In the cannabis industry, investors have shifted from funding early business plans to now injecting capital at a company’s inflection point and accelerating its growth. As investors, assessing a company’s growth potential is a process that
requires careful due diligence.
Here, we examine five key indicators that our team uses to evaluate companies. Scroll further below this infographic for more information on each of our investment criteria.
First, we assess market size. We ask:
This helps us to understand the magnitude of the problem that a company is trying to solve, and how much of the market it could eventually penetrate in the future. We are bullish on growth potential and look for market sizes in the range of billions.
For example, LeafLink launched in Colorado in 2016 and ended the year with $40M in annualized orders. Today, LeafLink’s e-commerce marketplace connects more than 1,500
licensed cannabis brands to over 4,600 cannabis retailers in the U.S. and has facilitated more than $1B in annualized orders. This means that LeafLink is now processing ~16% of all of the U.S.’ wholesale cannabis orders through its B2B marketplace.
Next, we assess how the market will respond to the product or service.
Simply put: how will this business make money? We evaluate whether the product or service will solve a fundamental need in the market, and whether customers will pay money for it.
Our research has shown that adopting new products and services requires a change in attitudes and behaviors, and only the best products and services can warrant that. Scott Kupor, managing partner of Andreesen Horowitz and author of Secrets of Sand Hill
Road, uses the analogy of vitamins versus aspirin. If you’re commuting to work but forgot to take your multivitamin, you probably won’t turn your car around to retrieve the vitamin. But if you have a raging headache, you’ll return
home for the aspirin. We look for aspirins: must-have products that address identifiable and urgent needs.
As a business evolves, traction becomes an important metric. To assess this, we ask:
While an early-stage company may be reluctant to build a financial model, we consider it valuable in understanding the brain of a company and its fundamental drivers of growth. Particularly, where the unit economics lie. For later-stage companies that
have a proven business model, we assess the viability of the business using metrics like: customer retention, gross margin scalability, and the lifetime value of a customer (LTV) versus the customer acquisition costs (CAC). Overall, we want companies
to grow quickly, reduce churn, demonstrate strong product-market fit, and show a path to profitability.
As investors, we focus on generating a return on investment for our shareholders. Some questions we use to assess this are:
While having the highest valuation possible may seem attractive in the short-term, being realistic about valuations today will be more beneficial for companies in the long-term. This will enable a company to prove its growth and momentum with each round
Most importantly, we assess a company’s team, asking questions like:
We believe that a company's team truly distinguishes it from its competitors. Cy Scott and Brian Wansolich, founders of our portfolio company Headset, previously co-founded and successfully exited Leafly, an award-winning cannabis information platform. We think that their experience scaling Leafly and the lessons
they learned along the way translate directly into their current operations with Headset. Melissa Jochim, founder of portfolio company High Beauty, is a beauty product veteran and serial entrepreneur with over 25 years of product formulation experience.
She applies her extensive knowledge from the traditional beauty world to cannabis cosmetics.
We also assess a company’s cap table to identify whether founders are incentivized with equity, and whether there are employee stock option packages in place to attract top-tier talent.
Overall, a combination of factors will demonstrate a team’s ability to execute on their vision and gain our trust.
Today, we are excited about a few categories. We are keeping an eye on consumer products, as we believe there are no household names in the brands category…yet. Data has shown that the top five brands in every legalized U.S. state shuffle every
month, indicating market fragmentation and a lack of consumer loyalty. We are actively evaluating biosynthesis companies focused on producing cannabinoids at scale from living cells such as algae, bacteria or yeast. Finally, our investment team continues
to evaluate ancillary technologies and plant science companies.
Building an experienced team, conducting adequate research, and proving product-market fit go a long way in demonstrating a company’s potential for success and securing an investment. If you are involved in a business that fits these criteria and categories, please submit your pitch deck using the form on our website.
This is not an offer to sell or a recommendation to trade in any securities. This information is provided as of the date hereof. This document contains data obtained from third parties that Canopy Rivers has not independently verified. This document also contains forward-looking information within the meaning of Canadian securities law, which is based on certain assumptions. While management believes these assumptions are reasonable based on information available as of the current date, they may prove to be incorrect. Many assumptions are based on factors outside of Canopy Rivers’ control and actual results may differ materially from current expectations. Forward-looking information involves risks, including, but not limited to, the risk factors set out in Canopy Rivers’ most recent Management’s Discussion and Analysis and Annual Information Form. You should not place undue reliance on forward-looking information. Except as required by applicable law, Canopy Rivers assumes no obligation to update or revise any forward-looking information to reflect new events or circumstances.
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