Upon arrival in the European cannabis market, the biggest news this year is what didn’t happen. Contrary to many people’s expectations, Germany is not yet on its way to legalizing the recreational use of marijuana. However, the EU’s most populous country dropped plans to reform the law after colluding with regulators.
Does Germany’s decision and precedent spell bad news for VCs investing in European cannabis startups? Not necessarily, and it might even be good news for some. According to Oliver Lamb, co-founder of Óskare Capital, “Germany’s push to slowly legalize recreational cannabis is positive for the medical and pharmaceutical market.”
“The hybrid recreational-medical experiment has been played out in North America, and there are a painful number of lessons learned that it would be careless to ignore,” he said.
Lamb, like other investors, is wary of the mistakes they see being made in the US: “The blurred line between the medical and entertainment sectors has undoubtedly undermined the targeted development of medicine,” he said.
“It is important to use lessons from the paths that others have laid before you. In New York, we have seen a failure to do this, with only a few dispensaries up and running with lax law enforcement, which has led to an obvious and developing bad market,” said Matt Hawkins, founder and managing partner of Entourage Effect Capital.
However, some funds are concerned that the overall addressable market for legal cannabis on the continent is limited and affected by Germany’s decision. “Scaling back in Germany made us more hesitant to deploy capital in Europe,” Hawkins said. “The process in Germany shows that the entire continent will struggle to create a commercial market that will be used by adults in the coming years and will have a limited TAM.”
Similarly, like other private businesses seeking to raise venture capital, cannabis startups are not immune to global repricing pushed by investors. “European cannabis companies are still overvalued,” said Emily Paxhia, co-founder and managing partner of Poseidon Investment Management.
For founders of cannabis-related startups hoping to weather the slowdown, the advice isn’t much different from what all entrepreneurs are saying right now: survive and thrive. That is Poseidon’s motto, said Paxhia.
For cannabis companies that know they can’t survive, finding a buyer seems like a viable option, as consolidation is expected in the coming months. But if we’re talking about investments or M&A, we’re in a strong buyer’s market, Lamb warned.
Read on to find out where these investors see the next opportunity, how they plan to tackle the market after Germany’s decision, and how they can make the most of it.
We are talking to:
Oliver Lamb, co-founder, Óskare Capital
Will cannabis be more legally accessible in Europe this year than ever before conducted our previous survey last year? Are there any significant regulatory changes at play?
On the medical side, cannabinoid therapeutics and non-cannabinoid therapeutics (ie, therapeutics that modulate the endocannabinoid system but do not contain cannabinoids) are increasingly becoming available.
There are many factors at play that explain this shift, among them [being] increase in tailwind and decrease in headwind. Today we have more, higher quality clinical data showing the efficacy of these drugs for various conditions, combined with an increase in qualified teams that bring these drugs to market.
As for the tailwinds, patient access difficulties have long hindered the prescription of drugs that target the endocannabinoid system (the mammalian regulatory system that reacts to cannabinoids and cannabinoid-like molecules, similar to the central nervous system).
However, we are excited to see more technologies and platforms that link specialist doctors to patients who need these drugs. One such example is Leva, whose digital clinic is tackling the highly underserved chronic pain market in the UK.
Along with this, there is a growing acceptance within the medical community of the suitability of ECS-modulating drugs for certain pathologies. At a conference in Berlin this month, a founder happily stated that a recent meeting of general practitioners dedicated two hours to discuss medical cannabinoids. This is a clear indication of the growing understanding and adoption of these drugs by doctors across Europe.
Except for watered down plans to legalize recreational useGermany imports a record amount of marijuana for medical and scientific use by 2022. Does this take attention away from the fact that imports are slowing down?
Although Germany’s decision is undoubtedly unpopular with companies betting on the law going in the opposite direction, this push to slow down the legalization of recreational cannabis is positive for the medical and pharmaceutical market.
The hybrid recreational-medical experiment has been played out in North America, and there are a painful number of lessons learned that it would be careless to ignore. Specifically, the legalization of recreational cannabis along with medical use in North America appears to have reduced the incentives for researchers to develop therapeutic targets for specific pathologies, due to the flooding of cannabis flowers distributed through dispensaries. That’s despite a preference held by most doctors to prescribe targeted and licensed treatments that don’t require smoking.
The North American approach also blurs the lines between the recreational and medical markets, reinforcing the impression that users of such therapies are primarily for pleasure while claiming a real need.
This misconception is not only counterproductive for patients looking for proven treatments, [but] it also distracts from the fact that ECS-modulating drugs can provide not only far superior side-effect profiles compared to traditional pharmaceuticals such as opiates, but also treatments for conditions that are currently incurable.
The Czech Republic may end up legalizing recreational cannabis use before Germany, but it’s a small market. Is it enough to move the needle and find out what the EU will allow?
Peter Lynch once noted that if you spend 13 minutes a year on the economy, you’ve wasted 10 minutes. Politics is the same. The influences on international regulation are vast and varied, and even if you have a good idea of the outcome, the times are just as complicated to predict.
Therefore, as a rule, we do not bet on regulation. Instead, we invest in what we know: strong teams, new science and untapped market opportunities. We select our investments assuming that the regulatory landscape is as stable as it is today. That way, if nothing changes, we know they can be successful anyway, and if things continue to open up, they can be positioned to benefit more.
The one prediction I feel confident in making is that the governments and medical communities will continue to gain an understanding of the benefits of these drugs.
How has your approach to investing in the cannabis sector changed over the past 12 months? What do you hope for in the next 12 months? Is consolidating the cards at that time?
As for our thesis, not at all. We started by focusing on Europe and continue to do so. Likewise, we launched the fund to target life sciences and deep technology investments in the sector, and this has remained unchanged, largely due to the fact that our portfolio has performed very well.
It is also heartening to see that many US funds are now looking to Europe for the next sector development. This is an asset, as we like to syndicate rounds and having stakeholders across the pond is always helpful when it comes to intercontinental expansion.
Here are our predictions for this year, and our predictions for 2022 are here.
We are happy to say that most of our past predictions have come true, and those for this year are on track to do the same.
What advice do you give your current cannabis-related portfolio companies about preserving or expanding their path?