March 18, 2022

What Germany can teach Europe about growing a cannabis market

Germany will likely legalise cannabis by early 2024. Here's what cannabis founders and investors need to know.

“Germany could be the world's largest cannabis market within the next two years.” No, that's not a line from some overambitious startup’s fundraising deck or Snoop Dogg’s latest pitch to LPs — it’s the conclusion of a study by a German economics professor last year. It illustrates how mainstream excitement about this industry is ever since doctors were first allowed to prescribe cannabis-based drugs in Germany in 2017. 

Germany’s federal government is now aiming at full-scale legalisation of the domestic cannabis market, and it's looking likely that we'll see some it in some form by early 2024. This could pave the way for legalisation in other European countries. 

Theoretically, such tantalising prospects should have founders and investors chomping at the bit. But beware, the outlook for this emerging industry may not be as rosy as it seems — in Germany and in other European countries weighing legalisation.


The state of cannabis regulation in Europe

Successful legalisation of cannabis in Germany could be a inspiration for other countries given the size of its economy — and the fact that it has open borders with its nine neighbouring countries, making it easy for citizens to hop over to Germany to get their own fix.  

Malta, Luxembourg, the Netherlands, Spain, the Czech Republic and many other European countries have already taken the first steps towards drafting similar legislation but are hesitating, opting to decriminalise possession rather than legalise the entire market. 

Partly that's because many European countries are signatories to the UN’s Single Convention, which commits them to fight the drug trade and limit legal use to medical settings. Any country that opens an adult-use market could therefore be breaking international law.

The only way to get around this would be to leave the agreement and re-enter with the exception of a legal cannabis market. Bolivia has already done something similar with coca leaves, but the process takes time and the approval of other member states.  

👉 Read: Europe’s capitals for cannabis investment, ranked

To compound the issue, European states are committed to important European treaties — including the Schengen Agreement — which explicitly criminalises cannabis. That’s why Luxembourg recently made a U-turn on proposed legislation to legalise cannabis. 

But where there's a will, there's a way. 

What founders need to look out for

So what does this mean for founders and investors anticipating the law's next steps? After five years of medical cannabis in Germany, we have insights into the size and potential of a fully legalised domestic cannabis market.

Things take a little longer in the cannabis business

As mentioned above, Germany's legalisation could serve as a model for the rest of Europe. Emphasis on could. After all, the federal government can only encourage the legal market if it pushes back on the illegal market. In Canada and other states, this has turned out to be a slow process. 

That makes it all the more important that politicians set clear and realistic conditions for how cultivation, imports and sales should be conducted. At the end of the day, availability and price will determine whether consumers buy controlled products in a legal store or illegally from a dealer.

Production is not the most lucrative business model in the long run

Despite initial shortages, high margins have encouraged more competitors to enter the market in Germany. The market is now in oversupply, and a price war over medicinal cannabis is in full swing. Distributors with low-cost sources or the companies that are in direct contact with patients have the greatest chances of survival.

Watch out for overregulation

Domestic cultivation is still nascent in Germany because the regulatory framework varies from state to state. Strict regulations are understandable in view of the federal government's primary goals in the adult-use market: the protection of minors and safety for consumers. But regulation can be tricky; entrepreneurs should look out for which governments give them sufficient freedom and scope.


Expertise and networks are key

In the case of full legalisation across Europe, there will be strict quality standards. Businesses who fail to establish contact with reliable, inexpensive and high-quality cannabis producers won’t have a chance. 

Furthermore, prior experience in the medical market surrounding logistical demands, product quality, import and export processes and certifications will be a prerequisite for founders of cannabis-related startups to effectively launch. Finally, companies need to understand the data generated by patients so far so they can ensure product security and education. 

Again, Germany is a good example of what might happen. The medical market in 2017 was almost exclusively made up of North American companies with previous experience in legal cannabis markets, but domestic companies are now succeeding too. The entrepreneurs emerging as winners from the current consolidation are therefore ideally positioned as early movers to build up a new and undoubtedly larger stimulant market.

Manage in the short term, think in the long term

Depending on how policymakers shape the market, it will be possible for companies — unlike many purely digital startups — to achieve rapid revenue growth from the outset. However, the oversupply in the medical cannabis market and the consolidation of startups shows that the companies that are successful in the long run are those that do not lose sight of their long-term vision.

What’s next for cannabis in Europe

The eager economist I mentioned at the beginning — Justus Haucap, at Heinrich Heine University in Düsseldorf — predicts that a total of 27,000 jobs could be created in Germany as a result of cannabis legalisation. If other countries in Europe follow Germany's lead, that could be huge boon for job market.

In addition, we are also seeing the first signs of interest on the part of institutional investors. Up to this point, US VCs have proven more willing to invest in and fund European cannabis companies than their European counterparts, but local VCs' interest in this new growth business is increasing. 

After all, the cannabis industry has one thing in common with the digital economy: where there are uncertainties, there are also opportunities.