Cannabis 2.0: “Honey is Sweet, But the Bee Stings”

Cannabis is gradually coming out of the closet. In Germany, the UK, France, Italy, Argentina, Australia, and some other countries in Europe and the Americas can already use it for medical purposes. In the Netherlands, Georgia, Spain, Mexico, Brazil, South Africa, and other countries, there is no criminal punishment for the recreational use of marijuana in non-public places. And in Canada and Uruguay, the use of marijuana in all forms is completely legal.

In the US, the use of cannabis is prohibited at the federal level. However, 35 states and the District of Columbia (DC) have legalized its use for medicinal purposes and 15 states – for recreational use.

There is a growing number of US states that continue to move towards legalizing cannabis. States considering this move include Missouri, North Dakota, Idaho, and Wyoming.

Estimating the Size of the Legal Cannabis Market

In 2019, the volume of the legal cannabis market was estimated at $28 billion, according to Barclays Bank. Even if everything remains as it is, by 2028, the market capacity will reach $40 billion. In case of medical marijuana legalization in Europe and at the federal level in the United States, it could grow to as much as $55 billion.

According to Grand View Research forecasts, the international market for pot and CannaTech products will reach $66 billion by 2025.

According to recent forecasts by Statista, by 2024, the marijuana market will grow to $63.5 billion, demonstrating a 21% growth YoY. Naturally, investors cannot avoid this trend.

The latest cannabis legalization trends spark an interest among entrepreneurs looking to tap into this new promising market. A new wave of technology startups hit the market with their digital solutions that aim to make the process of cannabis purchasing, delivery, and consumption as seamless and fast as possible. Each of those startups dreams of becoming the next "Uber" for marijuana in their niche.

What is Cannabis 2.0 and How It’s Driving Market Growth

Before cutting-edge software and hardware technologies got involved in cannabis growing and distribution, we referred to Cannabis 1.0 (e.g., early stages of legalization and strains’ distribution through dispensaries and coffee shops).

Today, when technology takes center stage, we’re speaking about the Cannabis 2.0 industry.

Cannabis 2.0 solutions cover a broad range of pot products, derivatives, and services, including but not limited to:

• Cannabis consumption devices such as vaporizers, vape pens, electronic joints, dab rigs, oil rigs, and others;
• Cannabis-infused food products for oral consumption such as edibles, tinctures, sprays, etc.;
• Cannabis dosing devices such as pens, vapor meters, and so on;
• eCommerce platforms and delivery apps;
• Systems for indoor and outdoor weed growing;
• Equipment for the industrial cultivation of cannabis;
• Breathalyzers – devices that determine THC's level and other active substances in the patient's body by analyzing their breathing.

Now let's dive deep into some of the most thought-provoking CannaTech use cases.

CannaTech Use Cases Across Verticals and Niches

Cannabis 2.0 market consists mostly of tetrahydrocannabinol (THC), cannabidiol (CBD), and cannabinol (CBN) infused products, their derivatives, accessories, and supporting products.

In addition to THC (a psychoactive substance that creates the "high" effect), hemp plants contain over 100 other active ingredients.

More than 25,000 different products can be made with hemp, including food, textiles, construction materials, ethanol, and biofuels.

No surprise that the diversity of cannabis properties and the growing infrastructure around it have been grabbing entrepreneurs' and investors' attention worldwide for several years already.

So how are different industries and domains taking advantage of cannabis legalization and mass adoption?

1. Medicine and pharmaceuticals

Weed has been widely recognized for its psychoactive and relaxing effects for decades.

Numerous studies have confirmed that CBD helps with epilepsy, neuropsychiatric and anxiety disorders, cancer, etc. Recently, the US Food and Drug Administration (FDA) has approved CBD to be used officially to treat the two types of epilepsy. Cannabis is also used as a substitute for opiates for chronic pain. One study says marijuana helped 80% of those surveyed relieve chronic pain, and 50% of them had used opiates before.

