Retail investors or guinea pigs?

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There is a paradox when it comes to retail investors: Many startup-related deals are out of their reach (in part for their own sake). Yet, laypeople have also become the target of novel schemes hoping to attract their bets and savings. Are nonprofessional investors assuming more risk than they should? Let’s explore. — Anna

Opium for the masses

I am by no means a stock exchange expert. But while writing on cannabis and psychedelics startups for TechCrunch lately, I discovered that some young companies in these verticals are listing on trading markets that I had never heard of. I mean, I had heard of “pink sheets” — in “The Wolf of Wall Street.” I just didn’t think that over-the-counter securities were something startups would ever use. It looks like needing money for drugs makes you creative!

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I have nothing against innovation, even when it comes to fundraising. But the fact that listed cannabis companies — many of which went public with nascent revenues more reminiscent of startup metrics than mature-company results — have seen their market caps crash is likely no coincidence. And when we consider the period of hype surrounding their public debuts, it’s difficult to not wonder how many retail traders got burned.

We’re not merely discussing the most obscure exchanges, either. Cannabis companies listed on the Nasdaq, such as Akanda and Tilray, have also seen their value plummet.

My perception that we’re seeing a new crop of companies, those focused on psychedelics, follow in the footsteps of cannabis companies is not mere speculation. “There is an unwarranted rush from founders to list their cannabis and psychedelics companies on stock exchanges,” VC Bek Muslimov told me.

Muslimov is a co-founding partner at specialized investment firm Leafy Tunnel, and he sees a danger in rushed listings. “In this pursuit, founders and management teams bypass private financing markets which consist of professional and diligent investors such as VCs or growth capital funds,” he told me in an email.

The problem here isn’t that private investors lose out on juicy opportunities. The problem is that they would have declined to invest in the first place. Not because they don’t invest in cannabis — few do. But Leafy Tunnel is one of them, meaning that its viewpoint here matters.

What Muslimov objects to is seeing cannabis and psychedelics companies going public when they would not have passed venture capitalists’ criteria to get funded. “Unfortunately, this can lead to a situation where companies with poor business fundamentals and insufficient level of maturity are listed, allowing them to tap into funds of retail investors.”