Friends – you may have noticed that the business world has demonstrated an unusual amount of weirdness in the past week or so. I’m thinking in particular about Elon Musk’s take-private of Twitter and the debacle in the crypto industry capped by the implosion of crypto exchange FTX this week. Intelligent people making seemingly poor decisions with other people’s money (yes, Musk put up a lot of money to acquire Twitter, but he also raised outside equity and borrowed a pile of bank debt that remains unsold). These two threads both have interesting lessons to teach the cannabis industry. Bear with me here.
The way I see it, Musk bought Twitter because he thought he could improve it – economically, operationally, and existentially. I could be wrong about that, but I don’t think I’m totally off base. He’s had outsized (to put it mildly) success building other companies, so how hard could it be to wrestle Twitter into shape? Granted, it’s still quite early days, but if you’ve spent any time on Twitter over the past week, it’s gone all farpatshket.
Whenever I talk with someone who’s thinking about getting into the cannabis industry, particularly if they think that they have some novel approach, I give them my free advice that you can’t adapt the cannabis industry to what works in any other industry – you have to adapt what works elsewhere to how things work (or don’t) in the cannabis industry. I’ve watched too many people think they can walk in and easily apply to a cannabis business the basic techniques that work everywhere else, and that clearly no one else in this industry is smart enough to have even thought of doing that. Oh, and they’re easily gonna make a pile of money. They’re smart, and they’ve proven themselves before, so of course it’ll work again. (Narrator: “it won’t.”) To me, this is Elon Musk vis-à-vis Twitter.
(In case you’re wondering whether this is a commentary on Diddy’s signing of a deal to buy various cannabis assets from Cresco for up to $185 million last week, it’s not. From what I can tell, the motivation is totally different. Look for example at Combs’ reported comment: “My mission has always been to create opportunities for Black entrepreneurs in industries where we’ve traditionally been denied access, and this acquisition provides the immediate scale and impact needed to create a more equitable future in cannabis.”)
Samuel Bankman-Fried built crypto exchange FTX into one of the space’s largest players. Bankman-Fried was touted as the face of crypto for helping to build the nascent crypto industry. As FTX all came crashing down this week, ending in a bankruptcy filing on Friday (a luxury not enjoyed by the cannabis industry), it’s been reported that FTX was apparently not only massively overlevered (particularly by providing leverage on its own tokens), but also possibly self-dealing by lending customer holdings to Bankman-Fried’s own crypto hedge fund. The tale seems to get weirder by the hour. In properly-regulated finance, there’s rules against that.
Piles of capital were raised by cannabis companies in 2017-19 based on meshuge valuations and expectations, with companies generally taking a blitzscaling approach to build an infrastructure base to grow the state-legal industry. Some succeeded, some spectacularly didn’t, and most are still hanging in there. While many were led by people trying to do the right thing by investors, I’ve seen my fair share of self-dealing, poor disclosure, and all-around cuspy and untoward behavior, the kind of stuff that gives lawyers nightmares. They believe in the transformative nature of cannabis, as a product and as a business, but they don’t care a single whit about things like fiduciary duties and good corporate governance (perhaps it’s because they figure, “hey, I’m breaking the law anyway”?). To me, this is Sam Bankman-Friend vis-à-vis FTX.
What’s my point? Well, the space has seen a real transformation over the past five-ish years that I’ve been involved. Many of the macro problems that the cannabis industry is facing are not very different from those faced by other newborn industries. (The rise of the crypto industry (if that’s even the right word for it) is I think a pretty good analogue for the development of the state-legal cannabis industry (though without the Ponzi schemes), but the first tech bubble provides a particularly useful history lesson for understanding the cannabis industry’s first wave.) Just like elsewhere, success for cannabis companies won’t (and can’t) be found by overconfidence, opportunism, or carelessness (do your diligence!). From what I’ve seen, success has been found with the right balance of professionalism, care, and sheer love of cannabis. If you’re gonna put up with all of the tsuris, you really need to believe in the product.
Be seeing you.
© 2022 Marc Hauser and Hauser Advisory. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form. Subscribe to Cannabis Musings at hauseradvisory.com.