Funding the Cannabis Industry

By Vivian Eberle and Matthäus Piatti

Cannabis, pot, marijuana, weed… This recently legalized industry expands far beyond dried cannabis (known as the “flower”) rolled up in a joint. Products such as oils, edibles, pills, beverages, creams for medical and recreational purposes; technology ranging from POS data analytics to consumer generated SaaS companies; and innovation along the supply chain – production, distribution and retail – has left investors curious and willing to take a serious look at cannabis. Given the risky nature of the industry due to regulation and stigma, a plethora of investment strategies have arisen depending on geography and respective levels of legalization. Investment in Canadian companies, where recreational cannabis is nationally legal, has been limited to its supply chain, both upstream and downstream. With greater innovation, the US has experienced increased diversity of investments in cannabis products and services in areas including tech, marketing and retailing.     


The US’ legal recreational cannabis industry debuted in 2012 with the state of Colorado’s legalization. Currently, 33 states allow the legal use of cannabis for medical purposes of which 11 states also legalized the recreational use of cannabis. This makes the US the largest market for cannabis – albeit illegal at a federal level – with legal sales estimated to reach $13.6 billion in 2019. Of course, this poses challenges regarding the funding of and scalability of the sector. Growth has been substantial nonetheless. Funding has increased 4-fold from 2017 to 2018 reaching $13.8 billion, and sales have increased at a rate of 31.7% from 2018 to 2019, with predictions of almost $30 billion in sales by 2025.  As it stands, cannabis flower is currently the top selling category at almost 50% of all transactions, though its growth is lesser than other categories such as oils, beverages and vapor pens.


  • Venture Capital

The VC sector for cannabis in the USA is picking up. This past year, the industry experienced mounting deal-flow and value of capital invested from VC. In the month of July, almost $1.6 billion was invested in cannabis from VC which represents a significant increase from past years. In September, that number jumped to just under $2 billion

The average cannabis valuation? $226 million according to Markets Insider. PAX-Labs topped 2019 as the largest deal, having secured an apropos $420 million in funding in April from various funds including Tiger Global Management and Tao Capital Partners to reach a valuation of $1.7 billion. This San Francisco based company focuses on cannabis e-cigarettes, formerly being a sister company to Juul Labs. More recently, however, PAX-Labs ran into issues after its CEO stepped down, its revenues did not meet projections, and the fury of the vaping health crisis tapered expectations. As such, its IPO timeline scheduled for 2020 is now considered premature.

This year’s most active Cannabis VC Fund with respect to deal-count, Phyto Partners, has invested in a total of 9 early-stage companies with a diverse portfolio, ranging from educational cannabis platforms to cannabis digital HR services. The fund seeks to establish a foothold in data and technology businesses within the sector. Other notable Cannabis VC Funds include Arcadian Fund, Gotham Green Partners, MedMen Capital and Casa Verde Capital – the latter being notorious for being founded by Snoop Dogg. 

  • Private Equity

The PE sector has also had its part to play in the space. Compared to VC, however, PE’s funding in cannabis is lesser. Last year’s transactions tallied a total of $375 million. Backed by Peter Thiel, Privateer Holdings was the first private equity firm to invest in cannabis. Its most notable investments include Tilray, Leafly, Marley Natural and The Goodship, making its cannabis portfolio widely diversified along the supply chain. Tilray is one of the most important licensed producers in Canada, Leafly is an online “Yelp” like platform for cannabis, Marley Natural is a partnership between Privateer and the (Bob) Marley family, and The Goodship produces candies and baked goods infused with cannabis. Privateer has raised over $100 million for investment in the cannabis space, as compared to $93 million by runner-up Tuatara Capital, another notable PE firm with a cannabis strategy.

  • Challenges

With all the VC and PE funds, as well as other smaller scale investment funds, one can wonder if all the big banks are involved within this space. This is incidentally one of the main challenges regarding the US cannabis sector. Due to the lack of federal laws permitting the use of cannabis, the top banks are left on the sidelines. That being said, there is a bill in place, the SAFE Banking Act, which when passed, will allow big banks to participate in the financing of companies in the cannabis sector without potential prosecution. Until then, smaller banking firms such as Viridian Capital and Ello Capital have been “overwhelmed by deal flow” due to the increasing activity within the US cannabis market. As for VC and PE, regulation has not stopped investors as there is no indication of any slowdown in activity. 


