Cannabis & Psychedelics companies: Raise your money, fast!
The Capital Markets are headed for some major hurt. Private & public companies would be wise to prepare for higher costs and a tougher funding environment.
After many years of feeding the capital markets with cheap capital and Covid stimulus packages, central bankers have signalled that interest rates will rise. This new, publicly announced approach is a response to rising inflation (now at a 40 year high] and the realization that higher prices are not short-lived. It is quite conceivable that the Fed & Bank of Canada will raise its overnight borrowing rate by up to 175 basis points by the end of 2022.
Depending on the organization and their cost of debt, this bump may lead to a doubling of interest expenses not to mention more onerous lending terms.
There are serious financial implications for the cannabis & psychedelics industries:
1. The cost of capital will rise immediately. Pricey cannabis debt will become even more expensive, hindering profitability at most firms. Rising interest expenses will be particularly harmful for highly leveraged, EBITDA-challenged LPs and MSOs. Conversely, well-run companies who locked in lower cost borrowing in 2021 will be best able to weather this storm and emerge stronger than ever;
2. Valuations will take a (further) pounding, hampering the borrowing and equity raising capacity of firms. The public markets will be the first to experience the valuations hit (it may have already started) following soon afterwards by the private markets (they typically lag public markets by 4-6 months). Founders should expect to get an even shorter valuation hair cut during their 2022 equity raises;
3. A significant amount of early-stage capital and debt that would be earmarked for cannabis and psychedelics will instead be redeployed towards safer, higher quality equity and fixed income assets. Many small VC/debt funds and fickle angel investors – the lifeblood of early stage companies - will abandon these sectors reducing funding for Seed to Series B investments. Again, the better capitalized firms will transition out of 2022 stronger;
4. Companies may see an exodus of talent if their stock price falls precipitously. Key employees could find their options under water, view stock grants as less appealing and feel angst over their financially troubled employers.
Rising rates is not the only thing that can spook the capital markets in the short term. The prospect of war in the Ukraine and additional supply chain bottlenecks is quite high.
Prudent companies will look to raise less expensive, long-term money as quickly as possible, especially if they are in growth mode and can leverage a strong balance sheet and operating results.
#psychedelics #capitalmarkets #funding #valuations #interestrates #equitycapital