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VCs work around tight laws to support Europe’s budding cannabis industry

Across the majority of Europe, cannabis remains illegal, but that hasn’t put off investors who see a nascent market and an untapped opportunity.

When it comes to legalized weed, there was a time when Amsterdam was the first place that came to mind. The Dutch capital’s tolerant stance on recreational drugs has been a draw for tourists visiting its many “coffee shops” for decades. Yet, in Europe, the Netherlands is the exception rather than the rule.

Several states and provinces across the US and Canada (to varying degrees) have legalized the production, sale and consumption of cannabis. In Europe, however, cannabis is still illegal for the most part, aside from some narrow medical exceptions. So it comes as no surprise that venture capital activity varies dramatically between the two regions.

So far in 2019, the cannabis sector in North America has seen 262 VC deals worth $2.39 billion, according to the PitchBook Platform. Over the same period, European companies in the sector have completed 16 deals worth $123 million—a small figure but nonetheless a record year following last year’s $17.3 million across six deals—also per PitchBook data.

Given the infancy of the European cannabis sector—and the numerous regulatory barriers—it is worth making the caveat that much activity could still be flying under the radar, with a lot more deals yet to come. That seemed to be the sentiment at the Cannabis Invest UK event held at the Langham Hotel this week, now in its fifth year. Eddie Lucarelli, chief financial officer of Canopy Rivers, a cannabis-focused VC firm based in Toronto, was one of 180 attendees at the conference. He thinks the market may be at an inflection point.

Lucarelli noted that there are still limited markets for medical cannabis in Europe and no jurisdiction specifically where recreational cannabis is regulated. As such, many targets are pre-revenue and investors are limited to transacting on the basis of startups having medical licenses. But that is expected to change.

"[If] you look at Europe as a whole, the dominoes are going to fall,” Lucarelli told PitchBook. “This is where Canada was three, four or five years ago [and], from that perspective, there’s a tremendous opportunity to make good investments. It’s just being able to get there on a valuation that’s reasonable and makes sense.”

The same sentiment is shared by Hugo Alves, CEO of Auxly, a cannabis company also based in Toronto. Auxly, which produces a range of cannabis products for both medicinal and recreational use, has operations across Canada and Uruguay and is now setting its sights on expansion into Europe. Like Lucarelli, Alves says the development of the European market echoes that of Canada.

“It reminds us a lot of Canada in 2014 or 2015 and we’ve kind of seen how those markets play out,” he explained. “But our approach here with the market is different to Canada, because it is a different regulatory environment [with] different infrastructure needs relative to Canada.”

Regulatory arbitrage

Alves said that his company’s focus in Europe is sourcing distribution channels for its products that are suited to new markets: “We are regulatory experts [and] it is that regulatory expertise that really drives our competitive advantage and allows us to approach new geographies in a way that we can kind of get in a little bit earlier and structure ourselves to use our capital more effectively.”

“There’s obviously a tremendous amount of regulatory arbitrage at play where you see jurisdictions that are perhaps not moving so fast, but you understand where they are going to be in three, four or five years’ time,” added Lucarelli. “One of the challenges that I think people have encountered in the cannabis industry is maybe a lack of patience around the investor mindset.”

Featured image via PromesaArtStudio/iStock/Getty Images Plus

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    Written by Andrew Woodman
    Andrew Woodman is PitchBook’s London Bureau Chief and oversees news coverage of Europe and the Middle East. Andrew has been reporting on the private markets since 2012. He was previously an editor with Private Equity International and with the Asian Venture Capital Journal. A Japanese speaker, he spent the best part of a decade in Asia, living and working in both Japan and Hong Kong.
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