Having recently finished “Alibaba: The House Jack Ma Built” by Duncan Clark, we decided to offer a few thoughts linking Alibaba back to what we see in the cannabis industry. Alibaba is a Chinese e-commerce juggernaut and, by virtue of that, is something of a global juggernaut as well. Often called China’s Amazon by us Americans, it took a very different approach in some ways to developing than America’s ubiquitous online bookstore. Alibaba seems to have come out of nowhere, but the reality is that it was founded before the Dot Com bubble in the late 90s and took a while to find its stride in terms of business models.

Maybe the first lesson Alibaba has in store for US cannabis is that when inflection does happen, it is often quick and significant or, as we like to say, nonlinear. Alibaba spent years building its platform merchandise volume at ~20% growth. At first, it generated losses and looked like it would forever, but once it hit the inflection point of where its necessary investment in its platform tapered off while growth continued to compound, it suddenly started to generate massive amounts of free cash flow - $19 billion in 2020 on $72 billion in revenue - while continuing to grow at an incredible rate. Initial infrastructure, including team building, can be expensive.

The same idea is in play with US cannabis companies as their losses, caused by large investments into infrastructure and often early preparations to be ready to serve adult-use customers, are now starting to inflect as the expected customers appear and the transition from illicit to regulated market takes hold.

Some other lessons from Alibaba and its founder, ex-CEO, and now-chairman Jack Ma:

“Alibaba might as well be known as “1,001 mistakes.” But there were three main reasons why we survived. We didn’t have any money, we didn’t have any technology, and we didn’t have a plan.” - Jack Ma,

• Probably not to be taken literally, the upshot is that being adaptive to change and turbulence is often the path to success. By avoiding being fixated on a plan but instead focusing on a goal, Alibaba was able to find its way through turbulent times. The cannabis landscape can change quickly, and adaptation is paramount.  Sticking to a plan for the sake of the plan has led to the destruction of shareholder value, and if you don’t believe that, we’d like to show you a few million square feet of Canadian greenhouses.

“In the case of China.com, a company that people in China had hardly ever heard of, the answer was $84 million—the amount the company raised in the IPO, to which the company added a then-massive $400 million the following February in a secondary offering, valuing the company at $5 billion. The company raised so much money that it would be eleven years before it finally slipped into bankruptcy.”

• Alibaba was not the first, not the most popular, and not the most capitalized competitor in its field. Many companies were actively trying to learn the best way to use the internet for business in China in the late 90s and early 2000s, and many of them received more funding than Alibaba, like the ill-fated China.com.
  
  Especially notable was that many companies went to the US to raise money because Chinese internet companies were a hot space,, Many of those were actually some of the worst operators with the lowest chances but that presented well. Similarly, the cannabis industry is littered with companies that looked terrific in a PowerPoint presentation but lacked the true operational and entrepreneurial core needed for long-run success. That core is admittedly difficult to judge, but it’s still often critical.

“If you hang your opponent as a target, and practice throwing darts at him every day, you are only able to fight this one enemy, not others.” - Jack Ma.

• Cannabis has matured rapidly, but most sales nationwide still go to the illicit market. As the development of new dosing technologies and form factors accelerates, new customers will likely begin to buy - the ~14% of America that uses cannabis regularly may expand significantly. Cannabis companies should keep in mind the broader canvas and not focus myopically on “beating” the store a few miles down the road to prepare themselves for the future.

“You need to buy a house. You need to buy a car. You can’t wait to sell the stock to get married, to have a baby. Selling the stock doesn’t mean you don’t like the business. I encourage you to sell some, to build your life, to give a reward to your family. Because you have been working too hard, you’ve been away from your family. They need some reward.” - Jack Ma.

• Insider selling is one of the most looked at signals in growing companies, and rightfully so. But investors should be hesitant to instantly read too much into selling. Employees and officers should be able to reasonably monetize some of the value they received for building value for others without investors jumping to the conclusion that they have lost faith in the company or are jumping from a sinking ship.
  
  Insider buying is much more telling. People sell stock for many different reasons - pay taxes, buy a house, college tuition for their kids, etc. But they generally only buy stock for one.

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