As we at Merida Capital Partners tout our fund as a cannabis infrastructure fund, one of the first questions inevitably asked by anyone we meet is, "What is 'cannabis infrastructure'?”
The answer to us seems quite simple, but recent news not only helps give color to how Merida invests, but also drive home the importance of infrastructure to the burgeoining cannabis industry.
One point we make constantly is that cannabis is a fragmented industry in its infancy, with growing pains around its underlying methodologies that are sure to disrupt much of the legacy, black-market mentality of many of its pioneering growers. What this means in the real world is that regulation is coming and coming in a big way. And nothing helps people comply with regulations more than “infrastructure.”
From lab testing, to data, to industrial quality equipment and tools, infrastructure is in essence the mechanisms and tools you use to create a product, process the product, and deliver the product to the consumer. In each step, rules requiring certain behavior or standards are present (or will be eventually). Infrastructure is what you need for the product cycle, but more important for today’s commentary, it's what you need to meet those standards or prove you have complied with existing law.
Think of it this way: Just four short years ago, the vast majority of the billions of dollars of cannabis consumed in the U.S. was largely grown by people violating both federal and state law. Now they are no longer violating state law, which means...regulations. In Canada, it’s a similar story with the federally illegal aspect there now removed by their federal medical law. If nearly $8 billion in cannabis will be consumed legally this year in the United States, as our portfolio company New Frontier Data predicts, than how many billions more of illegally grown product will be consumed? Estimates vary but it could very well be twice that or even more.
This likelihood is something we take account of when considering an investment thesis. The clash of nouveau participants versus the early, early adopters is going to take place on a massive scale in California over the next year and we will all be there to observe and determine whose predictions were correct. In the case of Merida or other “infrastructure” investors and cannabis-focused funds, you can judge our predictions in stark fashion: Our investments in many cases mirror our predictions.
Sophisticated growers and processors are entering the market daily and have the advantage of using the experience of pioneers without any of the baggage of having grown before laws existed. These market participants come from other industries where they simply accept the need and proliferation of infrastructure as a necessary cost to creating a product people consume safely.
A recent San Francisco Gate article makes our point for us: A reported 80% of all cannabis present at Hempcon last August was tainted with some type of contaminant. Granted that most of the cannabis was from the Bay Area of Northern California, where outdoor grows and lower infrastructure growing exists, nevertheless, we believe that in states with lower regulation threshholds, this would be a typical statistical result if all of their products went through comprehensive testing.
Merida invested in Steep Hill Labs for exactly this reason. The SF Gate article articulates what lies at the core of Merida’s investment thesis: That “… it’s up to growers to invest in cleaner — and necessarily more expensive — cultivation practices to avoid being turned away from California’s dispensary shelves. And they’ll need to do it in a hurry. Until then, it’s buyer beware. The marijuana legalization era has just begun, and its first major challenge has already emerged.”
Merida Capital Partners invests in the tools that drive cleaner and more expensive cultivation practices referenced in the article. That is what infrastructure translates to in the real world. It’s the difference between your local lemonade stand and Minute Maid. They both might taste good but one used more quality control in its production that ensures its safety over thousands of batches.
Steep Hill Labs is at the forefront of making products safer for consumers, and states like California are starting to realize that testing simply for pesticides and potency is not sufficient; mold and biological contaminants are just as dangerous if not more so. The SF Gate article cites a report that several cancer patients at UC Davis developed serious infections in their lungs, with one dying, from consuming cannabis with mold or fungi present. We have predicted for quite some time that pharmaceutical quality control and standards are coming to the larger West Coast markets and we are investing to mirror that prediction.
Another prediction we have been making is that the medical/pharmaceutical side of cannabis will continue to expand as science validates the effect of clean and safe cannabis on the endocannabinoid system. While adult-use cannabis gets much of the headlines, the infrastructure around validating medical cannabis is just beginning to really take shape. Pennsylvania passed a medical cannabis law that encourages medical schools and universities to participate in research. Ohio’s new law allows universities to test the cannabis that will eventually be sold there. We believe that state sponsored support for cannabis related activity will accelerate the adoption of medical delivery methods.