Top cannabis VCs predict a slew of M&A deals in 2022 amid more cash and slow regulatory changes

Last year, a slew of mergers and acquisitions took place in the cannabis industry as companies with deep pockets sought to expand their footprints while legalization spread across more US states.

That trend is set to continue in 2022, top venture capitalists focused on the cannabis industry told Insider. That could mean huge amounts of consolidation for the space, which remains highly fragmented, as big players with financial backing gobble up smaller operators across the country. Consolidation could paint a clearer picture of the winners in an industry where it can be hard to tell which companies will succeed and which will fail.

Insider talked to 14 top cannabis venture capitalists who collectively invested $925.8 million into the industry in 2021. We asked them about what we should expect over the next year. Seven of them told us they predicted a rise of mergers and acquisitions. Here’s why.

Big cannabis companies with money will continue to seek out M&A deals

Nico Richardson, an AFI Capital Partners managing director, told Insider he expected consolidation in the cannabis industry to accelerate this year.

Richardson said bigger multistate operators, companies that grow and sell cannabis in multiple states across the US, were now able to borrow money at lower interest rates. The low rates, in large part thanks to the healthy financials many US operators have, give big companies the room to make acquisition deals that benefit them financially.

Morgan Paxhia, a managing partner at San Francisco’s Poseidon Asset Management, added that because the strongest and largest operators had more money, they’d continue long-term plans to build out their businesses and position themselves at the front of the pack.

“A common quote for cannabis has been: ‘A rising tide lifts all boats,'” Paxhia said. “We think 2022 is more likely to be, ‘A rising tide lifts seaworthy boats.'”

Al Foreman, Tuatara Capital’s chief investment officer, said he didn’t think this wave of consolidation will happen only among the big cannabis companies that grow and sell marijuana.
He said it will also likely happen between brands and cannabis-technology companies.

Consolidation in the cannabis space was up throughout 2021. In December, Jonathan DeCourcey, an analyst at the cannabis advisory firm Viridian Capital Advisors, said he expected
M&A deals in the industry to provide positive momentum over the next year despite slow legislative changes from the US federal government.

Slow regulatory changes may push companies to make more deals

Some venture capitalists told Insider that slow regulatory changes at the federal level may also have a large hand in pushing companies to make deals in the space.

For example, a reform bill called the SAFE Banking Act could help cannabis companies access banks — but despite large bipartisan support in the House of Representatives, the bill hasn’t passed the Senate. Because cannabis is a federally illegal substance in the US, major banking institutions won’t work with the industry, and businesses in the space rely heavily on cannabis-focused venture-capital firms and smaller credit unions.

“The US industry remains extremely fragmented, and delays in SAFE banking keep access to capital scarce, especially for smaller players,” Juan Pablo Martinez, Measure 8 Venture Partners’ principal, told Insider.

These financial chasms between big and small cannabis companies “incentivize and enable further consolidation,” he said.

Matt Hawkins, a managing partner at Entourage Effect Capital, told Insider he thought the industry could finally see some sort of federal legislation this year, given the high levels of bipartisan support for banking reform. He added, though, that if reform didn’t happen quickly, the trend of competition and consolidation would likely intensify.

Hawkins added that the US cannabis companies positioned to scale and succeed whether or not federal reform happens were the ones that would attract further investments.

Note: This article is part of our series on cannabis VC 2022 predictions. Read the other articles below:

Top cannabis VCs predict major mainstream companies will enter the industry this year, which could help the push towards legalization.