Discover more from Money Puff
This newsletter starts smoking around noon and gets smarter throughout the day
Layoffs, the THC arms race, and... Woody Harrelson?
Here’s a grim headline from MJ Biz:
Will mass layoffs help or hinder the struggling cannabis industry?
I’m not naive, I know what they mean, but, like, you might wonder about the term ‘industry’ here. Do they mean the workers that make the industry run? Because layoffs are unequivocally bad for workers; if you had a job, and now you don’t have a job, you are worse off. But, yes, I’m sure they meant ‘Will mass layoffs help or hinder struggling cannabis corporations,’ and so we’ll push on:
Are widespread layoffs in the North American cannabis industry an effective cost-cutting tool – or will they do more damage in an already challenging environment?
Recent mass layoffs in technology, finance and media has prompted some business researchers to argue that widespread job cuts can be counterproductive when it comes to cutting expenses.
“Layoffs often do not cut costs, as there are many instances of laid-off employees being hired back as contractors, with companies paying the contracting firm,” Jeffrey Pfeffer, a Stanford Graduate School of Business professor, told Stanford News in an interview about the massive numbers of layoffs in the technology industry in December.
In his research, Pfeffer has found that tech layoffs also typically fail to:
Increase stock prices.
Improve market share.
“Layoffs are basically a bad decision,” Pfeffer said.
Do companies lay off workers to increase stock prices, boost productivity, improve market share, or increase revenue? No, of course not. The only reason you conduct mass layoffs is to cut costs. If you are a company that’s laying off workers and then failing to cut costs, please reach out, I have some thoughts.
Why do they need to cut costs? It’s not that they have bill collectors knocking down their doors and they need to scrounge up some cash ASAP. It’s really that they projected unrealistic top-line growth.
See, companies have a financial model that lays out assumptions of revenue, variable costs, fixed or operating costs, and capital expenditures or reinvestment in the business. It’s usually pretty detailed and accurate-ish for the next year (called the ‘Budget’) and then fuzzier and mostly conjecture from there on out. When companies are operating in a frothy market environment — maybe because of regulatory change, or near-zero interest rates — they get ahead of themselves. They project revenue, with a finger in the air, that they are never going to achieve. The rest of the model cascades down from there — you project margins as a percentage of revenue and headcount as X employees per dollar of revenue or whatever.
The bottom of the model spits out your ‘cash flow,’ or how much is going in or out of your bank account that month. And we’re talking about fledgling cannabis or tech companies here, so that’s mostly out. When your revenue falls short — maybe because of inflation, increasing rates, or your weed is just trash — your cash flow is going to be pretty negative. Then, you look at how much money you lose on average, and see when your cash balance is projected to run out — your runway — or when you’re projected to be profitable — your timeline.
A lot of finance departments looked at their runway or timeline in the last six months and went shit, that’s not good. And then what do you do? You can’t increase revenue — if you could, you would. If you're going to run out of cash, you probably can’t raise more money (not in this environment, anyway). So you have to cut costs. And the most obvious cost to cut is often a salary; finance people and execs are arrogant and assume you can cut people (outside the sales org) with no impact to the top-line.1
It’s not all malicious — you probably want entrepreneurs that think big and bold and all that, and sometimes ventures will fail. But an overlooked point is sometimes the role of venture capital in this equation, or the investors who seeded the operations and often fed the hype cycle during the boom years to boost their portfolios.2
These investors demand a return, and on a strict timeline. They are usually investing on a short-term horizon — they either exit at IPO, or, more and more frequently, they hold significant positions for a while after as a kind of crossover private/public investor. Make no mistake, these funds are involved in every discussion involving layoffs; they have Board seats and the ears of the top leadership at all times.
Here’s Don Muir writing for Forbes back in December:
These layoffs come at the request (or with the assent) of the VC firms that funded them, which months before were urging their portfolio companies to grow at any cost. Ignore the passé little things like EBITDA and positive cash flow, use our cash to grab growth, even at a loss. Expand overseas even before you build a viable business here.
The VCs were high on cash. In a two-year period (2020-21), venture investing totaled almost half a trillion dollars pumped into almost 30,000 deals; 2020 set a high of $166.6 billion, and then 2021 doubled that to just shy of $330 billion. Investors raised $128 billion in new capital in 2021, clearing the $100 billion mark for the first time.
Outsiders jumped into this gold rush, led by hedge fund Tiger Global Management, which last year topped the Q4 League Tables with 25 early-stage deals and 28 late-stage investments. Pitchbook counts 700 “nontraditional” venture funds in 2021, investing a quarter of a trillion dollars in tech firms, of the $330 billion total sum.
I was a banker for mainly private fintech companies during the 2020-21 time period, and I can attest to the breakneck pace of venture investing well into 2022. Tiger Global, in particular, had a look at just about every deal in the market at one point or another. And, well, there’s this:
The CEO of a still-struggling startup with 90 workers and only $6 million in annual sales recently told me, “Three months ago we signed a $45 million Series B term sheet at a $300+ million valuation led by Tiger Global. We’ve grown the team aggressively since we signed. Today the term sheet was pulled. We now have less than 3 months of runway and I need to lay off 40% of my team to survive.”
That sucks, although for all we know that company’s business model was, like, trying to get suckers to pay for an ugly monkey profile picture. At least cannabis companies have a real product to sell. The only question is, how to differentiate yourself, and…
THC arms race
…here’s one way:
My view is that the market naturally separates over time, and the alcohol market is probably a good comparison.3 Companies chasing THC percentages are like the craft brews that have popped up all across the market over the last twenty or so years.4 Bro, this IPA is 12% ABV? Substitute ‘IPA’ with ‘infused pre-roll’ and ABV with ‘THC’ and Brooklyn hipsters will prove that there is indeed a market for these products.
But, for the most part, people just want to get drunk. That’s where Bud Light comes in, the favorite brewski of this newsletter. Here, the corollary is what’s known in cannabis as mids, or the ‘so-so’ weed that will do for your average consumer (and that the snobs will turn their nose up at). For the most part, people just want to get high.5
Woody Harrelson apparently hosted Saturday Night Live this past weekend, and he’s catching a lot of flak for his opening monologue. I actually thought it had potential, at least from this newsletter’s point of view — he touched on consumer preferences for weed over alcohol, interstate cannabis commerce, and even unrealistic sales projections for his new movie.
What got most people pissed was that the payoff of his long-winded, rambling speech was a lame Covid conspiracy joke that he doesn’t even seem very committed to. But what got this newsletter riled up was this lame stoner conspiracy theory:
“I start smoking around noon, and get progressively dumber as the day unfolds.”
Here at this newsletter, we start smoking weed at noon and get smarter throughout the day. Oh, and will you look at the time.
I’m using ‘venture capital’ as a loose term; it really could be all sorts of institutional investors, but VCs are increasingly involved in the tech or tech-adjacent companies we’re talking about — or in cannabis, due to the risk, investors all tend to be venture-y anyway.
When talking about cannabis as a discretionary consumer good, rather than medicine. Thankfully, doctors have stopped recommending liquor for ailments.
That’s thanks in part to the home brew revolution that pushed boundaries in technique and consumer taste; stay tuned for Money Puff’s look into home grow and its effects on the cannabis market.