Investment in European CBD and Cannabis

By Calin Coman-Enescu, Regional Director, Europe, New Frontier Data

Unlike in Canada’s nationwide cannabis program or the patchwork of legalized states in the U.S., in Europe no consistent cannabis market exists. In reality, the market is regionally fragmented, both by country and by products themselves. In navigating that, one can discern three distinct markets taking shape in Europe:

• CBD/Wellness: In a space targeting consumers seeking ways to feel better (with balms, skin creams, etc.), there is no recognizable market leader or strong brands known across the continent, though there are a few candidates vying for attention.
• Medical Cannabis: Much like in North America, the segment covers a wide range of various conditions, and several non-European companies are well positioned to take advantage of the growing patient market.
• Pharmaceutical cannabis: The coming sector remains a few years off, but will end up being supported and dominated by Big Pharma players.

As far as the medical cannabis space goes, Germany remains Europe’s largest marke, though with approximately 60,000 patients that remains relatively unimpressive. France this year is conducting a trial on 3,000 patients, yet legalization is unlikely to be expected until 2021 at earliest. Factoring in the positioning of established players like Tilray, there is high risk for private-sector investors looking to back fledgling businesses.

Similarly, the pharmaceutical cannabis space remains nascent, notwithstanding the rise of Epidolox and Sativex, respectively. Yet, drug development costs are high, regulations are tight, and — given the size of the market — it is very difficult at this stage to see a startup raising enough capital to develop and launch a viable product to compete with Big Pharma. The European market needs time to mature, and stable supply chains need to form before such opportunities become available to investors.

That leaves the CBD/Wellness space, which has by far seen the biggest growth in Europe over the past couple of years. Despite such, the market remains fragmented, with countless brands and varying levels of quality, pricing, and availability. Many companies are small in scale and bootstrapped, and a few have taken investments from angel investors, yet most European venture capital funds are content to wait and see what the market may bear.

Why? The current regulatory environment is likely the biggest culprit: Without clear regulations, it is difficult to map out how a company will grow and scale. Venture capitalists also prefer to invest in clearly defined categories, e.g.,  biotech or similar sectors with high barriers to entry or a high risk/return payoff. From their perspective, startups creating CBD products have very low barriers to entry, thereby accumulating too much risk. There is also a general sense of a lack of sophistication in strategy, or at least too little to warrant making an investment and comfortably sitting back for 5-10 years to see how it pans out. At the moment, backing startup CBD companies in Europe would require active involvement from investors helping to navigate the changing environment.

As the market develops and matures, it is expected that companies — some already existing today — will increasingly specialize. Such is the case in North America, and now startups can focus on their core products while trusting in others enough to outsource their needs. It is not the case in Europe, however, though the beginnings of specialization are taking root. Companies are aligning themselves as growers, processors, or product makers. Exchanges like CanXchange are being set up to facilitate trading of raw CBD ingredients. Mile High Labs and others are focused on providing scalable CBD production and extraction, and some notable venture capitalists are starting to dip their toes in the industry.

As with all investments, timing is key. In North America, investors and entrepreneurs jumped at the opportunities around them. Many made millions, and many lost millions. The European way is to wait and see whether the  next new thing is really the next big thing. How that translates is that there likely will not be  a “wow” moment in Europe for investors like there was in the U.S. Rather, the market will just slowly grow and mature as time marches on, with European investors willing to take the risk they can and find good opportunities if they take the time to sift through the pile, especially in 2020. Any angels and venture capital investors who are more risk-averse and prefer to wait have other opportunities to gain exposure to the space — such as Rize’s Medical Cannabis ETF, which tracks already listed and well-funded companies worldwide.