According to Marijuana Policy Project, over 3 million patients in the United States regularly use prescription marijuana. 

According to a study by the University of Georgia, the pharmaceutical industry generates $4 billion in cannabis sales annually. Many pharma companies are considering incorporating marijuana into their selling strategy. 

GW Pharmaceutical is a world leader in the development of drugs containing CBD. The company was the only one to have received FDA approval to use their drug Epidiolex for the treatment of epilepsy. 

Canada's Tilray recently announced a partnership with Sandoz Canada (part of Novartis) – the first contract between a large pharmaceutical company and a marijuana manufacturer.

2. Cosmetics and products for a healthy lifestyle

CBD oil is a promising new product in the industry. It doesn't make you high, but it can relieve pain, anxiety, and depression. The oil also provides an anti-inflammatory effect and helps with acne. In addition, athletes can use it to ease inflammation after exercise. It also helps in building muscle mass. 

The popular US brand Lord Jones makes candy and body lotions from cannabidiol to help treat muscle, joint, and skin pain. Potentially, oil-based lip balms and mascaras can be created to foster the use of natural cosmetics among users.

3. Manufacturing and packaging

The fibrous structure of the Cannabis Sativa plant stem makes it one of the top contenders for the market dominance in renewable materials. Hemp packaging materials are a safe alternative to plastic. It can also be used to produce paper, clothing, and even building materials. Hemp seed oil is used in varnishes and paints.

The packaging of CBD-based products is strictly regulated by law. 

Among the requirements are: 

• a special cover that prevents access to children;
• indicators of unauthorized access,
• non-transparency, etc. 

Many new developments have emerged to meet specific market requirements. 

A lot of people use bags specially designed for storing cannabis. And also ziplock bags, cans, slide boxes, tubes of different colors, and small boxes, like those for contact lenses. That's a huge separate market that will grow bigger as cannabis legalization continues gaining steam all over the world.

The benefits of industrial use of hemp do not end here. Cannabis is excellent at retaining carbon dioxide and detoxifying the soil, helping combat global warming, and so on. Therefore, the ecological potential of cannabis makes this industry extremely attractive for both entrepreneurs and investors.

Plastic is inexpensive and versatile. But the fact that it is not biodegradable is a significant threat to the environment. The world's leading economies allocate $80-120 billion each year to solve this issue. Hemp can become a healthy alternative to plastic and can be used to make everything from bottles to household appliances and toys.

Best Practices Packaging, an Alaska-based developer of sustainable packaging, has created a hemp-based bioplastic. Together with their permanent partner Penta5, they can produce more than one billion units of various packages per year.

Lego is also looking to replace plastic with more sustainable material. They have already invested $150 million to research the use of hemp-made plastic in its products.

Hemp is a genus of plants in the cannabis family with low levels of THC. The potential of hemp can be harnessed to make paper. 

Up to 400 million tons of paper are used globally every year; on average, 17 trees are needed to make one ton. One hectare of cannabis can produce four times more paper than a hectare of trees.

In the construction industry, hempcrete has already become actively used. It's a light, cementitious material made from the hardened parts of the hemp stem, lime, and water. It can be used as concrete in modular building blocks. Hempcrete can replace oriented strand boards (OSB), drywall, and thermal insulation. In the US, the first 50 hemp homes were built in 2010. In Washington, Hempitecture remodels homes, while Left Hand Hemp in Denver builds campfire homes using hempcrete.

A Ukrainian company Hempire installs heat insulation in houses using hempcrete instead of traditional eco-unfriendly and toxic materials.

4. Agriculture and food

To produce a ton of finished textiles from hemp, you need half the land than if you make them from cotton.

Hemp can grow in different soils and at different temperatures. The plant is drought-proof, so expanding on an industrial scale will help conserve water resources.

Hemp plant products containing CBD have anti-inflammatory and cleansing properties and are used extensively in the United States as a dietary supplement to improve sleep and appetite.

According to a new report by New Frontier Data, in 2020, US sales of cannabis-infused food products have approached $3 billion.

