Bridging the Finance Gap: Medical Cannabis Startup Incubators and Accelerators

Offering valuation growth for companies and revenue opportunities for shareholders, medical cannabis startup incubators and accelerators are playing an important role in today’s global cannabis market.

The global cannabis market is expected to reach $57 billion by 2027, according to Arcview Market Research and BDS Analytics. Hundreds of entrepreneurs with innovative brands and products are vying for a piece of the pie, but without the right financial and expert support most will have to settle for crumbs.

Cannabis is a capital intensive industry — which can pose a problem for companies with great business plans, big ideas, but not much experience in securing financing and navigating the complex process of taking a company public. We often think of this as a dilemma unique to very early-stage startups, but many successful late-stage startups often find themselves unable to enter the next stage in their growth cycle due to a lack of financing.

In the medical cannabis industry, this poses an even bigger challenge as financial institutions are still hesitant to provide loans and banking services companies in this space. The investment community also seems hesitant to jump into early-stage, private cannabis startups. For now, most cannabis focused investment dollars are going to the publicly-traded licensed cannabis producers. But there is a lot of opportunity to be had in the innovations of the startup sector.

Medical cannabis-based companies in need of funding options and access to basic commercial banking services to help them build and grow are looking to incubators and accelerators. These companies provide alternative financing solutions to the cannabis industry and are now capturing market share, representing another entry point for investors in the global cannabis space.

Incubators and accelerators in the cannabis sector supply the capital and support services that companies need to quickly build their valuations and graduate to the next stage in their growth cycle without diluting their equity prematurely.

Cannabis incubators and accelerators provide capital and expertise

Incubator programs are usually targeted at early-stage companies that need seed capital and guidance — including help with marketing, branding and strategies — to gain leverage in a competitive market. Accelerator programs are meant for more mature startups that may already be generating revenue but need a capital bridge to move up to a higher valuation so they can be in a better position to raise large funding rounds on their own.

Even more important than money, the biggest benefit a startup can get from an incubator or accelerator is expertise. That expertise comes in the form of support services — ie. training, mentoring, networking and development programs — that help companies succeed in a complex and evolving cannabis market.

In any industry, the statistics show that very few startups ever even make it out the gate. That truth is even more bleak in an emerging market like cannabis with very restrictive regulations that can vary widely even between neighboring jurisdictions. Incubators and accelerators can supply fledgling cannabis companies with industry specific legal advice to help navigate those complexities successfully.

Leading cannabis market incubators and accelerators

One of the most active startup accelerators in the cannabis space is Colorado-based CanopyBoulder, which has launched 63 businesses since 2015. The firm focuses on companies offering ancillary products and services for both the medical and adult-use cannabis market — think tech, data analytics, security and consumption devices. On top of seed capital and follow-on funds, CanopyBoulder also provides the expertise of its industry insiders and program alumni.

In February 2018, the company raised $2 million for its 2018 accelerator fund. Ten companies were recently enrolled in CanopyBoulder’s 16-week accelerator program for a total investment round of $300,000. The roster includes a cannabis legal services company; a cannabis media outlet; a fintech cannabis banking platform; and DNA testing service to personalize cannabis consumption.

Canadian-based Redfund Capital (CSE:LOAN) provides incubator and accelerator financing and services to mid-to-late stage startups with a focus on medical cannabis including hemp, CBD-related and healthcare-related companies. The first merchant bank in the medical cannabis market, Redfund Capital helps revenue producing startups take their business to the next level with debt facility and equity financing. The company’s loan portfolio consists of five cannabis related brands including, Biolog Inc., a cannabis-infusion technology company; Biominerales Pharma Colombia, South American licensed cannabis and CBD oil producer with an eye toward global markets; Mary’s Wellness, a cannabis beverage company; Winterlife Inc., a CBD-based product company; and RxMM Health Care, a manufacturer of CBD medications.

Cannabis Strategic Ventures (OTCMKTS:NUGS) in Los Angeles incubates early-stage and growth-stage companies in the cannabis and CBD sectors through a proprietary branding and partnership model in addition to a range of services including infrastructure, product sourcing, communication and content support. The firm’s portfolio includes Halo Filters, FITAMINS, The Ahser House CBD and Pure Organix.

In November 2018, Redfund Capital announced that its portfolio client Biolog Inc. is partnering with Cannabis Strategic Ventures to develop and market water-soluble cannabis technologies for cannabis and phytocannabinoid- infused foods, beverages and consumer products. “Working alongside Cannabis Strategic Ventures and assisting them to realize their mandate building their products brands using Biolog technology shows collaboration of incubators in the space,” Meris Kott, CEO of Redfund Capital. “Branded products are the niche we believe will lead the industry just as patented medical products lead pharma for many decades.” Kott added that she believes Biolog will be the next client in Redfund’s portfolio to go-public.

Redfund is currently on-track to help its client Mary’s Wellness list in the first quarter of 2019 followed by Winterlife going public in the second-quarter of 2019. Redfund is in active discussions with partners in the UK, Switzerland, Colombia and Portugal to help launch Mary’s products. With Redfund’s help Winterlife is launching its WinterlifeCBD products with planned expansion across the US markets and into Canada and Europe. Redfund expects to have a return on investment of approximately $54.7 million by 2019 on these five initial clients. Another 11 companies are currently in the pipeline awaiting due diligence.

Providing revenue opportunity with less risk for shareholders

Getting in on the ground floor in an early-stage company in an emerging market like cannabis may carry a lot of risk, but can offer higher returns on investment. While some accelerators are private companies such as CanopyBoulder, others such as Redfund and Cannabis Strategic Ventures do trade shares on public stock exchanges — offering cannabis investors another way to play the market.

As the first to invest in a company, accelerators are extremely cautious when it comes to due diligence and de-risking projects, a big plus for investors. These firms often offer financing and services for an equity stake in the company — meaning investors stand to benefit from the future success of the company. Accelerators who can successfully help clients grow their valuations will in turn produce revenue-generating loan portfolios that have the potential to build significant shareholder value. Taking equity positions in companies that vary in subsector — from cultivation to CBD-infused wellness products to seed-to-sale software — as well as in wide-ranging jurisdictions — from California to Colombia to Germany — gives investors the deeper exposure to a rapidly growing market that can only be achieved with a diversified portfolio.

Takeaway

Although cannabis startups’ funding options remain limited, they can still gain capital and support services from cannabis focused incubators and accelerators. By taking an equity stake in cannabis startups as they build value and go-public, incubators and accelerators also offer investors another entrypoint into a market set to be worth tens of billions of dollars.

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