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Trifecta of Growth

October 18, 2017

Greetings,
 
These are exciting times indeed. Colorado recently announced a sales record with $1 billion in just eight months – 21% growth over last year. Keep in mind that this +20% growth is occurring within the fourth year of recreational legalization, not the first. Speaking of firsts, Nevada announced $27 million in sales for its first month of recreational legalization – approximately 2x the first month for each of Colorado and Washington. This tally was even more impressive when you consider Nevada faced significant supply shortages. But is cannabis another example of a hot consumer fad set to fizzle after an initial growth spurt? To answer this, we wanted to dig deeper and understand the underlying forces at work. And like all good things (especially the Warriors), we found that the answer comes in threes.     
 
First off, the regulatory landscape is accommodating. States have strong incentives to legalize, including voter preferences, economic benefits (tax revenue, jobs, etc.), and more efficient resource allocation (police and jail reserved for more serious crimes), while the downsides of legalization are becoming less clear. Meanwhile, as discussed in previous newsletters, despite posturing, the Federal government has maintained its reserved enforcement policy. Taken together, we believe there will be a growing pool of potential cannabis consumers (addressable market) in the future as more states legalize.
 
Second, after legalization, there has been a trend of rising consumption within each addressable market. In Colorado and Washington, for example, the percentage of the population who consumed cannabis within the past year rose approximately 2% points to 16-17% during the first year of recreational legalization. Contrast the past year cannabis consumption with that of alcohol, which is approximately 70% across the U.S.  In our view, the consumption rate will continue to increase as cannabis becomes de-mystified and companies increase capacity and expand product selection to meet demand. For example, we have recently met with several innovative product companies, including a female-targeted brand with an infused tea and a micro-dosing brand with a dissolvable sublingual product (think: breath strips).
 
Third and finally, cannabis spend per capita has been quite robust. A recently published study of cannabis consumers showed an average monthly spend of $111. To put this in perspective, the average monthly spend on alcohol and coffee was $106 and $91, respectively. Furthermore, the majority of these consumers now include cannabis purchases in their monthly budget and over 25% spend more on cannabis than they do on eating out. In short, it is clear that cannabis has now reached a level of meaningful fiscal significance in the lives of its consumers.
 
With a growing addressable market, increasing consumption rates, and robust per capita spend, we believe that the “triple threat” growth story for the cannabis industry is sound. Therefore, the robust data from the early legalization adopters can be both sustainable within those states and replicable within new ones. This unique growth story is why we created Presidio View Capital – one of the first investment managers focused exclusively on cannabis. We are currently setting up our first venture capital fund for which we’ll announce fundraising plans within weeks. Alongside these plans, we look forward to providing you with more industry and business updates in the coming months. Stay tuned!
 
Cheers,
Mike and Kip
Co-Managers, Presidio View Capital

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