The Ontario Cannabis Store (official cannabis distributor in the province) is offering a total of 59 new CBD-based products in Canada. A wide range of new products should attract consumers, including those who do not smoke it. Food products will also have much higher profit margins and help Canadian companies cross the profit margin.

A group of brands has invested in the renowned startup Canopy Growth, whose shares rose from 10% to 38%. Beer brands are also interested in developing special cannabis-based product lines. In California, Lagunitas Brewing Company announced two types of psychotropic soda.

Tobacco and alcoholic beverage producers are trying to create new marijuana products to stop their markets decline.

Another cohort of cannabis tech startups is specialized in solutions for indoor and outdoor weed growing. The cannabis legalization movement has made it possible to grow marijuana at home in many countries around the world. Canberra, the capital of Australia, has recently voted to legalize the personal use of cannabis for recreational purposes. It implies that residents have the right to grow two bushes of weed at home. Thailand is also currently considering a bill that would allow each household to plant up to six bushes of cannabis.

This trend is driving the demand for home-grow systems whose market has attracted both traditional equipment manufacturers and innovative startups. For example, a couple of years ago, Cloudponics introduced a specialized module for growing cannabis. Leaf raised $4.5 million in May this year to develop a plug-n-plant system that monitors the growth of cannabis bushes from a smartphone.

Hydroponics is a new trend that many CannaTech companies are looking to tap into. It's a horticulture and hydroculture method of plants growing, without soil, by using mineral nutrient solutions in an aqueous solvent. 

Hydroponic systems can accelerate marijuana growth significantly, which helps reduce time to market and increase the yields of strains. Brands specialized in the design and production of hydroponic systems include HTG Supply, General Hydroponics, PowerGrow Systems, and many more.

5. Fashion

Hemp fibers are used to make clothing, durable textiles for commercial and industrial purposes, and strong ropes. Unlike cotton, hemp is non-soaking and has antibacterial properties.

Today's consumers are willing to pay up to 20% more for eco-friendly products, which is why major suppliers and niche brands are heavily betting on hemp clothing. 

Hemp is appreciated for its durability and economy, but it doesn't dye as well as cotton. Hemp fabric is similar to linen, but it itches a little when touching the human skin.

Both mainstream and indie fashion brands such as EnviroTextiles, Patagonia, and Bad Decision Adventure Club produce clothing made from hemp fabric, which has a texture similar to jeans or wool. 

7. Biofuels and energy

Hemp produces four times more oil per hectare than soy – the only plant grown commercially for biofuel in the United States.

Researchers from the University of Connecticut have discovered that hemp can also be used to make biofuels. Scientists plan to build the first plant using a $1.8 million grant from the US Department of Energy. It will be able to produce up to 757 thousand liters of biofuels per year.

8. eCommerce and delivery

In line with the rapidly growing cannabis legalization trends, online retail portals pop up to enable the sales, distribution, and delivery of various hemp-based products.

London-based Alphagreen is one of the leaders in this space. The company is building "Europe's leading cannabis distribution platform," according to its website. It's more than just an eCommerce platform; in fact, it's an entire ecosystem of cannabis-infused products and CannaTech solutions. Besides a curated online marketplace, Alphagreen has a life science division called Alphagreen Med. It assists European cannabis suppliers with EU GMP certification and import, batch release and product registration, warehousing and distribution, support in marketing and branding, and more.

In the United States, Eaze is the leading cannabis delivery app created back in 2014. Backed by some $166 million in funding, Eaze is the first CannaTech startup to have raised big money in Silicon Valley.

According to TechCrunch, Eaze is trying "to pull off a "verticalization" pivot, moving beyond online storefront and delivery of third-party products into sourcing, branding and dispensing the product directly."

One of Eaze's most promising competitors is Dutchie, a CannaTech startup that delivers marijuana in American 18 states. The company raised $15 million from Gron Ventures and several other VC funds in September this year. Among Dutchie's investors is Jon Oringer, founder and CEO of Shutterstock.

