Humility is in short supply in the cannabis industry. Investors want that to change.
That was the message from several fund managers at the Northeast Cannabis Business Conference in Boston last week, where the industry was asked to reconcile its boundless optimism with the current reality of slumping stock prices and wary capital markets.
“We want to make sure the entrepreneurs we invest in are not drinking their own Kool-Aid,” said Kevin McGovern, chairman of McGovern Capital, which holds stakes in several international cannabis companies. “Don’t be greedy, be realistic.”
In the early days of the industry, a company could achieve a high valuation with an ambitious growth forecast and not much else. That will backfire when those companies go to raise money again, McGovern said.
“The worst thing you can do is a financing at a high valuation from angel investors, and then lo and behold institutions come in and they laugh at you and they lead a down round of 50 or 75 percent,” he said.
Publicly traded pot companies have also had to face the repercussions of their earlier swagger, with many revising or eliminating their forecasts as it became apparent that they were far too optimistic. This is also one of the reasons behind a recent spike in executive turnover.
Because the cannabis industry is so new, it had never experienced a bear market until the downturn that began in mid-2019. This led company founders to believe that growth would continue forever, said David Traylor, senior managing director at industry adviser Golden Eagle Partners.
“One of the big problems we saw with a lot of companies was arrogance,” Traylor said. “They thought that money was going to grow on trees, that it was never going to end.” He now looks for humility from executive teams before agreeing to work with them.
Ross O’Brien, founder and CEO of venture capital fund Bonaventure Equity, said pitch decks from companies with unrealistic valuations will go straight into the garbage.
And it’s not just startups that need to be humble. Even the largest multi-state operators, or MSOs, could use a dose of humility, said Sean Stiefel, portfolio manager at hedge fund Navy Capital.
“This industry is moving so fast, people are going to get things wrong and the ability to recognize when you get something wrong and quickly pivot is probably the most important thing anybody from the biggest MSO to the smallest brand can do,” Stiefel said.