When Will Significant Capital Return to Cannabis?

Investor interest in the cannabis industry has evolved through distinct phases—from the license land grab to the free-cash-flow austerity era. The central question today is not whether capital will return, but when and under what conditions. Frank Colombo emphasizes financial discipline and capital efficiency as prerequisites for re-entry. Seth Yakatan envisions a far larger structural influx once federal barriers fall, describing it as two waves of transformational investment. Their perspectives are complementary but diverge on timing, scale, and what investors will require to re-engage.

Part I. The Colombo View: From Green Rush to Capital Parsimony

• 2018–2020: The Green Rush. The defining metric was licenses held. Operators expanded aggressively across states, prioritizing footprint over profitability. Many assets were pre-revenue, and EBITDA was an afterthought.
• 2020–2021: Buildout. Money was plentiful. The largest equity, debt, and M&A transactions in cannabis history closed during 2021. Investors rewarded revenue growth, often ignoring margin pressure.
• 2021–2022: Entrenchment. As equity markets collapsed, the key metric shifted to EBITDA. Multi-state operators (MSOs) retrenched, focusing on cost control and consolidation.
• 2023–2025: Austerity. Capital scarcity made free cash flow king. Operators slashed spending, deferred taxes under 280E, and turned to secured debt. The result was temporary cash-flow self-sufficiency, but often at the cost of rising leverage and deferred liabilities.
• 2025 and Beyond: Parsimony. With the market starved for new equity, investors will increasingly focus on return on invested capital (ROIC). Unfortunately, as the graph below shows, cannabis compares poorly to tobacco, alcohol, and consumer packaged goods (CPG). NOPAT margins remain low, and sales-to-capital ratios show poor asset efficiency. Wholesale price compression, rising input costs, and limited economies of scale keep returns depressed.
• Descheduling / federal legalization will substantially improve this situation by allowing for interstate commerce. This will produce opportunities for regionalization of production and distribution, which will substantially improve asset utilization. Similarly, the consolidation of the industry should help tame the vicious price competition that a Michael Porter Five Forces analysis correctly predicts as the current state of affairs.

• Rescheduling will likely increase capital flow into cannabis at the margin but will not unleash a flood of new investment because most institutional investors will remain excluded by ongoing federal illegality.
• What reschedule WILL do is reaccelerate the pace of M&A in Cannabis. There are lots of owners who are “tired” and want to exit. They have not found willing buyers in the current market because 1) cash is dear and most MSOs are in husbanding mode, and 2) no MSO wants to use its stock as currency at today’s prices. The expected boost in prices will differentially benefit larger, more liquid MSOs compared to their smaller peers. This will make acquisitions accretive and with their stocks at higher levels, MSO will look to gain scale in their core markets.
• The SAFER Banking Act, by contrast, is a bigger potential catalyst. By providing a safe harbor for banks, it would eventually allow U.S. exchange uplisting of cannabis stocks, and, combined with an Attorney General memo, would meaningfully expand the pool of eligible investors.
• Even so, there are several other issues to face: one is that slower growth has attenuated the demand for capital. Some industry participants, such as Steven Ernest from Chicago Atlantic, argue that all of the cultivation assets that the country will ever need are already in place. For the near term, that may well be true. Significant amounts of capital may be required once federal legalization occurs to provide regionalized production and distribution hubs, but in the near-term, new capital will be mostly confined to one or two new states in any given year. Although there will be surges of growth when new states add recreational cannabis to their setups, most growth in legal cannabis will be coming from the substitution of legal sales for illicit sales. Estimates suggest that the size of the illicit market is perhaps as big or maybe even bigger than the legal market, but still, that might mean an additional $30–40 billion of sales over time. The chart below, showing invested capital/ Sales ratios for major MSOs, suggests doubling of cannabis sales from roughly $30 billion to $60 billion would only require around $45 billion of new capital. True, that is a large amount relative to annual capital raises over the last few years, but still it is nowhere near enough to soak up any avalanche of new capital that Seth sees heading our way.

