By Cory Ziskind and Tim Streeb
Cannabis Communications – A Unique Challenge and Opportunity
This ICR Insight originally appeared on New Cannabis Ventures.
In 2017, we authored a post titled “‘Hype vs. Reality’ – Managing the Delicate PR Balance for Innovation-Driven Businesses,” in which we highlighted the role of strategic communications in establishing true credibility with stakeholders and avoiding the classic pitfall of overpromising and under delivering on the path to building long-term equity value.
While the piece did not specifically discuss the legal cannabis industry – the following rings especially true for managing the ‘Hype vs. Reality’ dynamic in this emerging global industry:
Communications plays a critical role in managing this delicate balance. While creating excitement around a new innovation is critical for generating awareness of and interest in its potential, equally important is proving that ‘the hype’ is indeed ‘the reality’ over time in a real-world context.
In March 2018, Bill Alpert wrote a Barron’s article titled “Marijuana Stocks Could Be a Buzzkill” in which he highlighted that “today’s investors are effectively paying 15 times the industry’s cash flow five years from now, a generous multiple.” This was months before the largest publicly traded cannabis companies experienced a massive run-up in their share price in the summer of 2018 leading to valuations 20 to 55 times earnings.
These lofty valuations make it clear that there is a lot of excitement about the cannabis industry and expectations are sky high – but the long-terms winners will be those with substance who can methodically prove out their business models, unique value propositions and growth strategies quarter after quarter.
Building the Foundation of a New Global Industry
While there is indeed a race to raise capital, acquire cannabis assets and establish strategic footprints – characterizing the current market acceleration as a “green rush” is a misnomer, as the term implies that the industry is a bubble driven by hype. The reality is that we are still in the critical early stages of a major global industry and asset class backed by long-term secular growth trends.
Cannabis has been used across many cultures for thousands of years for a range of medicinal, recreational and industrial purposes and yet we are just now building the industry’s infrastructure and establishing best practices for communicating to company stakeholders. We are creating a new industry – a new cash crop, new supply chains, new distribution channels and retail models – all while navigating evolving public perception and government regulation around the world.
It’s an exciting time and optimism is warranted – but it will be the cannabis companies that manage that optimism appropriately that will win in the long run.
Regulators are Watching
In September of this year, the SEC issued an investor alert with the following warnings:
Even the most modest of admonishment from regulators will leave a permanent stain on your online record that is searchable and findable by anyone for years to come, leading to long-term reputational damage that could have a severe negative impact on a company’s credibility. When credibility is lacking, the ability to raise capital, attract customers, establish strategic partnerships and execute the business is significantly hindered, if not impossible.
Welcome to the Arena
Cannabis companies are sitting squarely in “the Arena” – where the stakes are highest, where their business models will be tested, questioned, distorted and valued by investors, the media and other stakeholders – and where a single stumble can take an otherwise positive story line into negative territory with a lingering impact on credibility, reputation and equity value.
Simply put: the market and its observers want substance, not fluff. This is true for any public company, but is especially the case in the cannabis industry.
Short sellers are actively calling out companies they have identified as lacking substance and intentionally overhyping their businesses and growth potential. Whether their public takedown is based on reality or perception, they have a powerful platform and often appear CNBC or other financial news outlets where their sentiment can send a stock spiraling downward.
Investors will comb through everything a company has said, every claim and every promise – in press releases, public filings, investor presentations, media interviews and speaking engagements. Discrepancies in these claims, failure to deliver on them, or failure to adequately communicate why promises were not met, will lead to public shaming via short reports, long-term reputational damage, a loss of credibility – and even legal ramifications.
Our work with cannabis companies of all types gives us a candid look at the broad range of corporate communications programs being deployed in the industry. On one end of the spectrum are substantive LPs, healthcare and other high-quality companies managing sophisticated and integrated PR/IR programs, well positioned to deliver long-term equity value. At the other end lie many dubious operators, phantom companies and industry hype men with lots of bravado and bluster to offer, but with little transparency into their operations and lofty and unsubstantiated performance claims. These very different approaches have made an already-confusing market even more difficult to decipher, especially for stakeholders new to cannabis.
