Venture Capital Seizes Investment Opportunities In European Cannabis Sector

Despite the disruption Covid-19 has caused across many sectors of the economy, Europe's burgeoning cannabis industry has continued to make gains. As medical cannabis, consumer CBD and even adult-use markets have continued to develop, so has the pace of investment activity in this nascent industry. A new report titled "The European Cannabis Investment Ecosystem" lifts the lid on investment and deals activity across the continent, revealing an exciting and innovative sector that's rapidly gaining pace. The report finds that investment into the European cannabis sector has reached an estimated €1.2 billion as of June 2021, with over 50% of publicly recorded deals flowing into healthcare segments and another 40% into wellness opportunities. Investments cover the breadth of the cannabis supply chain; a quarter of reported deals were found to fund formulation and manufacture activities, 17% to fund cultivation and processing, and a further 16% into both brand assets and R&D.

Record-breaking Deals Draw Investor Attention to Cannabis Sector

Several European cannabis operators have been the subject of major deals in 2021. GW Pharmaceuticals, a British global pharmaceutical company was acquried by NASDAQ-listed Irish biopharmaceutical company Jazz Pharmaceuticals earlier this year. The €6.1 billion transaction, the largest deal in the cannabis space to date, demonstrated the potential for big company exits and the promise of pharmaceutical-style cannabis medicines.

In March 2021, the U.S. cannabis multi-state operator (MSO) Curaleaf acquired EMMAC Life Sciences, a leading vertically-integrated European cannabis company, for €329 million in cash and shares, setting an example for North American acquirors looking for turn-key solutions into Europe. In the same month, British American Tobacco finalized a near €150 million investment deal in Canadian cannabis producer Organigram. The deal allows for a product development partnership with the firms granting each other intellectual property licences to commercialize the next generation of cannabis products under their own brands. Tobacco companies are beginning to see long-term benefits in investing into a sector with high growth-potential, as conservative stakeholders begin to come around to less traditional investment and acquisition opportunities, despite strict government regulations in place.

Venture Capitalists Embrace Blooming European Cannabis Sector

As early as 2018 several North American venture funds such as Artemis and Altitude made cannabis investments into Europe, looking to replicate the industry successes they had enjoyed in the United States. Over time, venture capital has become an increasingly important part of European cannabis funding. Attracted by the potential of the developing sector, mainstream European VC groups and global FMCG venture arms have begun to invest at an increasing rate, with venture capital now representing as much as 42% of European cannabis investment. As businesses grow from an unproven bet in a risky new market to an established operator in a growing sector, VCs and other institutional investors replace angels and high net worth individuals as the main source of investment.

Several specialist European cannabis funds, such as Óskare Capital and Verdite Capital, have now launched to cater to the growing ecosystem of cannabis companies, with mainstream venture capital funds such as Octopus Ventures also considering investments in the European cannabis ecosystem. Currently, the European cannabis sector still represents a risky investment for many VCs, but there are signs that this is starting to change. Will Gibbs, Principal at London-based VC Octopus Ventures, noted that they are watching the sector carefully and “have built a strong thesis and track record around taboo sectors. Only a subset of investors and entrepreneurs go into these spaces, but the size of the prize is massive.”

U.K. Becomes Hub for Cannabis Investment Activity

The U.K. currently stands at the centre of European cannabis investment activity, with over €50 million raised on London's public markets and over €42 million through private transactions in the first 6 months of 2021 alone. More than two-thirds of European cannabis public market listings have been through London exchanges, with a flurry of interest since the Financial Conduct Authority (FCA) provided guidance for cannabis companies looking to trade on U.K. exchanges in September 2020. The FCA has now released their technical guidance on that statement for consultation, adding further meat on the bones as to what 'types' of cannabis companies could access the public markets.

With the U.K. legalising medicinal cannabis in 2018, an accommodating environment for consumer CBD entrepreneurs and the potential access to large pools of capital that listing on a U.K. exchange provides, the U.K. cannabis investment ecosystem offers opportunities for both national and international operators.

Promising sounds have been made by the British government to help shore up this position. The Government's recent Taskforce on Innovation, Growth and Regulatory Reform (TIGRR), led by former leader of the Conservative party Iain Duncan Smith, former Life Sciences Minister George Freeman, and former Northern Ireland secretary Theresa Villiers explored post-Brexit regulatory reforms in high-growth sectors, including cannabinoid medicines, nutraceuticals and agri-tech. Proposals from the taskforce included moving regulation of cannabis medicines and CBD production from the Home Office and to the Department for Health and Social Care, as well as reforms to the U.K.'s clinical trials framework that could aid the development of more cannabis-based medicines.

Despite the government's efforts to stimulate innovation, the U.K. Proceeds of Crime Act 2020 (POCA) remains a significant issue for investors to consider. POCA has extra-territorial effect and covers operations carried out overseas, making investment into companies with operations that may contravene domestic UK law, even if the activity is carried out in a fully-legal manner abroad, very difficult. This limits, for example, the range of companies that may list on U.K. exchanges, as well as the portfolio of overseas companies that U.K. investors can back. POCA has created a chilling effect for the cannabis industry in relation to the banking and finance sectors. Without further reform it will continue to remain a significant impediment to the U.K.'s leading position in the cannabis investment sector.

Crowdfunding Launches Cannabis Entrepreneurship

The cannabis industry is often associated with innovation, and the European industry's embrace of equity crowdfunding is no different. With significant retail investor interest in cannabis and CBD but limited public companies to invest in, crowdfunding provides an alternative outlet for exposure to early-stage European opportunities. Cannabis companies have seen unprecedented success raising through crowdfunding campaigns on Seedrs this year, with every cannabis company successfully raising 100% of its target amount since the platform opened its doors to cannabis listings in 2021, reaching a total of over €6.3 million as of June 2021.

The perception of crowdfunding platforms is changing quickly with revenue-generating European cannabis companies like Grow Group targeting raises on the Seedrs platform beyond seed level funding. Crowdfunding provides a chance for companies to pool investments from a wider range of backers, build brand evangelists and a community from loyal customers.

With more cannabis businesses demonstrating their potential for growth, the European sector is set to need significantly more capital for further maturation, creating a vast opportunity set for investors to dip their toes into the sector.