Q&A: Kevin O’Leary Discusses the Dangers of Cannabis Investing Under Federal Prohibition

Serial entrepreneur Kevin O’Leary is probably the last person you would think of when it comes to the burgeoning cannabis industry, yet the Canadian-born investor was the star of the show and keynote speaker at the recent Grow Up Conference and Expo in Niagara Falls, Ontario. Also known by his moniker “Mr. Wonderful,” O’Leary has spent decades building businesses, beginning with educational software and climate-controlled storage companies, later launching his own venture capital firm and line of luxury wines and becoming a household name as a cast member of ABC’s hit show “Shark Tank.”

While he has yet to invest in marijuana because the plant remains a Schedule I substance in the eyes of the United States government, O’Leary remains an active proponent for reform, specifically when it comes to cannabidiol (CBD). In Niagara Falls, he implored leaders within the industry to join together for the common goal of advancing the medicinal market, arguing that its potential value globally far outweighs that of adult-use.

O’Leary spoke with Cannabis Now via telephone after the conference to explain what it will take to see institutional capital enter the industry, why he thinks recreational weed will never be legal in the United States, and whether or not it’s alright for CEOs of Fortune 500 companies (Elon Musk included) to consume cannabis.

Photo Anna Pitman for Cannabis Now

Cannabis Now: Cannabis is a fast-growing industry, so why have you decided at this time to take join in the discussion?

Kevin O’Leary: Well, I’m not interested in the whole cannabis industry. I have no interest in recreational marijuana. I don’t think that’s ever going to be broadly legalized outside of Canada, but I’m very interested in the medicinal side. The problem is I cannot invest in either medical or recreational markets currently because cannabis is considered a Schedule I narcotic in the U.S. So, that renders it impossible for me to invest in it at all.

But my assumption is that at some point the U.S. government will, through the FDA, regulate medicinal CBD products. That is very interesting, not just for me, but for institutional investors. Right now, there’s basically zero investment from institutions in medicinal CBD.

I have zero interest in recreational marijuana, because I think that’s just going to be a constant battle with various groups in different states and different countries.

Why are you so convinced that we’re not going to see recreational cannabis legalized in the United States?

So, recreational cannabis is legal in nine states, but the problem with places like Texas and Florida is that they have political forces working hard against it. Let me give you an example: Mothers Against Drunk Driving. They’re a very powerful lobby group. Nobody goes against mothers. They’re not on board yet and part of the reason is that testing capabilities of technology aren’t advanced enough yet. You don’t have any of those issues with medicinal cannabis, and so, if you’re a senator in a state where clearly 50 percent of constituents don’t want legalized cannabis, that’s not a great place to fight a fight, when the real opportunity to invest is in a market 10 times that size.

So, I have zero interest in getting involved in those contests because I’m a global investor and I invest in multiple jurisdictions. So, I can’t make investments right now in anything cannabis-related because a Schedule I narcotic falls under the RICO statute and aiding and abetting transportation of Schedule I narcotic across state lines carries a very heavy penalty and certainly not good if you’re an institutional investor.

My message is: Look, why is this industry not separating itself into two different components? One is recreational cannabis — and anybody who wants to invest in that can. The second is medical cannabis. The opportunity here is to go and get a federally mandated removal of CBD off the Schedule I narcotic list and regulate it like any other molecule or drug. That’s an opportunity I’d love to invest in.

When do you think it’ll happen that CBD would just be regulated as a simple commodity? Do you think that’ll happen?

I think it’ll take about three years, which is why I want to observe the industry and see who the players are and where the investment opportunities may be. It’s going to take some legislation, but the potential is there and there’s so much interest in people that suffer from various diseases that this helps remedy.

Also, when you talk off-the-record with sovereign wealth funds that have billions of dollars ready to put to work, they say they have no interest in recreational cannabis. They have interest in the licensing, jurisdiction by jurisdiction, of medicinal CBD products. And so, if someone was looking to buy the license to be the manufacturer and distributor or marketer of CBD products in a geographic area — assuming again that CBD was taken off the Schedule I list — and someone was looking for institutional money, I’d invest in that.