Given this opaqueness, we predict a flight to quality. While many considerations should be factored as part of designing and executing a value-adding corporate communications program, here are a few high-level tips for doing it right:
As the industry continues to commoditize driven by rapid increases in global flower and concentrate production capacity, branding will become an increasing crucial component of success and key to unlocking durable margins.
While it may be tempting to position your company as the “biggest” of its type to media, investors and other stakeholders, unless you are certain that’s the case, it’s best to tone down your message. The global market is still emerging and nebulous, with dozens of companies claiming to be “the largest, the best, the first or the only” company in cannabis. With the exception of a small handful of the largest public cannabis companies, these claims often ring hollow and only weaken your credibility. As the market matures, such tactics will become even less effective.
Investors and media bring a keen and critical eye to their work, and treat cannabis companies no different than others. When interacting with these stakeholders, make sure your messaging consistent, compelling and credible. Your core key messages should support your brand position and corporate narrative, and each be reinforced by quantitative “Reasons to Believe.” Have your company’s leadership team rehearse your key messaging often, in order to deliver consistent and influential messages across channels and opportunities.
The competition for media and investor attention is tougher than ever, especially in cannabis as the trend is for operators to announce every development, no matter how minor. While it’s important to maintain a regular cadence of news and issue press releases to stay current and inform stakeholders on key business milestones, it’s best to avoid “oversaturating” media with press releases on every step of an acquisition or your latest local marketing campaign. Doing so can overwhelm reporters, especially those just initiating coverage in new legal markets, causing them to miss your most important news and become skeptical about the significance of all announcements Aim for three to five substantive announcements a month, and use other communications channels to share more routine business updates.
As your company’s profile grows you will likely face criticism from media, activist investors and other potentially antagonistic stakeholders, and you should be prepared to respond when needed. Keep your communications cordial, concise and fact-based, providing additional background information as necessary. Avoid the temptation of pointing out other companies and referencing competitors; instead, briefly address the criticism, and explain in positive language your viewpoint on the issue and any actions you are taking as a result. Bolstering your response with facts, stats and other quantitative evidence will only make it stronger. You won’t succeed in in silencing the critics immediately, but over time this disciplined, measured and fact-based approach will prevail.
In today’s market, every communication you issue has the potential to reach any stakeholder. As such, it’s critical to maintain an integrated PR/IR program, so that your marketing messages fully sync with the corporate narrative you’re delivering to investors and other financial audiences. For public cannabis companies, a unified message to the marketplace is imperative to success.
At its most basic, PR is about building and maintaining mutually beneficial relationships. Relationship-building takes time and needs to be measured over the course of months, if not years. Focus on being a good communicator and news-making partner first and foremost, and don’t over-react when you see a story you think should have included your company. Understand that reporters are overwhelmed as they attempt to cover this new and complicated global market, and when you see misinformation or poor reporting, take the opportunity to politely educate the reporter. Communicate to key media your goal of serving as a long-term, valuable news source to establish a true relationship, and graciously accept when reporters say “no.”
The Bottom Line
Making exaggerated or misleading public statements may feel good, attract investors, increasing trading volume and share price in the short term, but the long-term ramifications will be disastrous.
The ‘hype vs. reality’ dynamic inherent in the cannabis industry must be managed strategically in order to truly establish credibility with stakeholders and avoid the classic pitfall of overpromising and under delivering.
As with any emerging industry there will be winners and losers and over time, and we expect a flight to quality. Strategic communications plays a fundamental role in helping the market decide which companies are high quality, with real long-term growth potential. Substance, not hype, will win in the end.
Cory Ziskind and Tim Streeb are Senior Vice Presidents at ICR and co-lead the firm’s cannabis PR practice. With a combined 32 years of in-house and agency experience, Ziskind and Streeb advise cannabis clients on a range of communications opportunities and challenges, helping them develop clear, consistent and compelling messaging and positioning, raising the visibility and understanding of their unique business models, and building and protecting their corporate brand and reputation. They can be reached at firstname.lastname@example.org and email@example.com, respectively.