Layoffs, cratering stocks, and blown-up deals: 11 experts take us inside the cannabis industry's meltdown and tell us where the industry goes from here

• Cannabis companies in recent months have struggled to raise money and close marquee deals.
• The emerging industry has been buffeted by headwinds including vape-related lung injuries, lower-than-expected retail sales, and a parade of lawsuits and corporate misdeeds.
• Cannabis execs and investors who Business Insider spoke with say these are temporary speed bumps in the quest to dominate a global industry worth hundreds of billions.
• "I think we'll see some real shakeout over the next few months," said Mark Zekulin, the CEO of Canopy Growth, a Canadian cannabis cultivator and retailer.
• Visit BI Prime for more stories, and subscribe here for our weekly cannabis newsletter, Cultivated.

For startups and publicly traded behemoths, navigating the choppy waters of the cannabis industry has been challenging.

Once flying high, cannabis companies in recent months have struggled to raise money and close marquee deals. Their share prices have cratered.

The industry has been buffeted by headwinds such as the spate of injuries related to vaping THC, lower-than-expected sales in Canada and US states where marijuana is legal, and a parade of lawsuits and corporate misdeeds.

Perhaps the biggest problem, though, is that cannabis companies and investors overextended themselves, driven by exuberance around an emerging market with an attractive story. Wall Street analysts say cannabis could become an $85 billion industry by 2030, and most US Democratic presidential candidates have advocated full-scale legalization.

But right now, that future seems far away. Business Insider talked to 11 executives, investors, and other experts to understand what went wrong in the cannabis industry and what the future might hold.

"I think we'll see some real shakeout over the next few months," said Mark Zekulin, the CEO of Canopy Growth, a Canadian cannabis cultivator and retailer. Zekulin said companies that didn't have access to capital would "start to have some real challenges."

Canopy Growth is one of the biggest cannabis companies in the world, and its shares have plunged from a high above $50 in September of last year to about $15, in part thanks to disappointing financial results. The slide has wiped out over $10 billion of the company's market value.

A 'toxic' operating environment and hundreds of job cuts

That slump has repeated itself across the industry. The Horizons Marijuana Life Sciences Index ETF, a fund that tracks cannabis stocks in the US and Canada, has slipped over 50% in the past six months. After a disappointing quarter, Tilray's market value dropped to just over $2 billion, from a high of close to $20 billion in the summer of 2018.

Cannabis companies have been forced to lay off hundreds of employees - more than 600 in the past few months, per Business Insider's reporting. An analyst at the investment bank Stifel summed it all up as a "toxic" operating environment.

Cannabis investors, executives, and industry experts nevertheless say they believe the thesis remains intact: Cannabis will be one of the world's largest consumer industries.

"The core thing is, it's just about letting the right amount of time pass," Zekulin said by phone. "At the end of the day, there's still a major prize in Canada - a $6 billion-plus recreational market. There's a major prize in the United States, and there's a major prize globally of hundreds of billions of dollars."

For cannabis companies and investors, Zekulin says it's about "having the patience" to "overcome some of the hiccups you expect in new markets and confusing regulatory environments."

To John Sandelman, the CEO of Ayr Strategies, a New York City-based cannabis company, the slumping share prices in cannabis stem from poor management and financial decision-making.

"It's a business predicated on the cheapest capital around," Sandelman said in a recent interview in his midtown Manhattan offices. "The stock prices reflect that these businesses were built on the backs of relatively unsophisticated Canadian retail investors."

Cannabis slowdown, by the numbers

This past week saw a series of high-profile cannabis companies report earnings, most of which served to pull share prices in the sector down, contributing to a 15% slump in the ManifestSeven Marijuana Index since Monday.

• Tilray reported a bigger loss than analysts expected, and the stock slid after earnings.
• Canopy Growth missed revenue estimates and saw its sales fall 15% quarter over quarter. The stock fell 14.4%.
• Cronos Group showed a small profit, but its revenue missed its guided target. The stock is down about 20% since it reported earnings premarket on Monday.

The dismal week is part of a broader slowdown. Both public and private cannabis companies raised $10.9 billion this year through November 8, down from $12.7 billion over the same period last year, according to data from Viridian Capital Advisors.

Cannabis mergers-and-acquisitions activity in Canada has dropped from $9.4 billion in 2018 to $2.0 billion this year, according to data from Dealogic.

Cash-starved cannabis companies have historically relied on their stocks as currency to make deals, because THC, the chief psychoactive component of marijuana, is federally illegal in the US and banks generally won't lend to the industry. As cannabis companies have seen their share prices slump, sellers no longer want to give up control of their businesses for what amounts to a volatile piece of paper.

That has scuttled the cannabis dispensary MedMen's planned $682 million merger with PharmaCann. Curaleaf, another US cannabis company, was forced to reprice a planned deal to acquire Select. On Wednesday, Cresco Labs, a competitor to Curaleaf and PharmaCann, announced it was repricing a planned combination with the Vancouver, British Columbia-based Origin House.

'The capital markets for cannabis are broken. Period. Full stop.'

On the private side, the picture is even less rosy.

While venture-capital firms have poured close to $2 billion into cannabis and cannabis-tech startups this year, per PitchBook data, most of that money flowed to early-stage companies. The average deal size for cannabis startups shrank over the first three quarters of 2019, and total funding declined to $452.8 million in the third quarter from $967.1 million in the second, per PitchBook.

