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Emerging Vertical Software Deep Dive – Cannabis Software

We at Bowery Capital released the 2016 edition of Opportunities In Vertical Software in November, which laid out our point of view on ten specific verticals and the potential for various software solutions to dominate each of these ten verticals in the coming years as well as technology shaping the future of four emerging vertical. This Emerging Vertical Software Deep Dive post is intended to provide an analysis of Cannabis software history, market themes, & investors.

History of Cannabis Industry Software

Technology entrepreneurs and investors alike should pay serious attention to the massive growth of the cannabis market. Many would be surprised to learn that the US market for legal marijuana, has by most analysts’ measures surpassing $4 billion. With a projected 5-year CAGR of over 20%, the category is experiencing explosive growth. Most estimates for the size of the US cannabis market in 2020 surpass $20 billion and common projections for a steady-state domestic market size hover between $50-75B.

The opportunity for technology focused on the cannabis vertical is unique. Large CPGs companies, like most large companies in mature industries, use software originally built for use across industries (e.g. SAP, Oracle, and IBM). Young cannabis CPG businesses, however, are growing up in the world of cloud software. They will look to a new class of software that is not only more specialized to meet the needs of their market, but also that will allow them to scale up from SMB to enterprise at their own pace.

Cannabis Software Market Themes:

(1) There is an unprecedented opportunity for emerging software companies to own a wider breadth of functionality in cannabis than has been possible in other vertical categories (especially CPG comparables). In particular, we see promise in production, SCM, ERP, and financial services, including: agricultural tech, facilities automation, physical security, testing & compliance, supply chain & distribution, wholesale & procurement, payments, banking, inventory management, and brand licensing.

(2) Regulatory pressure both negative and positive will continue to hold sway on cannabis business and technology markets in 2017 and beyond. The last 12 months have been tumultuous for marijuana policy, with big state-level and public opinion gains tempered by a new administration with some strong anti-cannabis views. The overall trends, however, seems to be positive for cannabis business: 28 states (plus DC) now allow some form of legally acceptable adult use and, according to latest polls, ~60% of US citizens in support legalization.

Most Active Investors Focused On Cannabis Technology:

Investor appetite in the space is hitting an inflection point, with only ~70 percent of cannabis businesses being bootstrapped in 2016. That figure is driven by increased access to bank capital, a proliferation of HNW investment, limited but focused PE activity, and of course, venture capital. VC activity in the space is heating up markedly, with traditional institutional VCs beginning to make bets in addition to early-mover cannabis-only funds. Outside of regulatory issues, the cannabis technology market’s biggest current challenge is a dearth of capable founders focused on the space, something we believe will change quickly over the next year.Some investors with a focus on cannabis software investment include The Arcview Group, Casa Verde Capital, Canopy, & MJIC

Thank you for reading our analysis on the Cannabis Software Vertical. Make sure to check out the 2016 edition of Opportunities In Vertical Software for the full report.

Nic Poulos
Nic Poulos

Nic is a General Partner at Bowery Capital based in New York. Prior to forming Bowery Capital, Nic was an Associate at AOL Ventures where he helped drive investment in and support of over 20 companies, primarily in the enterprise software space. Before AOL Ventures, he served as a Manager at Advertising.com, leading various business development initiatives focused around ad tech and sales. Earlier, Nic worked as a technology investment banking analyst at GCA Savvian Advisors in the firm’s Internet group. While there, he participated in the acquisitions of Broadband Enterprises and Register.com, as well as various early- and mid-stage private financings. Nic holds an A.B. in History from Princeton University.