It's April 20th, 4/20, the date some celebrate as "Marijuana Day." Open any newspaper or news website today and you're sure to see an announcement about any number of recent mergers in the cannabis industry.

The cannabis industry has probably seen more mergers recently than yours has, regardless of what industry you're in. What's driving this level of mergers and acquisitions in the cannabis sector? One word: growth.

At their core, all 21st century tech startups are fundamentally concerned with growth. From Y Combinator's Paul Graham to serial-entrepreneur Steve Blank to "lean startup" proponent Eric Ries, the consensus is clear: Startups must grow in order to not only survive but to thrive.

Boosting customer numbers, developing economies of scale, capturing greater market share, increasing revenues and profits, and expanding into new markets is the focus of many founders. Ultimately, if a startup doesn't grow then it doesn't survive.

The recent flurry of cannabis transactions is likely due to the time constraint put on building out new capacities. So instead of building, many in the industry are choosing buying.

What do you do, though, when your startup stagnates and your growth slows? Here are two proven strategies from the cannabis industry that you can use to push past plateaus and expand your business. While these acquisition paths are not unique to the cannabis industry, the plethora of recent marijuana mergers allows us to plainly view both paths in parallel.

1. Go horizontal.

When a company wishes to grow through a horizontal acquisition, it is looking to acquire a similar company in the same industry. The buyer may be seeking to increase its size, to diversify its product offerings or services, to achieve economies of scale, to reduce competition, or even to gain access to new customers or markets.

Some recent examples of a horizontal integration in the cannabis sector are Aurora Cannabis's acquisition of CanniMed Therapeutics and Canopy Growth's acquisition of Mettrum. Both of these deals involved the combination of ventures with similar business models (they're all commercial producers of marijuana).

2. Go vertical.

A company looking to achieve vertical integration is seeking to acquire a company that operates in the production process of the same industry. It may be aiming to strengthen its supply chain, reduce production costs, capture upstream or downstream profits, or access new distribution channels.

To do this, one company acquires another company that is either before or after it in the supply chain process. Let's look at MPX Bioceutical's recent acquisition of Canveda. (Full disclosure: as a professional investor, I own minority equity interests in both companies.)

MPX runs a retail distribution model--it sells what others make--and Canveda is a licensed producer. By combining, MPX will be able to distribute its own homemade brand, allowing it to gain the margins associated with production and sales, while Canveda will have the MPX distribution network to sell through.

The goal of vertical integration is greater profit potential through better control over operations. The strategy not only allows a company to reduce costs across various parts of production--such as transportation, transactions, and business-to-business marketing--but also ensures tighter quality control and a better information flow across the supply chain.

Vertical integration often allows a company to reclaim margins by stripping out the middleman, sometimes taking the form of wholesalers and retailers. Taking ownership of more of the supply chain can provide added flexibility for the buyer. This can be important in times of challenging market conditions, where margins are more likely come under pressure.

How to apply this to your growth:

Vertical Integration. Buying a supplier or a distributor means you'll own more of the value chain, which allows you to be more efficient and lower costs, thus growing your profits. You'll also add the revenue generated by those newly acquired elements. Follow this strategy if you want the security and agility associated with owning more of your venture's supply chain.

Horizontal Consolidation. You should buy competitors when you need to increase capacity and reduce competition, and most of all if you want to leverage your proprietary elements (like your brand). 

The cannabis industry is still in its infancy, with players jockeying for market share. By reviewing recent multimillion-dollar transactions in the sector, you can learn when to deploy vertical integration and when to follow a horizontal acquisition strategy with your business.  

Published on: Apr 20, 2018