Latest Etoys News
Nov 21, 2019
Share: By Evan Eneman, Chief Executive Officer of the MGO | ELLO Alliance, an accounting and consulting services firm for the cannabis industry. In 1999 companies such as Pets.com, eToys, UrbanFetch and Priceline shared what are now considered hallmark traits of the dotcom bubble: products sold at a loss to gain market share; big branding and bigger advertising budgets to raise awareness; and sky-high stock market valuations that didn’t mirror the companies’ actual performance. Now, 20 years later, entrepreneurship appears to be peaking again; spurred by VC-backed tech unicorns such as Uber, Lyft and Slack. Following suit, we’ve seen a “green rush” in cannabis, with new companies being formed seemingly every day and existing companies ‘profiting’ at a level we have not seen since those wild dotcom days. Perhaps because of that association, a lot of investors are worried that we’re living through a cannabis bubble that might burst at any moment. But should we be so apprehensive? There are certainly reasons to be cautious, but the similarities between the early aughts and today break down when you look up close. To examine the differences-- and what lessons can be learned--, let’s dive into what led the dotcom bubble to burst and how the case might be different for the cannabis industry and cannabis stocks. How Does The Growth Of These Two Industries Differ? Scaling Challenges If the problem with choosing growth over the bottom line was a telltale problem with the dotcom burst, the challenge with scaling profitable cannabis businesses feels much more logistics-driven. After some cannabis stocks saw valuations soar to unrealistic heights, due to a wave of legalization in Canada, the U.S. and around the world, massive drops in valuation, upwards of 80 percent, followed. The reasons for these fluctuations lay in the logistical challenges facing cannabis operators across verticals and borders. Canada, for example, has experienced growing pains with supply-side and retail challenges , as well as licensing backlogs, and are reflected in valuations. In the US, any operator who wants to be in a new legal market needs to get licensed and operate within that state’s borders and can’t transport any products across state lines, that leads to very inefficient infrastructure and high costs of operations. Additionally, US banks and creditors have, for the most part, avoided working in the cannabis space due to the legal limbo presented between federal and state laws. Any financial entity that finances or works with money for a cannabis company could face serious federal repercussions, even in states where it’s legalized. Though the House of Representatives recently passed, with strong bipartisan support, the Secure and Fair Enforcement (SAFE) Banking Act, it’s not likely that the bill will pass the Senate. There is more work to do, but different from the Pets.com era, these issues are temporary and solvable, and with solutions will come even more customers to legal channels. Carte Blanche Marketing Spends At the center of runaway spending during the dotcom years was branding, that period’s rocket fuel. Pets.com, for example, spent $11.8 million on advertising in its first year, essentially committing financial suicide from the get-go. The company was in the stock market for only 268 days before collapsing. In cannabis, marketing, advertising and public relations budgets are considerably more targeted, and can be healthy for those trying to build a brand ahead of infrastructure and operations. Some public relations (PR) companies have now created cannabis practices, groups within their firms dedicated to expanding knowledge in every facet of the industry. They’re in contact with the growers (lifestyle PR), influencers (cultivating key opinions), and even shops that sell paraphernalia (shepherding retail initiatives). Strong branding creates an emotional connection with customers and uses distinct processes to determine a company’s place in the market. Of course, this is not applicable to every company in the industry, but to a select few (e.g. MedMen) who can afford it. And that’s a good thing, an improvement on the lavish, often nonsensical spending days of the dotcom era.