With each new state and country that legalizes, the $300B illicit market shrinks and new startup unicorns are born.  

Source: New Frontier Data

Global Cannabis Market Size Projections

But it’s not the same TAM. 

The industry structure will change significantly

The illicit market was sold as a custom good.  The contribution margin flowed to small scale producers and distributors because the frictions of an illicit market protected them from commodification.

 

Regulation changes all that.

 

Post legalization, the regulated cannabis industry becomes much different in terms of industry composition and profitability. The plant almost instantly becomes a commodity.

 

We’ve already seen this price shift happen in states with mature regulated markets.  With the economies of scale and fair competition, price falls to where marginal revenue paces a quickly declining marginal cost. 

Wholesale Cost of Cannabis Post-Legalization

Source: New Frontier Data

So what happens when an illicit custom good turns into a regulated commodity?  

The big opportunities for new companies move to ancillary businesses.  

Agricultural

Infrastructure:

 

The industry will invest heavily on  infrastructure that can save them dollars or even pennies on pounds of cannabis.  The cannabis industry needs its own Deere ($50B market cap)

Quality
Assurance:

As businesses get bigger, the risk of unsafe or poor quality product becomes greater. Quality control technologies
for businesses and consumers
will be essential.  The cannabis industry needs its own ThermoFisher
($116B market Cap)

Distribution

and Logistics: 

With all highly regulated substances, the businesses that control distribution become powerful and profitable.  The cannabis industry needs its own Southern Glazer
($18B annual revenue)

Software
and Data: 

The industry is specialized and complicated.  It will need its own tools and data to navigate. The cannabis industry will
need its own Net Suite
($7.3B market cap).

Regulatory
technology: 

 

The government will need help, too. Those companies that embed themselves inside the regulatory system will be entrenched forever, and will always be making healthy profit margins.  The cannabis industry will need its own NIC Inc. ($1.4B market cap).

Advertising and Marketing: 

Most marketing and advertising dollars will flow to incumbent companies.  The opportunities for new startups will be harder, but not impossible to find.   Investors should be even more careful, because many of these companies won’t last as legalization becomes more widespread.

Products
and Brands: 

In the end, the industry is built around consumers purchasing product. Some of these products will rise to the top, and create some of the most valuable new brands in the world. The cannabis will need its own Inbev ($164B market cap)

Each new sub-vertical will be worth $20B+ by 2040.

Projected Market Size of Sub-Verticals by 2040

If you have a company inside one of these verticals, we want to hear from you.