Cannabis compliance and point-of-sale software company Greenbits closed a $23 million round of series B funding last week. That leaves it in an enviable position, much like medical-use producer Clever Leaves, having found funding at a time when financing is at a virtual standstill in the industry.
The round was co-led by previous Greenbits investors Tiger Global and Snoop-backed venture capital firm Casa Verde. Negotiations on the round kicked off in December, before coronavirus became a global pandemic, but Casa Verde managing partner Karan Wadhera told Cheddar the firm’s bullishness on Greenbits’ market positioning, leadership and business strategy would have remained the same, regardless.
“Greenbits is a company that we have known for a long time. We feel like we understand the business well and feel like there are tremendous opportunities,” Wadhera said.
“To be fair these conversations started pre-pandemic but that wouldn’t have changed our position either way,” he added.
Greenbits intends to use the money to invest in product development, and building out new features and operations in additional markets.
“There is definitely the backdrop of the cannabis industry and some interesting market dynamics going on, but I think our investors, as we talked through the process of raising money, they really realized our unique position in the market, ” said Greenbits CEO Barry Saik, who joined the team in late 2019 after years of experience in tech at major companies like GoDaddy and Intuit.
The Greenbits and Clever Leaves transactions are bright spots in a dismal funding environment, related in part — but not entirely — to COVID-19.
Funding activity in cannabis is down about 80 percent in the past month compared to the same time last year, according to Steven Ernest, former business director at Viridian Capital Advisors. Throughout the week of April 6, the advisory firm which tracks cannabis mergers and acquisitions and funding, reported just one capital raise totaling $8.4 million. During the same week in 2019, the firm tallied 11 transactions in the cannabis industry that totaled $185.3 million.
It makes sense that funding activity would slow during a time of unprecedented global disruptions — like during a pandemic. Investors are too busy triaging — or championing — existing portfolio companies to bet on new ones.
“You are not seeing new money going into new ventures right now, because it is almost impossible to forecast revenue and profitability in an environment where 80 percent of businesses are not really operating,” Ernest said. “So the money you are seeing change hands in this environment is almost entirely based on large capital sources looking at their large portfolio companies saying, ‘What do we need to do to stop the holes in our biggest ships?’”
TOUGH YEAR FOR CANNABIS
For cannabis companies, it’s especially difficult to acquire new funding in the aftermath of a challenging year for the industry.
Cannabis capital markets began to crumble early on in 2019 as overly-exuberant investors realized — oftentimes too late — that they had overpaid for unprofitable companies operating in difficult markets. In the middle of the summer, doctors in the U.S. began noting a disturbing trend of deaths linked to illicit vape products. The subsequent vape crisis, which killed 68 and sickened more than 2,800 Americans only exacerbated what was shaping up to be a tough 2019.
“Towards the end of last year and up until the pandemic, cannabis has already been in a much tighter liquidity environment than broader ventures and broader private equity,” Casa Verde’s Wadhera said. “A lot of folks turned sour on investing in the space altogether — either they had massive losses or got burnt and either way don’t want any more exposure to cannabis. That was the environment we were in before COVID and COVID, just to some extent, exacerbated that further.”
Those two challenges would have been enough to weed out many operators with weak balance sheets, even without the added challenges posed by coronavirus. Already at the start of 2020, several companies including CannTrust and James E. Wagner Cultivation, Bloomberg reported, began filing for bankruptcy, or the equivalent in the U.S. where the federally illegal cannabis industry cannot seek bankruptcy protection.
PANDEMIC THREATENS CANNABIS EXTINCTION EVENT
An essential shift not only in the amount of funding available, but also — and perhaps more crucially — the kind of funding available, could make the next 12 months an extinction event for many operators in the industry.
“Consensus is from industry leaders right now that 60 percent of publicly-traded cannabis businesses will go out of business in the next 12 months,” Ernest said.
Marijuana Business Daily analyzed the financials of major firms in U.S. and Canadian cannabis industries and found that eight companies don’t have enough funding to last a full year. U.S. multistate operator Acreage Holdings had funding enough to last less than a month, according to the analysis. MedMen and iAnthus Capital, the report said, were better situated, with funding enough to last about 10 months.
Once the money runs out, it will be difficult for companies to raise money on attractive terms unless, like Greenbits, they have the confidence and backing of existing investors.
“For those [companies that] were sort of on the edge earlier this year, this is likely going to be a fatal event just because there will not be easy access to capital that companies in an emerging industry need,” said Eric Berlin, a cannabis law expert and partner at Dentons.
OUTLOOK FOR INDUSTRY - NOT OPERATORS - REMAINS BRIGHT
The future may not be bright for some cannabis operators, but investors and experts are still bullish on the future of the industry at large. In the past few years, political progress has charged forward in spite of ongoing challenges, both at the state level in the U.S. and nationwide in Canada. Even now, in spite of the economic downturn and barriers to access posed by coronavirus, consumer demand for cannabis has been robust. The industry hopes the appetite for cannabis will hold out, and in so doing prove that it, like alcohol, is recession-proof.
“We are not dealing with a failing industry,” Berlin said. “This industry is most certainly going to continue and continue to grow. If we look at where the industry is now compared to five years ago, it’s way ahead despite all these crises. And I suspect strongly that the industry will be ahead of where it is five years from now.”