Not all Cannabis Enterprises are Created Equal: Businesses are Thriving in the Ancillary Cannabis Ma
Licensed cannabis businesses are receiving a tremendous media attention as more and more states legalize cannabis for medical and adult use throughout the United States. One market that is not as sensationalized, yet is thriving and extremely profitable, is the ancillary market. These businesses provide the cannabis industry the tools necessary to grow and thrive. Generally speaking, there are two types of companies in the cannabis industry: those that “touch” the plant, and those that don’t. The difference is important. Federal and state regulators, investors, banks, taxing authorities; they all treat cannabis companies according to which aforementioned category they fit into.
Plant-touching businesses are the types of hands-on operations that grow, manufacture, and sell cannabis. They’re the cultivators, product manufacturers, and dispensaries. Non-plant touching businesses aren’t directly involved in handling or distributing cannabis. Instead, ancillary companies handle everything from advertising and marketing, to digital media, legal services, real estate, and human resource management. Simply put, they supply products and services to the industry.
There’s a wealth of opportunity for non-plant touching businesses in the cannabis industry. In fact, “Ancillary businesses represent the largest and broadest segment of the marijuana industry,” finds the Marijuana Business Factbook 2018. The risk of working directly with cannabis doesn’t apply to ancillary businesses; they aren’t subject to the same legal and financial risks as their plant-touching counterparts. Plant-touching enterprises stand to have some of the highest growth rates, , but hold the highest risk in terms of federal intervention. Ancillary businesses also enjoy the highest profit margins thanks to reduced overhead and regulatory oversight.
This is, in part, why ancillary businesses are so attractive to investors. According to Business Insider, investment in ancillary operations allows access to the growing cannabis vertical, while “[shielding] them from -many of the risks involved with doing business in an industry the federal government considers illegal [...].” The industry holds enormous risk, even for companies that don’t touch the plant at all. The need for financing gives rise to a subsidiary market of its own: cannabis specific venture capital firms.
Many of the highest valued companies are in the ancillary market. Privateer, a financial service company who’s portfolio includes Leafly, and Tilray, was valued at $500 million in 2005, and insiders close to the company state that number is closer to $600 million. 2018 also saw the merger of multiple companies in the ancillary space. Baker – a leading customer relationship management (CRM) platform once valued at $40 million, was recently a part of a four-way merger to create TILT Holdings Inc., a company seeking to provide bundled services, which now includes cultivation and cultivation units with a total valuation of $500 million. MJ Freeway, one of the nation’s leading seed-to-sale tracking software programs, announced a merger with MTech Acquisition Corp, a company whose sole purpose is to enter into mergers, share exchanges and asset acquisitions, to form a debt-free holdings company, Pubco, with a balance sheet of $60 million with plans to be listed on the Nasdaq.
These companies will remain attractive, in part, due to their scalability. Broadly speaking, scalability refers to a company’s ability to -grow with market demands while also expanding their scope or profitability. In other words, scalable companies offer sustainable, long-term growth. Considering the cannabis market is still volatile, ancillary companies inherently have an edge here too. In most cases, ancillary companies -- like staffing, financial or branding firms -- also have an existing sets of standards and practices to follow. They can apply existing knowledge of parallel industries to cannabis.
Plant touching businesses are prone to market forces such as downward price pressure as markets mature and therefore thinning margins limited growth opportunities into new markets and a regulatory regime in constant flux. Additionally, maintaining compliance is costly for these operations. There are less start-up costs associated with derivative companies. According to the financial news site, Equitites.com, “As the cannabis industry continues to explode in growth and more people are scrambling to get involved, there are huge needs that need to be filled,” the site adds, “These ancillary businesses are filling in the many gaps and are helping the cannabis industry become stronger and more legitimate.”
Marketing, real estate, security, agricultural equipment manufacturers, fertilizer companies, lighting, engineering, HVAC, legal, insurance are also stepping up to fill niches, and serve the industry. Then, there’s software companies focused on compliance, CRM, and B2B and B2C platforms. The possibilities are seemingly endless.
Federal prohibition also positions ancillary companies for growth. Take regulations for example. In states like California -- where track and trace databases are required, and packaging and labeling standards exist -- plant-touching companies need ancillary businesses to help move them forward. This makes way for information service companies to create technological solutions for the industry -- like CRM, B2B, and compliance software. Green Bits, for instance, is a sophisticated point-of-sale software that helps retail businesses manage operations and stay compliant by tracking inventory, sales, customer information, and automatically syncing data with state -track & trace (Seed to Sale) systems. Other applications include seed-to-sale platforms, delivery and social media applications, and digital media like Greenscreens or EyeChronic.
Where ancillary businesses hold the most potential is in expansion -- inside and outside of the cannabis industry. Kush Bottles is a great example of a company that’s expanding its scope. The publicly traded company (KSHB) began by selling containers to dispensaries to display cannabis. They’ve since expanded their services to include things like child resistant packaging, and compliant labeling. Kush Bottles recently acquired CMP Wellness, and Roll-Uh-Bowl. The move brought them into the vape/concentrate space -- the quickest growing sector in the industry.
Media companies are also expanding their scope. The 45 year-old company, High Times -- which plans to become a publicly traded company on the Nasdaq (HITM) -- recently acquired DOPE Media for $11.2 million. The company also owns “Culture Magazine,” and “Green Rush Daily.” Integration of technology into agriculture is another prime example of the ancillary market’s potential for expansion.
The development of energy-saving, cost-efficient systems influence growing efficiencies for cannabis and other crops. In fact, the industry is a hub for progress and innovation. Companies, like iGrow and Bios Lighting, sell LED lighting for cannabis that increases crop yields while reducing energy use by as much as 40 percent. Grow Link, and Argus Controls are agro-tech companies that provide automation systems for greenhouses. These systems help manage irrigation, humidity, fertigation, lighting, etc. Other exciting innovations include the LEAF and Seedo, automatic plant-growing systems. The chambers are contained; can grow all sorts of plants; and climates are controlled via smartphone.
Biotechnology is one of the fastest moving sectors in the cannabis industry. The medical applications of cannabinoid research are seemingly endless. From the development of new drugs, to breathalyzers, anti-aging face creams, to pet nutrition -- cannabis may open up an entire new world of medicine, skincare, and nutritional products. Companies, including INSYS Therapeutics, Lexaria, and GW Pharmaceuticals, are developing new delivery methods, treatments, and medicines that could benefit millions of people.
The cannabis industry is driving innovation and will create a projected economic impact of close to $80 billion by 2022, with cannabis touching businesses bringing in around $20 billion. That additional $60 billion dollars underscores the value that the ancillary market brings to the cannabis industry. Entrepreneurs interested in getting into the cannabis industry can do so using the skill sets they currently possess to provide the necessary tools for the industry to realize its full potential and beyond.