Buckle up for more capital markets pain in cannabis
"There are decades where nothing happens; and there are weeks where decades happen" - Vladimir Ilyich Lenin
Its hard to be believe with all the cannabis sector’s recent trials and tribulations that things could get worse. I predicted a bumpy road back on November 7 and was challenged by some for being overly pessimistic. I was pessimistic – and right. As of today, NCV’s Global Cannabis Index is down approximately 15% since November.
Many pundits [sic] predict 2023 will be the year market caps bounce back. I disagree. The prognosis for 2023 remains poor.
Stock promoters and navel gazers tend to focus a lot on cannabis-specific issues but regularly ignore the impact of broader macroeconomic headwinds. The following forces are putting downward pressure on cannabis valuations and limiting available risk capital.
The demise of cheap money…
Pre Covid, most people believed that interest rates would hover around zero forever. The onset of high inflation punctured that thesis. Today, every cannabis business faces a cost of capital in the mid-teens – if their balance sheet can attract the funding. While the Fed and Bank of Canada could bring down rates by Q4 2023, borrowing costs will remain quite high for the foreseeable future.
Have stalled equity markets
There is an adage that bull markets don’t die of old age, they are killed by central bank rate increases. Rising interest rates punish all asset classes and markets, with risky sectors like cannabis hit particularly hard. Depressed equity markets will stifle public & private company valuations and M&A activity, while keeping employee options under water – hurting management retention.
Alternative investments are imploding…
Cannabis remains a reputationally challenged sector tracing to ongoing stigma, a pervasive bro culture and dodgy investor promotion. Add some dollops of crypto and IT cluster fcuks & frauds and voila: a pullback of jaded early-stage investors. Meanwhile, institutional money takes it all in and remains cautious.
Causing investors flee to safe harbours
Higher interest rates shorten investor time horizons, encouraging them to favour immediate profits to those in the distant future. Thus, growth investments are out and value investments like blue chips, real estate and high-quality bonds are in. Capital abundance before 2022 has turned into capital scarcity in 2023, particularly for pre-profitability raises.
Where do we go from here…
You can’t control the capital markets or the economic climate, but no one went broke making money. Keep building your business, and most of all, driving EBITDA. And pray we are not headed into a recession or this funk spills over into 2024. Things could get much worse.
#capitalmarkets #funding #capitalraising #marketcap #valuations