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Tips for Investors to Mitigate Risk in Cannabis Cultivation

Cannabis is becoming an increasingly popular sector for investors, with more than $10 billion invested in the North American cannabis industry in 2018, and projections for final 2019 numbers hovering around $16 billion. That isn’t to say the market hasn’t been without its ups and downs, with more recent troubles in new deals and mergers and acquisitions. It is increasingly important for investors in this space to take the necessary steps to mitigate risk and protect their assets.

In an industry as fast-paced and dynamic as cannabis, the investment process isn’t the same for any two investors. However, despite different processes and approaches, one thing all investments in this space should have in common is an educated and thorough operational evaluation and facility assessment. Executing due diligence prior to investing – especially when it relates to environmental and cultural control considerations – can make or break whether or not you see a return on your investment.

Why environmental control should matter to investors

Environmental control is a critical business consideration because it directly impacts all of the KPIs involved in cannabis cultivation. As the market continues to mature and consumer demands evolve, product quality, consistency, brand loyalty, output and sustainability are key drivers influenced by environmental control systems – all of which affect growth trajectory, business performance and the bottom line.

In short, if the systems in a cultivation facility are not properly controlling the indoor environment, the potential of the business as a whole is limited. Working with the right team of experts to perform a thorough operational evaluation and facility assessment prior to making any financial commitments should be of the utmost importance. Investing in a cannabis business during the design process where important decisions are still being made is a wise choice in order to see the highest return on your investment.

Tips for investors to mitigate risk

  • Gain intimacy with the cannabis and commercial agriculture industries before you invest. Spend time getting to know the ins and outs of the industry, who the key players are, and learn from the mistakes that have already been made in the market. We have a lot to learn from the day to day operational discipline that permeates the commercial agriculture industry.

Top questions to ask: Have you networked with an owner or operator who is already active in your future marketplace? How are the tastes of cannabis consumers and medicinal products going to change, and how will they impact your operating strategy?

 

  • Understand the goals of the company. There are countless ways to go to market with a cannabis company, each of which need to be thoroughly considered and planned out. Your investment process will directly depend on the company’s planned direction.

Top questions to ask: Do you plan to be a fully integrated craft cannabis company? What is your specific business model, e.g. a bulk-grade grower that sells flower directly to extractors or a clone manufacturer that sells starter plants for other cultivators?

  • Get to know and trust the people you’re going to do business with. As an investor, you’re going to rely heavily on the other owners involved in a project of interest. Take the steps necessary to truly and fully understand the level of experience and goals of each of your potential partners to make sure you are aligned. An owner at this stage of the cannabis industry’s development would be better served by hiring specific experts in each field and making sure all partners talk to each other on a regular basis. The only way to conduct effective due diligence is to have the right people at the table that allow you to compare different opinions.

Top questions to ask: Have you done a preliminary background check on everyone involved, checked on references and offered up your own background information for consideration? Have you spent a significant amount of time determining the character of your future business partners by watching their actions under pressure?

  • Build an ecosystem of experts you can trust, and engage them early. There will be many experts involved in the design and construction of a cannabis facility – from engineers to architects to contractors. Assemble a team of professionals with experience in the cannabis and/or agriculture industry, and rely on their input to help you make important decisions surrounding capital allocation and risk. Remember that experience does not necessarily equal proficiency – not everyone who claims to be an expert actually is. The goal is to introduce partners into your ecosystem so you can make stronger decisions, reduce equity dilution and allocate capital more effectively.

Top questions to ask: Have you walked through a facility designed by your experts and gathered feedback from past clients and partners? Do their operational goals match the solutions your experts prioritized during the design phase?

  • Take a holistic approach. In our experience, investors who can take a step back and understand how every decision impacts the bigger picture generally ensure a higher return on their investment. Each decision is interrelated and one misstep early on can be detrimental to business success.

Top questions to ask: Are there are too many variables to keep in focus at any one time? Have you created a mind-map or similar network diagram to understand the implications of each design change?

  • Get cash-flow positive as soon as possible. Create modularity so the facility can be phased to preserve capital and reduce capex. Until a company is cash-flow positive, it won’t be able to grow. Negative cash flow leads to debt, dilution and other problems that can affect your return on investment. Cash is king, and is also a huge risk mitigation strategy. Generate cash flow as soon as possible and research access to different types of financing.

Top questions to ask: What cash is being generated in each phase to fund future phases? Will your production costs be increasing or decreasing over time, and how will this be impacted by market price pressure?

In Conclusion

The design and construction of a cannabis facility is a complex process, and there will inevitably be a few pitfalls along the way. Knowing how to work around complications and find comprehensive solutions to issues that arise will allow you to stay in business and see the highest return on your investment. An intimate knowledge of the industry and a nuanced approach to understanding how all of the systems involved in a cultivation facility work together to best optimize plant vitality will allow investors to mitigate risk and ensure business profitability.

About The Author

Adrian Giovenco is a passionate engineer with over a decade of experience designing, selling and commissioning HVAC and process systems throughout North America. Recognizing a knowledge gap around fully understanding plant transpiration rates and how they impact controlled environments, he founded InSpire to focus on Advanced Transpiration Solutions. www.InSpire.ag

 

Adrian Giovenco

Adrian Giovenco

Adrian Giovenco is a passionate engineer with over a decade of experience designing, selling and commissioning HVAC and process systems throughout North America. Recognizing a knowledge gap around fully understanding plant transpiration rates and how they impact controlled environments, he founded InSpire to focus on Advanced Transpiration Solutions. www.InSpire.ag

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