• And let’s keep the cannabis industry size in view. Seth argues that Pharma, Tobacco, and Bev Alcohol NEED to invest in cannabis. That may well be true, but the scale of cannabis hardly makes a dent in those industries. Eli Lilly, the largest pharma company, with a market cap of $740 billion, is almost 9 times the market cap of the entire cannabis industry, including the illicit market, and over 80 times the size of the combined market cap of the 10 largest cannabis companies. Absorbing cannabis just doesn’t make that much difference for these industries.
• A longer-term growth issue can be posed by the following question: Who do you know that doesn’t use cannabis today but will use it tomorrow? And is federal legality really a factor? More than 50% of the U.S. population lives in adult-rec states now. A substantial amount live in medical states where it’s not that hard to become a ‘patient.’ Indeed, some of these states, like Florida and Pennsylvania, are quasi-adult-rec states already. Add to that the current availability of hemp-based products, the ability to drive a short distance to an adult-rec state, and the fact that most people are just not particularly worried about being arrested for cannabis consumption and are therefore willing to purchase on the illicit market, and you get the picture: anyone who wants to use cannabis will find it readily available almost anywhere. So if someone isn’t using cannabis today, they probably won’t be tomorrow either. The image of the canna-curious soccer mom who hasn’t tried it yet but would if it were totally legal is mostly a myth. Seth’s argument that cannabis penetration increases from 11% of the population to 60% seems implausible in the face of this reasoning. More likely, once illicit sales are absorbed and new states with significant populations go rec, the remaining growth rates will be similar to other CPG products—i.e., population growth plus inflation.
• Colombo argues that there are a few reasons why growth might accelerate: new form factors, such as Hemp THC beverages, enjoy wider availability in a non-dispensary setting. These more “sociable products,” while still small relative to the overall market size, offer potentially industry-changing growth potential. Similarly, one of the less heralded aspects of rescheduling, the opening of research, might invigorate the medical side of cannabis with new applications and products now unknown. It’s a bit too early to foresee the impacts of these changes, but that’s what it will take to push adoption to levels close to what Seth anticipates.

Colombo’s thesis: The elements of regulatory reform on the horizon, rescheduling SAFER, and a new AG memo are critically important. Of these, SAFER is the most important for bringing in new capital, but it still stops short of producing a great wave. The next wave of capital will come only after the industry demonstrates sustainable ROIC improvement—not merely regulatory progress. Institutional investors will look for better ROIC, and that, in turn, will require more reform than is currently on the table. Moreover, the growth rate of the industry is slowing. It will hold up for a while as remaining states go rec and hopefully smarter regulation and tax strategies move illicit sales into the legal channel, but fundamentally, cannabis is not tech, it is CPG and its growth will mirror that reality. The result of all of that is that the industry in the near term is overcapitalized and not able to absorb a huge wave of new capital

Part II. The Yakatan View: Two Tsunamis of Capital

Yakatan’s thesis: Significant capital inflows are inevitable once federal restrictions lift—a process he divides into two waves.

Wave One: Institutional Access. Schedule III plus banking reform (SAFE or SAFER) would unlock roughly $7.5 trillion in previously sidelined capital from banks, mutual funds, pensions, insurers, and hedge funds. Even a 5 percent allocation implies up to $375 billion of investable capital—five times all historical cannabis investment to date. This will catalyze M&A, up-listings, and lower-cost financing.

Wave Two: Strategic Buyers. Once the regulatory path is clear, global CPG, alcohol, tobacco, and pharma giants—together representing more than $13 trillion in market capitalization—will enter. These firms face stagnating growth and will use cannabis acquisitions to maintain scale. M&A is the only efficient path for them to capture share in a category where per-user spending already rivals mature sectors.