Do you think it’s all still too risky for the typical person to invest in a cannabis company?

No. No, I don’t. However, I think there are two things to consider. First, I’m going to make the assumptions that companies that have a larger market cap are drawing the best management in. So, all these start-ups, many of them will fail, not because there isn’t a market for their product, but because they don’t have executional skills.

Second — and this is the bigger problem — cannabis is a commodity like any other commodity, and in the commodity industries of any substance, the low-cost provider always wins. Look at alcohol and tobacco. So, I don’t think Canada is an ideal geography to grow cannabis in because it’s very expensive to do it in a climate that you can’t get five harvests from cheaply. Why not go do it in a place near the equator where you can get very low-cost high-quality products? To do that you need scale, you need a large market cap and you need to be able to have access to capital to make those arrangements.

So, if I were an investor, I would be looking for the company that is figuring out how to become the lowest cost provider to this pure commodity in five years. There’s nothing proprietary about growing cannabis — nothing. And so, there’s going to be a massive consolidation. Small guys will either get acquired or just go out of business, but for the recreational side, there’s an additional risk because of federal restrictions and how much building a brand is going to be very important. When you’ve got a total commodity, like in cigarettes or in alcohol, you need a brand. Building a brand is very, very, very expensive and so that’s another issue that you don’t have to deal with when you’re licensed to provide a medicinal product in a geographic area. Even if you are competing with other medicinal offerings, you have a cost advantage if you have the scale.

And so that’s why, again, I really prefer to invest in the medicinal side of cannabis.

Which international markets outside of Canada do you think are really leading the charge right now?

Europe, there’s no question about it. Europe already has a more liberal approach to cannabis, but again, all the interest I see from institutions are around medicinal offerings. Also, there is just so much interest in an Asian-European market for CBD products. I wouldn’t even consider investing in recreational product. I mean, it’s just so small compared to how big the medicinal CBD side is going to be. That’s where you can really put money to work. Everybody’s waiting for one thing: Get CBD off the Schedule I narcotic list. That’s it. Billions will flow when that happens.

Do you use CBD?

I don’t use any cannabis products.

There’s been a lot of buzz in the news about Elon Musk smoking a joint on Joe Rogan’s podcast and people are wondering, should CEOs use cannabis? How do you feel about that situation?

You know, Elon Musk is a unique entrepreneur. If you invest in his company, it’s because you know how he is and who he is. You’re not going to see a lot of people doing that in the public markets, but because of who he is, maybe he can get away with it. That’s not something that any of my CEOs are going to do and keep their job.

Have you received any pushback — personally or professionally — just for speaking at events like the Grow Up Conference in Canada where you recently headlined?

No, because, as I’m doing with you, I make it very clear why I’m speaking at them. I along with thousands of others social investors are extremely interested in the CBD medicinal market and so I monitor the situation. However, I will not touch this space until it clears the federal mandate.

Now, I know that you said that you have no interest in recreational cannabis, but say a deal comes along where the beverages business, which is projected to be a large player in cannabis, wants to do a non-alcoholic cannabinoid-infused version of O’Leary Fine Wines. How would you feel about that?

I wouldn’t do it. Nope. By the way, infused beverages are total commodity, and so you’re going to find only the big players with distribution will survive. But, there’s no cannabis in my portfolio. Zero. And there isn’t going to be any until it gets off the Schedule I narcotics list and that is the same position of 99 percent of institutional investors.

Let’s say that cannabis is removed from Schedule I tomorrow. Which companies are you interested in, or would you be interested, or could you say so?

It’s not going to happen tomorrow, so that’s a very hypothetical question. I monitor the situation almost state by state in the United States as to where the political winds are blowing, and right now, the only interest is to take a medicinal product forward on a federal mandate. State-by-state legalization is useless because you can’t put your capital into a FDIC insured bank. You have to walk around with a bag of money. It’s ridiculous.

This interview has been edited for clarity and length.

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