Venture Investments in Cannabis 2.0

Although the total number of cannabis venture deals in 2019 decreased compared to 2018, the volume of investments has almost doubled.

PitchBook data shows that in 2019, there were 307 VC deals with 277 CannaTech companies, totaling approximately $2.62 billion.

The leading VC funds in terms of capital investment in the cannabis industry in 2019 and 2020:

• Phyto Partners (Boca Raton, FL) – 23 deals;
• Poseidon Asset Management (San Francisco, CA) – 21 deals;
• Entourage Effect Capital (Dallas, TX) – 20 deals;
• Arcadian Fund (Beverly Hills, CA) – 20 deals;
• Altitude Investment Management (New York, NY) – 19 deals;
• Salveo Capital (Northbrook, IL) – 18 deals;
• Casa Verde Capital (West Hollywood, CA) – 13 deals;
• Merida Capital Partners (New York, NY) – 12 deals;
• Big Rock (San Francisco, CA) – 12 deals;
• Cannabis Growth Opportunity (Toronto, ON) – 12 deals.

Key Risks Associated with CannaTech Investments

There are clear risks of investing in CannaTech today:

- Political and legal risks (the upcoming change of the US president and policies in this segment, restrictions on funding cannabis producers, etc.);

- Overestimation of supply over demand (those who use marijuana illegally will continue to do so, and there may be too much supply on the market due to drastic legalization).

It’s also worth considering that, according to analysts' forecasts, many cannabis producers will simply not have access to reputable exchanges (e.g., NASDAQ), which provide access to really large capital. This fear rises because most of the producers do not have sufficient capitalization and will not be able to trade on the stock exchange. At the same time, the purchase of such shares in OTC trading promises serious risks.

Exchange-traded marijuana producers (most of them are Canadian companies), albeit worth billions of dollars, have lost significantly in capitalization in 2020 compared to 2019. As of October 2020, the capitalization of Canopy Growth Corporation fell to $5.79 billion, Cronos Group - to $1.87 billion, and Tilray - $ 692 million.

According to Cannabis Legale, the market is already oversaturated. The capitalization of public companies grew in 2018 on expectations of the legalization of marijuana in Canada. However, the market's legal demand remains limited, and a new growth factor is needed – the market largely depends on cannabis legalization at the federal level in the USA.

However, not all companies experienced a decline in 2019. At least two CannaTech players felt like rock stars, namely Valens Groworks and Medipharm Labs. 

Based in Kelowna, British Columbia, Valens is a vertically integrated company specializing in cannabinoid and terpene extraction systems for CannaTech 2.0 products. Traded in both the United States and Canada, Valens posted more than 112% gains in shares in the US OTC market last year while yielding just over 105% on the TSX VIX in Toronto. 

Ontario-based MediPharm Labs specializing in refined cannabis concentrates gained just under 128% in the US and more than 120% in Canada.

Many venture capitalists have turned their attention to the marijuana market since its legalization in California in 2018. The California market is set to become one of the largest in the United States. In 2019, its volume exceeded $5 billion. 

Nonetheless, since cannabis has not yet been legalized at the federal level, large American funds are not interested in the market.

Marijuana is still a risky market for VCs and investors. Banks refuse to open accounts for companies that work in this area. Coffee shops selling weed are only allowed to use cash, which, again, cannot be deposited into a bank account and poses a lot of inconveniences. 

Final Thoughts

If you're looking to tap into the fantastic new opportunities that will unfold as more countries legalize recreational and/or medicinal use of weed, you should hurry to start building a strong CannaTech brand now.

In case of mass legalization, you will be competing with alcohol and tobacco corporations (many of whom are already investing heavily in Cannabis 2.0 R&D) and innovative startups like yourself.

Which CannaTech startups do you consider the most promising? What startup would you launch yourself?

If you're a startup working on cannabis innovation and you have a cool project/product to pitch – reach out to me on LinkedIn and I'll be happy to feature you in my next article or interview.