Unlike the USA, Canada legalized the recreational use of cannabis on a federal level last year, in October 2018. As such, Canadian banks and cannabis-specific investment funds have been front and center in this area due to the rise of IPOs as a source of funding. Of course, the Canadian market is much smaller than that of the USA’s by sheer size of population – estimated sales were $1 billion in the past year in Canada. In spite of this, Canada is still considered the global leader of cannabis given that even prior to recreational legalization, medical cannabis companies were already operating on a national basis. Additionally, recreational legalization means greater government tracking of cannabis usage and company operations – and thus access to quality data regarding the market with the launch of the Cannabis Tracking System. This system was launched in order to comply with Health Canada’s function of “track[ing] the flow of cannabis as a means of preventing the illegal inversion and diversion of cannabis into and out of the regulated commercial system.” This has effectively created a centralized database of the entire legal cannabis supply chain, providing information such as the amount of cannabis for product categories of dried and oil-based cannabis — in the state of unfinished & finished product, unfinished & finished inventory, and sales. With this data, one can easily find that both dried cannabis and oils are growing and Canadians consumed just under 10,000 kg of dried cannabis and 10,000 L of oil in the latest recorded month, June 2019. On average, these numbers come out to 0.27g and 0.25L of cannabis consumed per Canadian per month.

  • IPO

All the major licensed producers – the companies that can legally grow and make cannabis products – have gone public and are for the most part listed on the Toronto Stock Exchange (TSX). To date, the TSX hosts the largest amount of publicly traded cannabis producers. Amongst these, Canopy, Aurora and Aphria are Canada’s leading producers, though the total amount of licensed producers is currently well into the hundreds. Given the access to IPOs for cannabis companies in Canada, listing  has been the funding method of choice to satisfy the need for capital in order to grow. 

  • RTO

Having established that companies access growth capital by listing publicly, many of which circumvent the lengthy IPO process via a method called “Reverse Takeover”, or RTO. Simply put, in an RTO, a publicly listed company merges with a private company, such that the majority owners of the public company become the shareholders of the private company. This procedure allowed many private cannabis companies to become public, without going through the IPO procedure. For example, Aurora Cannabis Inc. — a leading cannabis company — went public through an RTO with Prescient Mining Corporation in 2014.

  • VC/PE

Compared to the US, there is much less movement in both VC and PE in cannabis in Canada. This is especially due to the availability of public funding. However, with the hype created in 2018, the largest VC exit was that of a cannabis joint venture based in British Columbia, Tweed, which took place in the quarter preceding domestic legalization. The exit constituted $374 million of the total $797 million in exits that year. Involved in this transaction was Canopy the acquirer and Avrio Capital VC.

  • Challenges

The federal regulation in Canada creates limitations. As demonstrated by the Tracking System, widespread legalization was escorted by stringent regulation to the industry. Prime drivers of the cannabis industry include innovation and brand distinction yet, in these respects, Canadian companies have their hands tied. In the first year of legalization, only cannabis flower, oils and tinctures were allowed to be sold (no edibles or vapes) while marketing, advertising and brand distinction of the products are either prohibited or very limited. This, coupled with the fact that almost all companies have had supply problems in order to meet the large domestic demand have contributed to unattractive first year financials – most stocks were overvalued last year due to optimistic forecasts and a failure to recognize organizational and regulatory constraints.


Although cannabis legalization is only sporadically present across the continent, Europe is set to become one of the most attractive cannabis markets in the coming years. With the trend of positive steps towards legalization and a population twice that of the US and Canada’s, Europe’s cannabis industry is steadily gaining traction with investors. More than €500 million has been invested in the cannabis industry to date and researchers at Prohibition Partners estimate that the total cannabis market in Europe could be worth as much as €123 billion by 2028.

  • Legislation

Medical marijuana products have been legalized in the U.K., Italy, Germany and Portugal with France and Spain poised to follow suit. When it comes to recreational use, all European countries, with the exception of the Netherlands and Luxembourg, have opted for conservative regulation. This enabled the less conventional but broadly legal CBD alternative to take Europe by storm with stores springing up in many urban centers to develop a €416m market in 2019. CBD is subject to less regulation and is broadly legal across the continent.

  • Venture Capital

At the forefront of this new industry is the German company Demecan, located in the VC Hub Berlin. They have, as the sole German company to do so, won the right to legally produce medical marijuana (up to 2,400 kilograms). Now, the firm has set its sights on the expansion of production facilities and has successfully raised €7 million in a Series A financing round. Btov Partners, a venture capital firm, invested €3.5 million and a German family office another €3.5 million, a testament to growing investor appetite in the emerging industry. 

The biggest investors in the up-and-coming industry have come from across the pond. More seasoned companies from Canada have ramped up investment schemes in the European cannabis sector and are expected to continue doing so. Examples include Canopy Growth, a Canadian publicly traded cannabis company, who have recently acquired German cannabinoid-based pharmaceuticals firm C^3 and Cafina, a Spanish weed producer.

Tilray, another Canadian industry giant has invested €20 million in a Portuguese research and cultivation campus and Aurora (Canada) has entered the Portuguese cannabis industry via acquiring 51% of Gaia Pharm, a marijuana producer. 

Summing up, the market in Europe is established and this provides opportunity for its financial backing; 16.6 million individuals (aged 15 – 34) on the continent used cannabis in the last year. With products becoming increasingly accepted, the trend is looking promising as investors now await deregulation. Once barrier doubts have been mitigated, Venture capital firms will ramp up investment in the new industry. 


Editor: Eric Peghini

Authors: Matthäus Piatti, Vivian Eberle