Cannabis investors are living in groovy times again. 

Valuations for publicly traded cannabis companies with significant operations in the U.S. are up more than 50 percent since July. After more than a year-long slump, stock prices are rising as investors predict the feds will ease bank debt restrictions, and that more states will legalize cannabis in next week’s elections.

Investor enthusiasm for privately-held cannabis companies, however, is more tempered. Plant-touching companies with significant multi-state licenses are raising money with healthy valuations. Investors queried by Grown In say smaller operators that lack significant holdings in states where licenses are limited are having greater challenges. 

“If you look into the market there are a vast amount of companies trying to raise capital,” said Michael Gruber, managing partner at Salveo, a Chicago-based cannabis-focused venture capital firm. “And most of those deals are not being done.”

There is even more uncertainty for startup companies that have (or in Illinois appear to be on track to obtaining) a cannabis license, but have yet to begin operations. Ancillary cannabis companies, particularly digital platforms that have traction with plant-touching customers, are attracting investor interest.

Here are five things you should know about capital and cannabis in the Midwest right now. 

1. Investors want scale for public companies.

Chicago-based and publicly-traded cannabis operators Green Thumb Industries and Cresco Labs are each trading at near 52-week highs. GTI’s market cap is near $3.5 billion while Cresco is valued at $1.6 billion. 

Each company has significant cultivation and retail operations in their home state of Illinois where overall cannabis sales are expected to exceed $1 billion in 2020, Illinois’ first year of adult-use legalization. Unlike larger markets like Colorado, California, and Washington that are saturated with cannabis companies, Illinois is a limited license state where incumbent operators are currently benefiting from greatly reduced competition. 

“A focus on depth and scale in core markets is crucial for achieving profitability,” said Alex Gastevich, vice president of V. Gastevich Investments, LLC, an early investor in GTI. “We also want to see companies start planning for the next phase of cannabis east of the Mississippi.” 

As detailed by Grown In earlier this year, GTI and Cresco are among the handful of 21 operators licensed to cultivate in Illinois that are fully operational. Cresco’s Sunnyside dispensaries represent nine of the approximately 65 dispensaries currently operating in Illinois. GTI operates seven Rise dispensaries in the state. Further, both companies are heavily invested in Pennsylvania, which many analysts predict to go recreational next year along with New York, where Cresco operates four dispensaries, and in New Jersey, where GTI also operates a dispensary.

Despite the well-documented problems Illinois is having implementing social equity licensure provisions in the state to date, industry observers believe East Coast that could legalize adult-use sales in 2021, which includes Connecticut, will have similarly-constructed limited licenses with commercial advantages going to incumbent operators. 

2. Privately-held multi-state operators are also struggling to scale up.

In 2019, Chicago-based multi-state operator Verano Holdings agreed to be acquired by Phoenix-based Harvest Health and Recreation for $850 million. A year later, when the market for publicly traded cannabis companies hit bottom and the novel coronavirus began changing life as we know it, the deal got nixed. After the deal collapsed in early 2020, multiple investors told Grown In that Verano managed to raise money at a higher valuation last summer than what Harvest offered in 2019. Putting that new capital to work, Verano just opened up a second Zen Leaf dispensary in Aurora, Illinois and is pursuing additional opportunities in the state. 

New York-based Ascend Wellness Holdings raised capital at a $300 million valuation last summer, and paid $28 million in August for MOCA Cannabis’ two Chicago locations. Ascend operates in multiple coveted states, with a cultivation license in Illinois and multiple dispensaries in Illinois and Michigan. A number of company stakeholders also tell Grown In that the company’s Illinois Supply & Provisions dispensary in Collinsville, Illinois near St. Louis  is generating nearly $1 million in sales per week.

Chicago-based multi-state operator Pharmacann, which was to be acquired by MedMen in a collapsed deal for $650 million last year, continues to raise capital from investors and through sale-leaseback transactions, including a deal with Chicago-based NewLake Capital. Revolution Global based in Elmhurst, Illinois also has been seeking capital in 2020, investors and family office managers tell Grown In.

3. Time will tell whether new license holders can operate a strong business.

Investors view Missouri, where medical sales began earlier this month, with great curiosity. The state is operating a limited license model, but unlike Illinois it awarded hundreds of licenses to cultivate and sell cannabis with a handful of cultivators and half a dozen dispensaries now operational after a series of delays.

Consumer demand seems to be strong, as evidenced by fast sales at new Missouri dispensaries and the growing stream of Missouri consumers crossing the Mississippi River to Collinvsville’s Illinois Supply and Provisions dispensary. However, the longer-term economics of Missouri-based cannabis operators are not yet clear, giving pause to many investors Grown In spoke to.

The biggest cannabis industry story in Illinois remains the status of upcoming dispensary, craft grow and infuser licenses. While investors clearly see value in buying into awarded licensed assets in Illinois, few if any are willing to get their checkbooks out until there is clarity on who is licensed to open dispensaries as well as craft grow and infusion facilities. Additionally, if dispensaries in Illinois are narrowly-owned by a “short-listed” group of 21 applicant groups, investors feel that there will be fewer opportunities with higher valuations to invest. 

4. Cannabis tech platforms are gaining critical mass.

Chicago-based cannabis software companies Fyllo and Leaf Trade continue to attract investor interest. Publishing icon Christie Hefner just joined the board of directors of Fyllo, which helps brands comply with advertising and marketing regulations. Hefner is also an investor in Belushi Farms, Jim’ Belushi’s cannabis company that has an Illinois distribution deal with CuraLeaf, which officially acquired Deerfield-based Grassroots Cannabis for nearly $900 million this summer.

Gastevich is bullish on Chicago-based Leaf Trade, which raised more than $4 million last year in a venture round led by Hyde Park Angels.

“On the ancillary and tech side,” explains Gastevich, “a lot of verticals are crowded and we anticipate several roll ups in the coming year. One of our strategies has been to focus on tech verticals that are less crowded. For example, Leaf Trade operates in one of the few tech verticals that is less saturated and they have the best B2B platform geared towards cultivators and dispensaries.”

5. Opportunities will only increase with time.

While investors sort through opportunities for plant-touching and ancillary cannabis businesses, there is uniform agreement that the trend is their friend. As more states convert from medical to recreational or launch medical programs, there will be more opportunities for cannabis companies to sell more variations of the plant to medical and recreational consumers.

Industry normalization, which includes decriminalization and legislation that will allow banks to join the party and flood the sector with debt capital, will reward companies that already have entrenched interests. 

Innovation, specifically around how the plant is consumed by more people for more purposes, is also of keen interest to investors. Companies that can differentiate through brand merchandising in particular are also seen as having competitive advantages as more consumers experiment with and embrace the plant.

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Brad Spirrison is a journalist, serial entrepreneur and media ecologist. He lives in Chicago with his son. Interests include music, meditation and Miles Davis.