Venture capital investments in the cannabis industry grew to more than $1 billion in 2018, a milestone for the sector — and they’ve already surpassed that level in 2019, new research shows.
As of mid-May 2019, venture capital firms have already set a new investing record, pouring $1.26 billion into 80 deals so far this year, according to new data from MGO | ELLO Alliance’s inaugural review of private investments in the cannabis sector. MGO | ELLO Alliance is a partnership between CPA and advisory firm MGO and cannabis-related investment banking and advisory firm ELLO. The report used figures from investments data provider PitchBook.
Cannabis is now legal for both recreational and medical use in ten states, as well as the District of Columbia, the Drug Policy Alliance shows. And according to the report, the number is expected to grow, with federal legalization for both medicinal and recreational use seen as inevitable by some.
“We, and most market participants, are cautiously optimistic that a change in federal rules around cannabis is coming within the next one to three years,” said Evan Eneman, chief executive officer of MGO | ELLO, via email. “Investments will accelerate if, and when, the federal government legalizes cannabis, and private investors who are either new to the industry or relative veterans are developing bullish investment theses and deploying capital into the industry in anticipation of this change.”
Venture capital firms have taken notice — and as the industry matures, the number of late-stage deals has grown.
MGO | ELLO expects the number of late-stage deals to eclipse the number of early-stage deals for the first time in the industry in 2019. Just over $600 million was invested in late-stage deals through mid-May 2019, as compared with $530 million in early-stage deals during the same period, according to the report.
This is compared with 2018, in which $494.3 million was invested in early-stage venture deals, as compared with $430.4 million invested in later stage deals, the report showed.
What’s more, the late-stage investing completed so far in 2019 was done in just nine deals, as compared to 18 deals in 2018, the data showed. This is compared with 70 early-stage deals in 2018 and 33 early-stage deals completed so far in 2019.
Private equity firms are getting into the cannabis game too, the report showed. In 2019, 19 private-equity deals valued in total at $474 million were completed in the industry, the report showed. In 2019 so far, nine deals have been completed by private-equity firms, with a total value of $44 million.
“This year’s volume is on pace to surpass last year’s mark,” the report said.
[II Deep Dive: Wall Street’s Invasion of the Legal Weed Market]
Most of the deals completed by private-equity firms were investments in companies based in the United States, the report showed. While Canada federally legalized marijuana consumption in 2018, investment in the Canadian market has been slower to pick up.
“Given the size of the US market, compared with the Canadian market, the overall opportunity to create value and generate returns for investors is far greater in the US,” Eneman said via email.
In 2018, venture capital firms invested $69.3 million in the Canadian cannabis industry, while private equity firms invested $140.4 million, the report showed.