The Market Need for Constant Growth

Seth Yakatan emphasizes that capital markets have an insatiable appetite for growth. He argues that the public market system is designed to reward expansion rather than stability. Without constant new growth categories, valuations across sectors stagnate, and investor interest shifts elsewhere. This explains why the market continually seeks the next disruptive industry—whether it was dot‑coms in the late 1990s, biotech in the 2000s, or crypto in the 2010s. Cannabis, once federally investable, fills that same structural demand for a new story to monetize. For institutional capital, the absolute size of the cannabis market matters less than the narrative of scalable future growth. Once banks and funds can participate, the question will not be ‘if’ capital floods in, but ‘who gets there first.’

Public markets reward scale and sustained expansion. Organic growth slows as companies mature, so large firms rely on M&A to add customers, categories, and distribution. Recent global deal values in 2023–2025 stayed in the multi‑trillion‑dollar range, with mega‑deals driving totals even when overall deal counts fluctuated. Once cannabis becomes investable, it offers a new category for growth‑hungry consolidators.

80% of Consumer Packaged Goods We Consume Are Owned by ~10 Companies

Yakatan points out that roughly 80 percent of all consumer packaged goods consumed globally are owned by just ten corporations. This high level of consolidation is not an accident—it is a function of efficiency, scale, and distribution power. Each of those dominant companies constantly searches for incremental growth through brand extensions and acquisitions. As regulatory barriers fall, cannabis brands will become natural bolt‑ons to these portfolios. He notes that early entries such as Constellation Brands’ investment in Canopy and Altria’s investment in Cronos were not anomalies, but previews of how established consumer firms behave when presented with a new intoxicant or wellness category. The industry’s eventual shape, Yakatan argues, will mirror beverages, snacks, and personal care—dominated by a few global players that buy innovation rather than build it internally.

Across many CPG categories, a small number of manufacturers control most revenues. Consolidators win on scale, shelf access, and marketing efficiency. Cannabis brands are likely to be absorbed into these portfolios because the distribution and brand‑building advantages mirror other CPG verticals.

Don’t Build It, Buy It

Yakatan frames corporate expansion as a financial, not operational, exercise. He argues that in every maturing sector—from biotech to beverage alcohol—major incumbents eventually decide that it is cheaper and faster to buy proven platforms than to build new ones. This is why the pharmaceutical industry acquires late‑stage assets instead of funding early R&D, and why beverage and tobacco companies have absorbed most emerging brand categories over time. Cannabis will follow the same pattern once legally investable: the first large waves of deals will be strategic acquisitions of strong regional operators. ‘Don’t build it, buy it’ captures this logic. The balance sheets of global CPG companies are primed for accretive roll‑ups, and the return profiles of M&A easily outperform internal development when discount rates are high. Yakatan concludes that the moment cannabis is treated as a standard CPG vertical, acquisition activity will accelerate immediately and permanently.

For strategics, the build‑versus‑buy decision favors acquisition. Buying delivers immediate revenue, customers, and capabilities, and creates cost and revenue synergies that would take years to replicate organically. Large buyers will prefer M&A entries into cannabis once legally feasible, rather than slow internal builds.

Fight for Share of Wallet

Cannabis reaches about 11% of adults, with roughly $469 per user per year, comparable to coffee (~$244) and painkillers (~$229). Total retail spend is near $30 billion today. If penetration rises toward coffee‑like levels, retail could reach $150–$160 billion. This underpenetration, given healthy per‑user economics, underpins Yakatan’s view of strong strategic interest.

Part III. Point / Counterpoint

Synthesis: Two Sides of the Same Curve

Colombo focuses on investor readiness: profitability, efficiency, and disciplined returns. Yakatan focuses on market inevitability: pent‑up capital and the global logic of consolidation. Both perspectives agree that the next true bull phase will be driven by scale buyers seeking growth and efficiency.

Until then, the cannabis industry sits between austerity and inevitability—tightening capital, low ROIC, and fading retail enthusiasm on one hand; and the promise of strategic absorption on the other.

Colombo’s Closing: “Regulatory wins may open the gates, but investors will only cross when returns and growth potential justify it.”

Yakatan’s Closing: “Those gates won’t just open—they’ll break under the weight of trillions looking for growth.”

Appendix charts

Photo by Towfiqu barbhuiya on Unsplash