There’s a kind of boom and bust cycle that tends to follow the development of every new technology, or every major societal change. People get excited about the possibilities of the shiny new concept, they dump money into stocks, they start businesses in the industry, and they push public enthusiasm even higher. Then, at some point, someone realizes all these businesses aren’t really innovating or providing the value people thought they had, and the bubble bursts.
If the marijuana industry isn’t careful, it could follow the same pattern. Fortunately, individual companies in the industry (and individual investors) can avoid a financially grim fate with one simple change to their approach: favoring innovation.
The dotcom bubble
It’s easiest to see this pattern through the lens of incidents past, so let’s take a look at a reasonable counterpart: the dotcom bubble of the late 1990s and early 2000s. The internet was a brand-new technology, giving people access to content they’d never had before and opening the door to millions of new potential business models. Accordingly, the general public became excited, and started investing in internet-based companies like online shopping businesses and communication companies. Entrepreneurs became excited, and started launching new sites and new businesses mimicking the strategies of their counterparts (which, let’s face it, weren’t very well-formed).
The end result was a market full of amateur entrepreneurs focused more on getting a slice of the pie than developing something truly new, or something that really made the most of the new technology, as well as amateur investors dumping money into stocks just because they capitalized on some “game-changing” trend. It was only a matter of time before the overinflated prices started to fall, and after a wave of panic selling, it led to a full-fledged economic crash.
Of course, this clearly didn’t mean the internet was a fad—it truly was a game-changing technology, and there were hundreds of online businesses that survived the dotcom crash, including modern tech overlords like Google and Amazon. But they survived because they innovated; they provided a product that gave users something new and valuable, rather than just trying to cash in on a trend.
How marijuana fever is affecting the industry
We can see a similar enthusiasm rippling through the marijuana industry. Several developed countries have fully legalized marijuana, including Canada and the Netherlands. And while the United States is lagging slightly behind, there’s a wave of legalization setting the course for not just medicinal marijuana, but recreational marijuana use as well. Average people, regardless of how they personally feel about the legalization of marijuana, tend to see legalization at a sweeping progression that can’t be stopped; someday soon, any adult will be able to legally buy weed the way they buy alcohol or tobacco today.
Acceptance of cannabis is also growing. In the words of Harvest (House of Cannabis), “people are starting to realize the massive benefits of cannabis, including its treatment of anxiety, PTSD, chronic pain, and even epilepsy. It’s only a matter of time before public perceptions finally acknowledge the positive impact cannabis can have.”
Speculators want in on this trend before it fully manifests. Venture capitalists and entrepreneurs want to start cultivating plants and developing brand recognition with consumers. Ground-level investors are hungry for “marijuana stocks,” eager to buy up stock from companies that have a chance of leading the pack when marijuana does, inevitably, become fully legal.
But there are a couple of major problems with this. First, just because a business is working with marijuana doesn’t mean it’s founded on good business principles. If it’s following a stagnant formula that a thousand other marijuana companies are following, it’s not going to stand out. If its leadership is shortsighted and focused only on riding the wave of the trend, the company isn’t going to last.
Second, an individual consumer isn’t forward-thinking for believing the marijuana industry will soon be thriving; the vast majority of other consumers also realize this is the case. Accordingly, demand for marijuana stocks is high, which is a surefire recipe to push market prices higher than they should reasonably go. The same thing happened with internet stocks in the late 1990s; everyone believed the internet was “going places,” and everyone was excited about tech stocks. They had good reason to be excited, but the enthusiasm pushed the boundaries of what was appropriate, and got placed on companies whose only saving graces were the fact that they were associated with the internet.
Toward innovation and true value
Starting a company or investing in a company just because it’s tangentially related to marijuana is a bad idea, not just for you, but for the economy at large. Though recreational marijuana isn’t going to be as far-reaching or game-changing as the internet, it does carry substantial power, and if the market gets too hot or too crowded, it could spark a wave of failed investments and collapsing businesses that results in a full-blown economic recession.
The solution, of course, is to focus on truly innovative ideas. Several new, amazing cannabis-related technologies are emerging, including upgraded rosin production, vending machines that focus on compliance and big data analytics, and new cannabis-related products that open the door to new demographics and new opportunities. The companies inventing technologies like these, or at least capitalizing on them, have a much better chance of succeeding than a business simply jumping on the trend (providing other business fundamentals are still in place, like solid leadership and ample cash flow).
As a society, we have a bad habit of putting all our attention on sexy new technologies that have the power to change the world in some way. It’s both natural and appropriate to push for these changes, and be excited for how they’re going to change our lives, but the disproportionate investments and blind favoritism can only lead to problems, both for the industry and the economy at large. Be prudent in how you evaluate marijuana-related companies, and don’t over-sensationalize the emerging industry.
This post is part of our contributor series. The views expressed are the author's own and not necessarily shared by TNW.
Published July 15, 2019 — 14:32 UTC