For companies later in the growth cycle, capital is hard to come by. Adrian Sedlin, the CEO of the cannabis startup Canndescent, told Business Insider in a September interview that "the capital markets for cannabis are totally broken. Period. Full stop."

Institutional venture funds that are able to write large enough checks to support growth-stage companies are mostly sitting on the sidelines of the industry because the investors in their funds are generally uncomfortable with cannabis.

Because of that, Sedlin says, there is lots of appetite from risk-taking family offices or cannabis-specific funds to invest in smaller or earlier-stage funding rounds.

"But growth capital - that traditional later stage, B, C, D series capital - where the check sizes are anywhere from 25 to 150 million bucks? Good luck in cannabis," Sedlin said. "That doesn't exist."

So how did we get to this point?

The story of the industry's rise and stumble, cannabis industry executives and experts say, goes something like this. Because of capital constraints arising from federal prohibition, cannabis companies that sell or cultivate THC in the US were forced to go public - perhaps encouraged by bankers who stood to make a huge profit off these deals, the Canadian newspaper Globe and Mail reports - far too early in their growth cycle.

Major exchanges like the Nasdaq, the New York Stock Exchange, and the Toronto Stock Exchange wouldn't take these companies. So companies that sell or cultivate THC in the US were forced to tap into Canadian public markets. That caused a frenzy of cannabis companies going public on the Canadian Securities Exchange - a secondary exchange in Canada - in the last quarter of 2018 and the beginning of 2019.

Once they went public, many of these companies saw their share prices skyrocket as investors, mostly retail buyers, bought into the sexy story of making an illicit drug legal. In January, Aurora Cannabis, which is listed on the NYSE since it confines its THC operations to Canada, outpaced Apple as the top stock among younger investors using the stock-trading app Robinhood.

Institutional investors, by and large, have not bought into the cannabis industry in a significant capacity because of restrictions around the drug. And neophyte investors, cannabis execs say, don't have the stomach to weather any significant downturns, causing significant volatility for companies.

Early cannabis investors are 'tapped out or exhausted'

But with the slow rollout of retail sales in Canada and states in the US where marijuana is legal, as well as a series of management scandals at CannTrust - a Canadian cannabis cultivator that was found to be growing unlicensed cannabis - companies started to repeatedly miss their quarterly targets, analysts pulled back their estimates and put sell ratings on the stocks, and investors started to lose money.

"The initial wave of investors that went after this market has been tapped out or exhausted," Marc Hauser, the vice chair of the law firm Reed Smith's cannabis team, told Business Insider in an interview. "Companies are having a much harder time raising capital than just 12 months ago."

On top of that, the acquisitions many of these companies announced have so far failed to close, mired in US Justice Department antitrust reviews.

"What's going on in cannabis isn't unique to cannabis," said Jennifer Drake, a former Goldman Sachs managing director who is the chief operating officer of Ayr Strategies. "It's what happens when you have exuberance and free-flowing capital from retail investors."

To Drake, the markets definitely "overshot" the upside in cannabis when cannabis valuations skyrocketed last summer - and "we're definitely overshooting the downside," she said. "It's possible we haven't reached the bottom yet."

Nick Kovacevich, the CEO of KushCo Holdings, a company that manufactures packaging for cannabis companies, said a key part of the problem was that companies were putting out "huge numbers" to differentiate themselves in a hyper-growth and hypercompetitive market.

And then, on top of that, the vaping crisis hit.

"That couldn't have come at a worse time," Kovacevich said. "That just injected more uncertainty and more risks into the air for cannabis companies on top of all of the other challenges the industry is facing."

Have we reached the bottom for cannabis stocks?

Other cannabis executives say what we're seeing in the industry now is reminiscent of the dot-com bubble in the late 1990s, and it's made investors - both private and public, institutional or otherwise - wary about betting on the industry.

"I think that many companies went out to the public markets thinking that capital was infinite and time horizons were infinite," said Peter Barsoom, a Wall Street veteran who is CEO of the cannabis edibles startup 1906. "So I think what we're seeing today is likely to be the Pets.com and the Webvans of the cannabis space."

Barsoom said the right set of capital to fund cannabis companies was growth capital, rather than public markets. "So there was a mismatch that led to a bubble and sharp decline," Barsoom said.

To Peter Horvath, the CEO of Green Growth Brands, a CSE-listed cannabis company, the cannabis industry is facing the "exact" same problems as tech in the late 1990s.

"I think the capital markets has been a challenge for every cannabis retailer because a year ago, you were a fool if you didn't go public," Horvath said. "And some people got stung immediately after they went public."

But there is room for optimism. An analyst at Cantor Fitzgerald, which initiated coverage on six Canadian cannabis companies last week, said the positive catalysts for the industry "far outweigh" the negative ones.

"We are calling the bottom on Canadian cannabis stocks," the analyst, Pablo Zuanic, wrote in the note.

And Ayr Strategies' Sandelman, an executive who has worked on Wall Street for decades, says he believes markets are cyclical.

"You have to be a keen observer of markets," Sandelman said. "Everything comes back around, whether it's web 1.0 or cannabis."