The Biggest Lie in Cannabis is…
MJ Unpacked and ICBC are a rap. Like other cannabis conferences, there were plenty of bullish market estimates thrown about for new markets like Florida and Pennsylvania, along with Germany and Thailand.
Market potential is expressed through TAM, or the Total Addressable Market. In layman’s terms, this is the most ambitious and optimistic market size forecast one can surmise.
This post is a PSA to investors and operators (especially the naive and newbies) in the Cannabis & Hemp industries.
TAM is not a 4-letter word, but it should be. It is a weapon of mass capital destruction and investor deception.
Consider this recently published statement (redacted):
“XYZ firm estimates the total canna TAM could reach $483B and that’s just the THC side. Their models also suggest that hemp, which is used in everything from textiles and cosmetics to concrete and automobiles, has a potential global market of $456B; slap ‘em together and we’re talking about a ~trillion-dollar plant.”
Really? The total combined global market for wheat, aluminum, potash, and gold doesn’t come close to a trillion dollars.
TAM happy talk is not limited to cannabis & hemp companies. Highly reputable banks and consultancies also get it spectacularly wrong.
To wit, in the early 2000s BCG and McKinsey forecasted global e-commerce sales to hit $10T by 2015. The number is more like ~$5T today.
TAM should be banned from every pitch deck, pundit’s mouth, and business plan, for the following reasons:
1️⃣ Limited utility, except to wow investors and management
I understand the steak looks better with a little sizzle. The reality is that new markets never hit their TAM numbers over the forecasted period. In the meantime, you are investing for a market size that won’t materialize.
What people need to know is what and when something is going to happen in the short term, not how big a market could be in 5-10 years.
2️⃣ Obvious conflicts
Understand the motives of big TAM cheerleaders. Large numbers generate interest; small numbers, not so much.
3️⃣ Ignores what’s important
TAMs only tell half the story. They don’t tell you industry profitability or time to revenue and profit.
4️⃣ Built on shaky foundations
EVERY cannabis & hemp TAM I've seen features shaky assumptions around pricing & tax levels, intensity of the illicit economy and regulatory clarity. Relying on any TAM without validating their assumptions is dangerous.
TAM is here to stay. However, you can mitigate the hangover by:
✔️ Being skeptical
To get a realistic forecast, I square root every TAM.
✔️ Limiting the damage
Focus on a 1-2 yr time horizon. Anything beyond that is useless.
✔️ Verification
Drill into the financial, regulatory and strategic assumptions behind the estimates.
#germany #florida #pennsylvania #TAM #totaladressablemarket #marketsizing #thailand