enormous financial pain. Customers feel it the most, having to pay ridiculously high prices for a lot of mediocre weed grown at scale. Employees feel it as they get laid off and see their wages collapse when corporate raiders take over companies.

A parade of executives with the finest Ivy League pedigrees and successful track records from a plethora of industries have completely failed to make their cannabis companies profitable. They’re feeling it, too, as the churn in the C-suites makes one dizzy and keeps headhunters busy.

Is Scale Just a Waiting Game?

After all this loss, it’s natural to begin questioning if “scale” is really all that good a thing. With many believing that federal legalization is coming within the next couple of years, there’s palpable exuberance at the prospect of being in the right position when that happens. The question of scale is often put in this context: the idea being that bigger will indeed be better someday.

“We view our scale, breadth and depth as a competitive advantage, one that we’ve been building since inception 12 years ago,” says Matt Darin, CEO of
Curaleaf, one of the country’s largest cannabis companies. “As the external environment becomes more challenging, both in cannabis and the broader economy, we’re in a strong position to leverage our asset base and drive margin improvement.

“What’s more, we’re nearing the end of our capex cycle as we’ve completed most of our large projects in the U.S., thus allowing us to drive greater operating cash flow to deploy to other key areas to further our growth such as international or accretive M&A.”

The largest companies and investors in the space are clearly doubling down on the “bigger is better” approach. There seems to be consensus that the losses investors are taking now are a down payment on big returns, post-legalization.

“Scale matters, especially in states with more heavily regulated cannabis markets—California, for example—and current legal and regulatory constraints often make vertical integration a requirement to enable robust returns,” says Matt Hawkins of Dallas, TX-based cannabis investment firm Entourage Effect Capital. “Despite investor losses in the U.S. and Canadian markets, we believe the smart move is to invest in the U.S. ahead of federal legalization while the entry point is compelling and where the future market opportunity is large and embedded.”

Authenticity Over Enormousness

Other folks are not so sure. When I talk to people who build their businesses around equity and sustainability, not just returns on investment, the consensus is much different.

“Bigger is not always better,” says Jesce Horton, CEO of Portland, OR-based craft cannabis cultivator LOWD. “Companies that grow large, without a solid foundation in efficiency, sustainability and customer service, quickly find themselves at a massive disadvantage in this market. Authentic brands who operate efficiently and demand customer loyalty in this increasingly competitive market is where I would place my bet.”

Entrepreneurs like Horton point to other agricultural, food and beverage, and consumer packaged goods (CPG) sectors where underdogs have snatched market share from companies that operate at scale. They say smaller farmers and family enterprises can collectively carve out lucrative stakes in their supply chains.

“A growing countercurrent to massive, multi-stage operations across the food economy is regional craft enterprises,” Doug Fine says. Fine is a regenerative hemp and cannabis farmer, author and advisor. In his book, American Hemp Farmer, he notes that craft beer could soon overtake mass-market beer in sales revenue.

“Because small-batch, farm-to-product cannabis and hemp is generally of superior quality and more environmentally friendly,