Cannabis investing: Avoid these 5 common pitfalls

  • FOMO, confirmation bias result in irresponsible investments.
  • Identifying competitive advantages and applying lessons learned greatly mitigates risk.

Investor´s appetite for the global cannabis industry continues trending up. As new markets come online with fresh regulation, like Mexico, Morocco or Ecuador, local entrepreneurs rush to capitalize on the opportunity. However, well established companies and start-up entrepreneurs alike seem to be falling into the same pitfalls. What are the 5 most common mistakes we´re observing from industry newcomers?

Impulse-driven decision making

Paralysis by analysis will kill any opportunity. And the ability to execute fast and effectively is a common trait of most successful entrepreneurs. That doesn´t mean that you should model your investment based on intuition alone. The first step in your actionable plan should focus on discovery, due diligence, and design. Depending on your previous knowledge of the cannabis industry, and business experience in general, this will take weeks or months. Make sure your plan is based on real world data and avoid the overwhelming amount of misinformation and hype flooding the internet.

Anxiety to get in early before the sector continues to mature  

Take a step back and gain perspective. In generational terms, the cannabis industry is still in its infancy. Think of the internet during its first decade of existence and how it has evolved since. Science is just starting to catch up. Volume of medical prescriptions is nowhere near its potential. Dozens of industrialized countries are yet to join the global legalization trend. First mover advantage is real, but there are also obvious benefits in tucking in behind the slipstream.

Lack of nuanced understanding of the cannabis industry

Cannabis is not a sector, but a myriad of sectors. Scientific research, agriculture, industrial processing, chemistry, pharma, retail, regulation… All these activities differ greatly from one another and require specific, often unrelated skills. The dynamics that influence the recreational market often don´t apply to the medical cannabis segment. And industrial hemp is a different universe altogether. Confirmation bias, the act of interpreting information in a way that supports pre-existing beliefs, is common amongst cannabis investors. Having consumed cannabis profusely during some stage in your life doesn´t mean you´re an expert in cannabusiness. Like in any sector, winning takes a lot more than passion, and a thorough, detailed knowledge of the industry is the cornerstone of any investment. Make sure your plan capitalizes on your competitive advantages as an entrepreneur and mitigates risks stemming from your inexperience.

Local thinking in a globalized value chain

The commoditization of cannabis is inevitable. It´s already happening. And your business plan should account for that. As global trade barriers for cannabis continue to crumble, the importance of being competitive internationally is key. Is your model built to last in the global arena? Will your production costs stand competition from lower-cost producing countries as they too pass progressive legislation? Are you tapping into the global demand as it becomes available?

Poor financial planning

Face it – it´s likely that you won´t get rich overnight. Experience tells us that few companies, approximately 5%, match their cash flow projections over the first 12 or 24 months. It also tells us that many face life-threatening liquidity problems during these early stages. Granted, raising working capital for a cannabis start up is relatively easy these days, but it will take up time, energy and resources that would otherwise be focused on creating tangible value. Using updated, vetted market data is pivotal. Price volatility remains high, and basing projections on an 18-month-old market intel report isn´t good enough. Consumer trends are rapidly shifting – see the delta 8 THC phenomenon. Banking is still a headache for many cannabis companies depending on their jurisdiction, which may cause a liquidity crush at the worse possible time. Be extra conservative with your financial plan and make sure you enter the battle with a deep war chest.

Prey to irresponsible “industry experts” and advisors

As a cannabis consulting company, we understand the skepticism of a potential client. The industry is plagued with opportunists and self-described cannabis consultants. Most of our clients had bad experiences prior to them becoming clients. Being a cannabis expert doesn´t make one a good consultant. A proven track-record in consulting, plus cannabis knowledge, does. Ask for, and act on, relevant references. Do your due diligence. Test your consultants before you sign a contract. And don´t let FOMO get the best of you.

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