„You are the wind beneath my wings.”
The CBD industry may be the riskiest sure bet ever.
First, the sure bet. The demand for CBD in multiple types of consumer goods—from foods to healthcare to beauty products—is going to provide companies a wealth of opportunities. In a survey of 2,000 U.S. consumers, 1,500 reported using a CBD product within the last three months. With a CAGR of 39.5% for CBD oil alone, the U.S. CBD market is sprinting towards becoming a multibillion dollar industry.
On its way to becoming a juggernaut industry, hemp and CBD are revitalizing farming in many places hit hard by the tariff wars or by diminishing profit margins on staple goods.
For something that remains illegal under federal law in most applications and shares many of the associations with its cannabis cousin, marijuana, the rise of CBD is meteoric. The mainstreaming of CBD goes back to the beginning of 2018, perhaps, and was boosted when the 2018 Farm Bill legalized industrial hemp. And we’re nowhere close to the ceiling.
While CBD’s popularity may be a sure bet, the risks of running a business in this space are manifold. Unlike a normal consumer goods company, products that incorporate CBD will be under special scrutiny from regulators. Though the Farm Bill pushed hemp-derived CBD to the purview of the FDA—rather than the DEA—the FDA is making it clear that they won’t be a pushover.
Right after the Farm Bill passed, the FDA passed regulations restricting CBD as a dietary supplement. Over the last six months, there’s been uncertainty in the rules surrounding CBD products—rules which many companies have largely ignored.
Asking for forgiveness rather than permission is a risky business strategy when the FDA can shutter your business. The FDA, however, is seen as a temporary roadblock to the industry. All signs point to Congress and industry lobbyists successfully pressuring the agency to draft friendly guidelines for CBD oil and CBD-infused products.
The biggest challenge in the short-term for CBD businesses is going to be oversaturation and stiff competition. Celeste Miranda, founder of the CBD Expo Tour, told WFYI that the time of free-wheeling growth is over. “You know there’s going to be a bigger supply. Oversaturation? Absolutely. So many factors come in at that point then. Things like marketing, branding, do you have all your checkpoints in place to be [sic] that survives.”
As consumers start to learn more about CBD and approach products with more discerning tastes, companies will need to start differentiating themselves from their competitors through smart branding and delivering excellent products.
Capital, with a side of mentoring
In an industry that still has a tenuous relationship with banks, liquid investments from private funds is critical to any company. The costs of testing for pesticides alone can run upwards of $40,000 per month for a large CBD company like Green Roads in Florida, so liquidity is key when credit may not be available.
Investors are more than willing to open their wallets to spend millions of dollars building these companies up. That’s going to leave a lot of small businesses out of luck competing against their more well-funded competitors. Small cannabis growers are already feeling the pinch and taking preemptive measures like forming co-ops to save on costs, have the ability to scale, and purchasing power to compete.
I spoke with Zak Garcia, the CMO of CBD Capital Group, a group of entrepreneurs and business operators who come together to buy small-to-medium-sized CBD brands. But unlike most investment groups, CBD Capital Group is also providing companies with expert advice and operational resources.
“We help businesses scale and grow their company over the course of a year,” Garcia told me, “and then we convert them into our equity stack. We’re offering these entrepreneurs a path to liquidity they wouldn’t normally have, while providing them services and consulting that they wouldn’t have either.”
CBD Capital Group brings cannabis and start-up experience and works closely with the brands they invest in. Before they invest in a company, though, the brand’s mission needs to be aligned with the group’s. While they add more brands under their umbrella and continue to grow them, they’re staying focused on their overall mission: helping the CBD entrepreneurs—and the industry—achieve its potential.
“It’s important to us that we understand the goals and the dreams of the entrepreneurs we work with. Our mission is to actually help CBD entrepreneurs achieve their dreams and positively impact the world. Everybody has financial goals, but we don’t want to work with people who are just in it to turn a profit and sell a company. For us it’s important the brands we work with are building a foundation and giving good jobs to employees.”
Garcia and CBD Capital Group hope their hands-on approach to investing through mentoring will not only lead to a 9-figure valuation of their portfolio by 2020, but creating competitive companies that will stand out from the field in the long-term. That’s why they’re looking for companies that are doing more than producing a great product. They’re acquiring companies who know how to build organic online traffic through SEO and run smart paid advertising campaigns.
Their first acquisition in April this year was Medix CBD, a manufacturer and supplier of high quality CBD products, including tinctures, gummies, and vape oil.
For Medix CBD Founder Miguel Lozano, there were plenty of investors out there for his company, but the coaching and mentorship of CBD Capital Group stood out. “We are excited that instead of a traditional VC where we receive just capital, CCG is working alongside us to give us their expertise and an array of operational resources that will help scale much faster than our competitors. I know that similar to many other entrepreneurs, I’m not as well-versed in back-end resources like HR, payroll or supply chain management, and CCG is providing us with these resources while also coaching us as professionals to learn how to do these critical tasks ourselves.”
That’s the rub of excelling in the cannabis industry: there’s no model of excellence right now. It’s a fluid and shifting industry that didn’t really exist just a few years ago. And if you’ve got years of experience right now, it probably means you were operating in less-than-legal, not-so-regulated ways. Now that CBD and hemp and marijuana are—or are becoming—legal, these industries need to nail the big and small things they didn’t have to worry about before legalization. That’s where the coaching of CBD Capital Group and other similar investors can make a world of difference for many.
The key, Garcia told me, is that entrepreneurs have to be willing to learn. “You have to be willing to put in the work. And you have to be open to feedback. I would not be where I am today if it wasn’t for the coaches that I had along the way.”
Finding success in the ultra-competitive CBD industry may well come down to who has the best coaches backing them. From the changing regulatory landscape to the rapidly-evolving consumer understanding and tastes, the CBD industry isn’t going to be getting easier for small businesses in the near future.
Disclosure: I have no financial interest or positions in the aforementioned companies. This information is for educational purposes and does not constitute financial and/or legal advice.