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By Richard Garner, Contributing Blogger
While early entrants into the soon to be legal Canadian cannabis market have posted significant returns for their first-round investors, skepticism from analysts and the financial media remains high about what many are calling bloated valuations. Enter Biome Grow. With a team made up of long time capital market players and regulatory experts with a strong adherence to market fundamentals and a “slow and steady wins the race” approach to business, the Biome Grow management team has, what some are calling, a unique advantage in the nascent cannabis sector: they weren’t first…sort of.
Through the capital raising side of their business, they financed many of the early market leaders. Co-founder and interim CEO, Khurram Malik: “We’ve been immersed in this space longer than anyone, 5 or 6 years now, because we’ve had to be. We raised around 70% of the capital for a double-digit number of the first cannabis companies in Canada and took many of them public, including Canopy etc. No one understands better than we do, what investors are looking for in this space. We’ve had to be subject matter experts in every regulatory matter in all the provinces in Canada as well as understand how things are evolving in the global markets. Obviously that knowledge and information is a big advantage.”
And why is that important? Well, according to Malik, its allowed Biome Grow to gain important insights into the regulatory process of the industry itself in all provinces as well as a strong understanding of their competitor’s business models and strategies and, most importantly, learn from their mistakes. “There’s no substitute in life for experience. No matter how much analytics, data etc. we have access to these days, venturing into uncharted territory is always fraught with unknowns, risks etc. and you’re going to make mistakes. And many of the first to market players have, IMO, learned some tough lessons the hard way. We’ve learned those same lessons, but from an arm’s length, it hasn’t cost our investors and we’ve been able to refine the Biome model accordingly.”
“First to Market” (FTM)” is somewhat based on the “gold rush days” concept of “staking your claim” in a territory and thereby guaranteeing success by shutting out your competitors. But the business world hasn’t worked that way in a long time, least of all in new markets where the rules of the game are still being defined. And even in this unprecedented time of data/analytics/information, no one can predict how any market is going to play out. While some in the start-up world still cite FTM as an important indicator of success, we need only look back to the mid-nineties to be reminded of how the perils of the antiquated notion of FTM cost so many, so much.
Remember Lycos? If your answer is “uhhh, sort of…”, you’re not alone. Very few now remember the early to market search engine and market leader. Lycos was at one time valued at 12.5 billion dollars; today they no longer exist. Friendster and My Space were the first significant social media platforms, but Facebook, who came along 2 years later, won the day. Apple didn’t produce the first cellphone and Dell didn’t make the first PC. In the early days of “dot-com mania”, companies could do no wrong, and AOL was at the head of the pack as the ‘dominant’ player”. Its sky-high valuation, bid up by investors looking for a windfall, made AOL more valuable in market cap than many blue chips at an inconceivable valuation of 224Billion!
So, what does all this have to do with the price of tea? Well, nothing actually but it should have a lot to do with the price of cannabis stocks. Are the FTM’s of Canada’s soon to be legal cannabis industry like Canopy, Aurora etc. the next Lycos or AOL? The principles and first round VC’s at the top of the pyramid might have gotten rich, but the majority of investors did not. In 1998, four years LATER than the FTM’s in search, the eventual winner arrived, as some said at the time, “late to the party”: Google.
Many of the same red flags have been raised about bloated valuations with little to no correlation to revenues, sales, EBITA etc. in the cannabis industry. In a June 15th, 2018 article entitled “blowing Smoke”, the Globe and Mail’s Christine Pellegrini called into question Aurora’s 5 billion-dollar valuation, saying it has less to do with justifiable metrics – only 50 billion in revenues last year – and more to so with smoke and mirrors and CEO Terry Booth’s penchant for being a “Trumpian Master of Superlatives”.
In another recent article in the “Cantech Letter” by Jayson Maclean, Don Lato of Padlock Investment Management argues that Canopy, like many of the early FTM cannabis companies, is overvalued.
“You’ve got a company valued at $8 billion, now closer to $7 billion, that has $80 million in sales. Even if you look out to 2021, you’re only looking at potentially a billion dollars in sales, so it’s still trading at 8 times three years out sales,” he said. “As great as the industry might be — and I think there are valid uses for medical marijuana and certainly recreational is going to have its participants, as well — this is like the Internet in 1999. The Internet is a wonderful thing but you wouldn’t want to buy a lot of those stocks at 1999 prices,” Leto said.
Biome’s Malik agrees and points to a business model and LP deal structures that will make them profitable in year 1 as the ultimate differentiator in vision of being the “Google”, not the “Lycos” of Canada’s cannabis industry. “We’re in this for the long haul. Just like the dot com era, there are going to be some early players who managed to create a lot of hype and significant valuations based on smoke and mirrors. But in 10 years, will they still be here? Obviously, we can’t answer that without a crystal ball, but we can say with confidence that we will be. Biome is in for the long haul and will be a major global leader for years to come.”
The information and opinions presented here are that of the author and do not represent the thoughts and opinions of this website. The analyst owns but does not represent any of the companies listed in this article and receives no compensation from any party mentioned in this article. Readers are urged to do their own research and due diligence and should seek advice from an independent financial advisor before making any financial investment.