Is decriminalization enough to spur UK VC cannabis deals?

The UK is Europe's largest exporter of medical cannabis, but its resistance to relaxing regulation is stifling VC investment in the sector. 

Last week, London mayor Sadiq Khan announced that he would launch a review into decriminalizing cannabis if he were reelected in May. Although quickly condemned by the UK government, the move speaks to a shift in public opinion that could put the country on the path to legalization and spur a long-awaited wave of VC investment. 

Medical cannabis has been legal in the UK since 2018, but few startups in the sector have successfully raised funding due to uncertainty over regulations. Last year just 11 UK deals brought in around €35 million (about $42 million) in aggregate, according to PitchBook data. In bigger markets where recreational use is legal, the level of VC investment is much higher. For example, the US saw 174 deals in 2020 worth €983 million—cannabis is fully legal in 17 states and medical usage is allowed in 36.  

"Legalization feels imminent globally, to varying degrees, and the UK has been a bit slower than others but conversations around adult use have been gaining momentum," said Karan Wadhera, a managing partner at cannabis-focused VC firm Casa Verde Capital. "We're very bullish when it comes to investment in the UK, but you need regulation to move forward before cannabis companies can actually build a real base."

Los Angeles-based Casa Verde is one of the few firms that have invested in the UK. It participated in biotech startup Oxford Cannabinoid Technologies' Series A in 2018 worth a reported $10 million. Wadhera said that investment in the UK's cannabis sector is limited because mainstream VCs are not comfortable deploying capital into a market with such restrictive laws and potentially waiting years until it becomes legal. 

According to Juan Martinez, a principal at New York-based Measure 8 Venture Partners, the issue isn't necessarily that VCs don't want to invest but that they can't. 

"Most VC funds have vice clauses in their mandates, which makes it very hard for us as investors, even in the US where it's still federally illegal," he said. "Decriminalization is the first step to removing these obstacles. We can see a lot of demand, but there won’t be significant growth until regulation changes."

The demand for cannabis companies in the UK is already apparent on the public side. In September, the Financial Conduct Authority announced that foreign and domestic medicinal cannabis companies would be allowed to list on the London Stock Exchange. Since then, Israel's Kanabo, which makes vaporized marijuana pods, went public, with shares tripling in their debut. DB Ventures-backed Cellular Goods, a maker of skincare using cannabinoids, listed in February with demand for its IPO reportedly exceeding the deal size 13 times. 

The FCA's decision was a massive win for the UK’s cannabis sector not only because it will allow companies to access capital outside the private markets, but it also provides a clear exit path for firms who do invest. 

The regulatory movement in the public markets and Sadiq Khan's review are positive signs that the UK is on the path to legalization, according to Wadhera, particularly as jurisdictions around the world are looking for new sources of revenue following the pandemic. 

"Cannabis is a low-hanging fruit, or plant in this case, that can be leveraged for tax," he said. "I think it's only a matter of time until regulation catches up and like in most industries, London tends to be at the center of what's happening in Europe. We definitely anticipate much more VC activity."