Interview Preparation

When it comes to to the European cannabis market, the biggest news this year is what didn’t happen. Contrary to what many people expected, Germany is not on track to legalize the recreational use of marijuana. In contrast, the most populous country in the EU diluted their legal reform plans after establishing contact with regulators.

Is the German decision and precedent setting bad news for venture capitalists investing in cannabis startups in Europe? Not necessarily, and it might even be good news for some. According to Oliver Lamb, co-founder of Óskare Capital, “Germany’s push to slow down the legalization of recreational cannabis is positive for the medical and pharmaceutical market.”

“The hybrid recreational-medical experiment has already been conducted in North America, and a painful number of lessons have been learned that it would be unwise to ignore,” he said.

Lamb, like other investors, is wary of the mistakes they have seen being made in the US: “The blurred line between the medical and recreational sectors has certainly been detrimental to targeted drug development,” he said.

“It is crucial to use the lessons of the paths that others have placed before you. In New York, we have seen a failure to do this, with only a handful of dispensaries operating along with lax law enforcement, leading to an overt and booming illicit market,” said Matt Hawkins, founder and managing partner of Entourage Effect Capital.

However, some funds are concerned that the total addressable market for legal cannabis on the continent is limited and has been affected by the German decision. “Germany’s downsizing has made us more hesitant to deploy capital to Europe,” Hawkins said. “Germany’s process has indicated that the entire continent will have difficulty creating a commercial adult-use market in the coming years and will have limited TAM.”

Similarly, like other private companies looking to raise venture capital, cannabis startups are not immune to the global price review that investors are pushing. “European cannabis companies are still overvalued,” said Emily Paxhia, co-founder and managing partner at Poseidon Investment Management.

For founders of cannabis-related startups hoping to weather the slowdown, the advice isn’t much different from what all entrepreneurs are told right now: survive and move on. That is Poseidon’s motto, Paxhia said.

For cannabis companies that know they will not survive, finding a buyer appears to be a viable option as consolidation is expected in the coming months. But whether we’re talking investment or M&A, we’re in a strong buyer’s market, Lamb warned.

Read on to find out where these investors see the next opportunity, how they plan to approach the market after Germany’s decision, and how best to present them.

We spoke with:

Oliver Lamb, Co-Founder, Óskare Capital

Is cannabis more legally accessible in Europe this year than when we conducted our previous survey last year? Have there been any key regulatory changes at play?

On the medical side, the availability of cannabinoid and non-cannabinoid therapies (ie therapies that modulate the endocannabinoid system but do so without cannabinoids) is increasing remarkably.

There are many factors at play that explain this change, including (to be) increases in tailwinds and reductions in headwinds. Today we have more, higher-quality clinical data demonstrating the efficacy of these drugs for various conditions, along with an increase in highly-skilled teams bringing these drugs to market.

As for the tailwinds, difficulties in patient access have long hampered prescriptions for drugs that target the endocannabinoid system (the mammalian regulatory system that reacts to cannabinoids and cannabinoid-like molecules, similar to the central nervous system).

However, we are excited to see a number of technologies and platforms linking specialty physicians with patients in need of these drugs. One such example is Leva, whose digital clinic is tackling the highly underserved chronic pain market in the UK.

Alongside this, there is a growing acceptance within medical communities of the suitability of ECS modulating drugs for certain pathologies. At a conference in Berlin this month, one founder happily relayed that a recent meeting of general practitioners spent two hours talking about medical cannabinoids. This is a clear indicator of the growing understanding and adoption of these drugs by physicians across Europe.

Apart from watered-down plans to legalize recreational useGermany imported a record amount of marijuana for medical and scientific use in 2022. Is this diverting attention from the fact that imports are slowing?

While Germany’s decision was undoubtedly unpopular with companies that bet on legislation going in the opposite direction, this push to slow down the legalization of recreational cannabis is positive for the medical and pharmaceutical markets.

The hybrid recreational-medical experiment has already been conducted in North America, and a painful number of lessons have been learned that it would be unwise to ignore. Specifically, the legalization of recreational cannabis in conjunction with medical use in North America can be seen as having diminished incentives for researchers to develop specific therapies for specific pathologies, given the deluge of cannabis flowers being distributed through dispensaries. That happened despite the preference of most doctors to prescribe a specific, licensed treatment that doesn’t need to be smoked.

The North American approach also blurred the lines between the recreational and medical markets, reinforcing the impression that users of such therapies simply prioritized pleasure while claiming a genuine need.

This misconception is not only counterproductive to patients seeking proven treatments, but also diverts attention from the fact that ECS-modulating drugs can provide not only vastly superior side effect profiles compared to traditional pharmaceuticals such as opioids, but also treatments for conditions that are currently untreatable.

The Czech Republic might end up legalizing recreational cannabis before Germany, but it’s a smaller market. Is it big enough to move the needle and find out what the EU will tolerate?

Peter Lynch once pointed out that if you spend 13 minutes a year on the economy, you’ve wasted 10 minutes. Arguably, the policy is the same. The influences on international regulation are wide and varied, and even if you have a good idea of ​​the outcome, the timing is just as difficult to predict.

Therefore, as a general rule, we do not bet on regulation. Instead, we invest in what we know: strong teams, innovative science, and untapped market opportunities. We select our investments assuming that the regulatory landscape is as fixed as it is today. That way, if nothing changes, we know they can succeed regardless, and as things continue to open up, they can position themselves to benefit even more.

One prediction I feel confident in is that governments and the medical communities will continue to understand the benefits of these drugs.

How has your approach to investing in the cannabis sector changed in the last 12 months? What are your expectations for the next 12 months? Is consolidation in the cards in that period?

With respect to our thesis, not at all. We started by focusing on Europe and continue to do so. We also launched the fund to target deep tech and life sciences investments in the sector, and this remains unchanged, largely because our portfolio is performing very well.

It is also gratifying to see that a number of US funds are now looking towards Europe for the next wave of growth in the sector. This is an advantage as we like to syndicate rounds and having stakeholders across the pond is often helpful when it comes to cross-continental expansion.

Are here our predictions for this yearand the ones we did for 2022 are here.

We’re happy to say that most of our previous predictions have come true, and this year’s are on track to do the same.

What advice are you giving your cannabis-related portfolio companies right now in terms of preserving or expanding your track?