If retail investors want to get a glimpse of future stock offerings in cannabis, one way to do it is by seeing where venture capitalists or family offices in the space are putting their money now.
These and other players such as high net worth individuals and some private equity firms populate the private market for startups aiming to be the next major player in legal cannabis.
For example, before Valens GroWorks Corp. (VGWCF) became the largest pure-play cannabis extraction and testing player in Canada that trades on the OTC and the Canadian Securities Exchange, the B.C.-based company first raised capital from its founders with no outside capital. The practice, often called boot strapping, means that the company got itself off the ground without outside investors.
Once it got up and running, Valens GroWorks tapped high net worth individuals and institutional investors that focus on start-ups in a series of offerings. Most recently, in September, Valens raised about $20 million in a bought deal private placement with underwriters AltaCorp Capital Inc., Mackie Research Capital Corp. and Beacon Securities Ltd.
The offering was a success for the company as venture capitalists, private equity firms and family office investors get behind the overall business of oil, vapes and edibles -- in a big way.
In 2018, the infused products and extracts sector drew 82 capital raising events including stock offerings, mergers and private investments for total of $507 million, according to Viridan Capital Advisors, the New York-based research firm. That's up nearly six fold from $90 million of activity in 2017 via 36 transactions.
Following this so-called smart money into infused products and extract reveals a potentially bright future for stocks in this part of the business for investors looking for the next trend ahead of the pack.
This indicator can make incumbents such as Valens GroWorks and others even more attractive right now, even as private money continues to flow into companies that may soon go public either in Canada or possibly the U.S. down the road.
With cannabis companies unable to get loans from banks because cannabis remains illegal under U.S. federal law, private capital investors continue to fuel growth in the industry.
"There certainly is a place in the cannabis business for participation from private equity, venture capital, institutional investors, and family offices and high net worth individuals to help fuel the industry," said Andrew Berman, CEO of Harborside, the Oakland, Calif. vertically integrated cannabis firm that is going public this year on the Canadian Securities Exchange through a reverse takeover of Lineage Grow Co. "For a couple of years, Harborside raised capital through friends and family rounds. In 2017, more traditional investment vehicles also stepped in. These groups have helped many industries develop, such as technology, health care, biotech, and education, and now they are in cannabis. They're an important part of any industry's growth."
In November, Harborside raised $27 million USD in a Series B convertible debenture financing led by Navy Capital, with participation from Tidal Royalty Corp. and Salveo Partners, LLC. The investment marked the first by Salveo in a company that directly "touched" the cannabis plant through cultivation and retailing.
"There's more willingness now to step into the plant touching side," Berman said. "We've previously seen capital coming into ancillary businesses. Now it's nice to have those same types of investors -- those familiar with the business -- expand their interests."
Emily Paxhia, managing director of Poseidon Asset Management LLC and an investor in GTI, SPARC, Flow Kana Harborside and more than 30 cannabis companies, said her firm sees opportunities in services and technology that help integrated cannabis operators improve their business.
"We're focused on ancillary components of the business -- software and technology, building cannabis business infrastructure, machine learning, data analytics to analyze consumer behavior and drive decisions being made further up the supply chain," Paxhia said. "We also like device technology backed by software. Some of these opportunities will hit retail capital markets within the next five years."
One investment the firm made in the vape category was Pax Labs, which makes high quality vaporizers that come with their own software app to let users lock their devices to prevent unwanted use and customize vapor and flavor output. The company has yet to go public.
Paxhia and her brother Morgan started investing in cannabis in 2014 and she has already seen exits in Poseidon's stakes in seven portfolio companies. Those include a company that went public on the Swedish Nasdaq exchange, as well as a stake in Canada's Aphria (APHA) , which it fully exited early last year.
Micah Tapman, managing partner and co-founder of 7thirty Capital, said he came from a cyber security background after and started investing in cannabis in 2014. He worked at CanopyBoulder business accelerator before launching his firm last year. All told, he's already made about 100 investments in cannabis, with a focus on business logistics, or the so-called picks and shovels in the green gold rush of cannabis.
"We want to invest in the infrastructure of the industry," Tapman said. "We like to think about where people will look for investment in the next five years. No question, it's the supply chain -- extraction and converting the raw product into a finished good. It's going to be about the brands driving consumer loyalty and introducing new products to the market and distributors for everything from cannabis dispensaries to pet food."
The cannabis industry will reach bridge products in natural food stores, mainstream supermarkets, the wellness category and others.
Just as BASF as a chemicals maker or Delphi (DLPH) as the leading auto parts maker have positioned themselves as makers of components in many products, cannabis will develop its own major players involved in products across multiple categories.
"Smart investors realize that a lot of the infrastructure for all that is non-existent in the cannabis industry," Tapman said. "There's a real question over who will create these networks."
Some investments in this vein are already available to retail investors, he said.
Among them, Valens GroWorks will continue to play a prominent logistical role as a partner in extraction and cannabis refiner for branded vape oils, edibles and beverages through its major extraction facility in Kelowna, British Columbia.
"They have one of the leading extraction facilities in Canada, with the lowest cost of production and a nearby distribution channel from their airport," Tapman said. "They're an infrastructure provider for the Canadian market."
Currently raising a $30 million fund, Tapman sees opportunity in the rapidly changing cannabis landscape. Cost of production will come down as growers scale up. Prices will come down. Supply chain management, which will become more critical, now offers ample investment opportunities over the next two or three years.
"People don't know how to do mass marijuana cultivation yet," Tapman said. "The early adopters in the space are not cost effective. Those facilities are being sold and new cultivators are coming online with lower cost facilities."
He also sees a big opportunity to improve financial and insurance services in the industry as major banks continue to stay away.
So, while cannabis remains a nascent industry leaning toward more oil and edibles growth, private market players like Tapman and Paxhia continue to see more places than ever to place capital and spot trends.
"The term I use is green fields," Tapman said. "There's nothing there -- it's an open field. When you're starting from scratch...you can do anything you want. That's where we are with cannabis."