Back in January, none of us could’ve predicted how 2020 would play out for the industry. Now that we’re in the fourth quarter, it’s worth looking at where things stand and how MSOs can effectively scale in the current environment.
Continued industry growth is a given. But how that growth happens—through either federal legalization or incremental steps at the state level—will impact the competitive landscape in different ways. I covered these challenges in a recent CBE article looking at the 2020 cannabis boom.
For MSOs to come out on top, it’s critical to build a core business plan that can pivot and evolve, and to find investors who are along for the ride and can provide value beyond capital. It also requires knowing when to execute.
Fourth Quarter Check-In: Cannabis Appears Ready for Explosive Growth
Let’s quickly survey where we’re at in the final quarter of 2020:
- Landlords are eager to fill empty space, with the current retail vacancy rate hovering around 20%, opening up new options for retail operators.
- Regulators are growing more comfortable with cannabis as the industry matures, and state and local governments are eager for new revenue streams.
- Five states are voting on cannabis. Passage of adult-use legalization in Arizona and New Jersey, in particular, would encourage neighboring states to fully legalize cannabis, powering significant regional growth.
- Investors are increasingly confident about the future of cannabis, and cannabis stocks are rallying on the prospect of a Biden/Harris election victory that could lead to decriminalization.
Legalization in the U.S. is very popular and bipartisan. According to a recent Pew Research study (Nov. 2019), nine out of 10 Americans favor legalization of either medical or adult-use cannabis. Out of 11 states that have already legalized adult-use, nine did so through ballot measures. The other two, Illinois and Vermont, legalized through legislatures. And if all five states vote in favor of legalization, more than a third of Americans would live in a state with legalized marijuana.
There’s a lot to be optimistic about, but we can’t break out the champagne yet. While polls on state legalization look promising, this election is anything but ordinary and nothing can be taken for granted. Other unknowns exist outside of the election cycle. For example, a spike in COVID cases combined with seasonal influenza could disrupt retail operations and supply chains in a redux of March 2020.
Despite the unknowns, when considering whether now is the time to scale your MSO, the signs point to ‘go.’ But knowing how to scale in the current environment is key.
Build a Business Plan That Can Evolve and Pivot
While there’s not one right business plan, all successful strategies have a few things in common, including a strong vision and story that aligns with the financials. That vision guides everything the company does, from day-to-day operations to talent recruitment to fundraising. It also provides a framework to evaluate emerging opportunities and remain disciplined in your growth.
Some MSOs have been sidetracked chasing the newest shiny object or latest trend and end up spread too thin. They lose focus on their core business and often end up spending time and money trying to dig themselves out of a hole.
On the other hand, the MSOs that succeed are the ones that stay true to the course, building a foundation that provides a springboard for growth.
A solid business plan is not a static plan, though. The plan needs to be capable of adapting and pivoting in response to market conditions, with the right team to lead growth.
For example, at Cresco we started as a single state operator in Illinois but quickly ran into headwinds. The state’s medical program was difficult to navigate, and the anticipated patient population wasn’t coming. We ended up going into other markets like Pennsylvania and Ohio, winning licenses there. Building an 11-state footprint wasn’t what we set out to do, but it’s where we ended up as we followed our core plan to grow a profitable cannabis business.
Looking at another example, the pandemic has challenged everyone’s standard operating procedures. Before March, I doubt that many cannabis dispensaries were thinking seriously about digital menus, online ordering or curbside pickup. But as COVID restrictions rolled out, these new options suddenly went live, advancing the industry by five years. The operators who came out on top were able to quickly pivot, respond to new consumer behaviors and adapt to the digital landscape while staying true to their core vision.
We talk a lot about lining up business plans with the ‘new normal,’ as if it’s a temporary thing. At this point, we need to recognize that the current landscape is simply ‘normal’ and adapt. It’s no longer an option to pivot if you want to stay in the game.
Find Investors Who Believe in Your Vision
Fundraising makes for heady times for MSOs. It can be easy to lose one’s way amid the excitement and stress of a major capital raise.
Not all money is equal. A well-known investor might not be the right investor for your MSO if they don’t support your vision or have expectations that match your timelines. Turning down money is hard, but you have to be picky and ensure your investors align with your business plan.
That’s why I believe the best time to raise money is when you don’t need it. Your back isn’t up against a wall, and you can take time to build relationships with the right investors who believe in your vision for scaling and driving value.
A good investor will be long on your business, knowing that in cannabis there will be ups and downs. They’ll understand the business timeframes and recognize that things may not always go to plan due to regulatory bottlenecks or other outside factors. In many ways, cannabis is still the Wild West—make sure your investors are along for the ride.
It’s essential to do your homework on potential investors, asking the following questions:
- Who have they funded in the past?
- What do they look for in businesses?
- How involved do they want to be?
- What’s their investment horizon?
Also, keep in mind that investors can provide more than just capital. Don’t be afraid to ask them for help or invite them to join your advisory board. Many investors work with CPG companies or start-ups in other industries and bring experience that you may be able to tap. They can provide insights on where they’ve seen things go badly for other companies, and help identify opportunities outside your normal channels.
Don’t Let Perfection Get in the Way of Growth
Executing against your business plan would be easy if you had unlimited capital. Most of us aren’t that lucky, though.
The reality is that if an operator waits for everything to line up perfectly, they’ll be left behind. Just as there’s not one right business plan, there’s not a magic time to execute against that plan. Success comes from having a business plan you believe in and the confidence to scale it to the capital you have on hand and execute. After the business is up and running, the brand is out on the shelves or stores are open, then you continue re-evaluating and adjusting your plan, keeping investors in the loop and making sure you have the right people on your team as you grow.
There’s no doubt in my mind that the cannabis industry is poised for explosive growth, regardless of the election outcome. For cannabis businesses that are stuck in wait-and-see mode, they may soon discover that they’ve been left behind if they waffle on executing now.