The Wink in Weed: The Sock Puppet of Pot

“We lose a little on every sale, but make it up in volume

By David Rheins

“We lose a little on every sale, but make it up in volume.” The famous failed business strategy harkens back to the heady dot.com days when star-struck venture capitalists backed wild-eyed technologists at crazy valuations, betting on low-revenue/no-revenue ventures to capture valuable “market share” in the emerging digital economy.

Back then the goal for tech startups was to ‘Go IPO’ – take their companies public through an initial stock offering. Fancy suits, slick decks in hand, young tech entrepreneurs made schmoozing the Angels and Venture Capitalists their priority. Real products and actual profits would come eventually; but building mind share was more important than market share, and so these dotcoms raised enormous amounts of capital, which they quickly invested on flashy Super Bowl ads, groovy offices and over-the-top industry parties.

Perhaps the best known example of this failed approach is Pets.com, an online pet store famous for its ubiquitous sock-puppet mascot.  Raising $300 million, the company spent lavishly on high profile marketing efforts in an effort to build excitement around its initial stock offering.  The stock debuted in February 2000 at $11 a share, peaked at $14, and then quickly sank to less than $1. The whole wild ride was over in less than one year. Three hundred employees lost their gigs, and as many millions evaporated when Pets.com folded in November 2000.

Amazon, Google, Facebook. For every internet success story, there were tens of thousands of failures, some spectacular in the enormity of their disaster.  Billions of dollars were created and evaporated in the mismanagement of once-huge brands like Netscape, MySpace, AltaVista, Excite and AOL. Just this week, Yahoo gave up the ghost and was sold to Verizon for less than $5B, a loss of more than $100 Billion in value from its once lofty portal peak.

In today’s Green Rush, thousands of companies are being created and hundreds of thousands of workers of weed have signed up for their piece of legal cannabis. This November, a handful of new fully-legal states are expected to come online, including the huge California and Nevada markets. Our $5.4 Billion legal market is expected to quadruple in the next 5 years.

So, are we in the process of creating another bubble? Is the high-flying Pot Boom on a path to suffer the same burst as its dotcom predecessor?  And if we are doomed to repeat our past failures, who will we point to as the Sock Puppet of Pot?

While there are sure to be some dramatic flops, some key differences between the two markets suggests that the Pets.com scenario is unlikely to be repeated in our budding marketplace. First, while the legal cannabis industry is the fastest growing segment of our economy, it is not for the most part being fueled by over-exuberant VCs.  While ArcView and a couple of other funds are playing a small role, for most cannabis entrepreneurs, capital remains expensive and hard to find. Federal Prohibition has made commercial credit from banks unavailable, and Venture Capital cautious, and as a result so-called Friends and Family and other Angels are funding this grass-roots revolution.

Second, there are no public markets to wildly inflate company valuations. Beyond the dubious OTC markets, Wall Street is not yet playing the weed game, and won’t until there is a change in federal scheduling or regulations.

Most importantly, the cannabis industry is creating real products and generating real revenues and profits.  While the world only needs one or two search engines, it can absorb hundreds of cannabis brands.  Consumer demand for legal cannabis in its many forms is strong, and getting stronger, driven by product innovation in new categories like Cannabis Health and Beauty Aids (CHABA), edibles and concentrates, not to mention the explosive growth predicted in medical cannabis and industrial hemp.

So don’t look for any Pot Puppet ads on the Super Bowl anytime soon. Pot is not pixels, and decades of prohibition have created enormous pent up demand. That is not to say that there will not be some spectacular losers. Competition is fierce, and getting more cut-throat, as wholesale and retail price per gram shrinks, and more well-funded entities enter the marketplace. Look for marketing budgets to significantly increase as the battle for brand awareness and loyalty take center stage in the next act of our grand experiment.

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