Money guys getting in on marijuana business
Marijuana is going corporate, and for risk-taking pioneers of the Acapulco Gold Rush, fortunes will be made. But for consumers long used to pot’s outlaw subculture, it could be a bummer.
Investors are becoming emboldened and putting their money into an expected $3 billion cannabis market this year—double that of 2013—from sales in medical dispensaries in 20 states and D.C., and in retail boutiques in Colorado and Washington, where recreational use is now legal.
This budding industry has “vast potential,” said Marijuana Business Daily editor Chris Walsh. “We’re talking $46 billion if marijuana is legalized nationwide,” Walsh told Capital. “More than the wine, coffee, and tea industries combined.”
Currently, there’s only one cannabusiness company listed on a major exchange—Britain’s GW Pharmaceuticals, which closed at $48.39 a share Friday on NASDAQ. Self-described cannabis financial analyst Alan Brochstein calls the billion-dollar maker of cannabinoid sprays “a Rolls Royce of companies in this space, a true medical company.”
Yet Brochstein warned subscribers to his 420 Investor newsletter against the marijuana penny-stock companies whose share prices plummeted in the “Dot Bong Bubble” last year. “It would be better to get into a private company and watch it go public,” Brochstein told Capital. “That is where a lot of the money is going to be made.”
This weekend, 20 of Brochstein’s subscribers flew to Denver to meet him for an investors’ tour of what businesses have already blossomed in the state where recreational marijuana became legal on Jan. 1.
“We’ll visit dispensaries; a cultivation facility; and a vape [vaporizer] pen factory,” Brochstein told Capital. They’ll also tour a manufacturer of Pharmpods—stackable shipping containers repurposed for growing organic plants indoors with 20 percent less water and light and climate control.
It is only a matter of time before Wall Street gets its mitts on the marijuana business. Even High Times has started a capital fund.
As for the future, all this normalization makes it hard to picture a resurgence of the “Dave’s not here” days of Cheech Marin and Tommy Chong, who in 2003 served 9 months in jail for selling bongs [with “Wall Street Wolf” Jordan Belfort as his cellmate]. Color will drain like a bleached Rasta beanie from annual 4:20 celebrations, where students in tie-dyed Spiral Bears tees would in the past be arrested and French-bread-sized doobies seized.
Brendan Kennedy, C.E.O. of Privateer Holdings, the clear leader of the private equity pack in the cannabis marketplace, is fine with all that. Of the image of Leafly, a Yelp-type site for different strains of marijuana Privateer bought, Kennedy told The New York Times, “There aren’t pot leaves. There is no Grateful Dead. There are no nurses in bikinis.”
“Everytime we see those cliches, we think it’s hurtful to a cancer patient suffering the side effects of chemotherapy, or to the mother or father of a child with epilepsy,” Kennedy, who cofounded Privateer with fellow Yale School of Management grad Michael Blue in 2010, told Capital. “85 percent of Americans believe that if a doctor prescribes cannabis, patients should have the right to use it. 58 percent of Americans think it should be legally taxed in a way similar to alcohol and tobacco. And I find that fascinating. You can’t get 10 Americans to agree on anything. Cannabis is mainstream now.”
While four more states are expected to vote on recreational marijuana this year, and Gov. Andrew Cuomo announced he will sign an executive order to make medical marijuana available through research hospitals, marijuana remains illegal on a federal basis. It has been so since 1937, when William Randolph Hearst, Andrew Mellon and the Dupont Corp. formed an anti-hemp cabal. Note to Gov. Cuomo: residents of New York state are among the top visitors to Leafly, according to Kennedy.
As states have thrown off their Prohibition-like chains, the U.S. Justice Dept. has warned banks and credit card companies not to do business with marijuana merchants. This has forced owners of medical dispensaries to transport large amounts of cash, including to pay their weekly taxes, at some risk.
Due to these federal constraints, Privateer does not yet have institutional investors, yet expects to raise $25 million in its next round of fund-raising in April from high-net-worth individuals.
“We may not have banks yet, but we have lots of executives at those banks who see the inevitability of legalization federally,” Kennedy, 41, told Capital. “They also see that this will be a $40 to $50 billion industry.”
Privateer’s investors will be required to put in a minimum of $1 million for financing of entities like production and warehouse facilities, services like security, and paraphernalia companies. They are not unlike the late billionaire Peter Lewis, who gave millions to the pot legalization cause.
“Our investors are looking for a financial return, yes,” Kennedy noted, “but they also want to be involved in social change. They are from the far left and the far right, but they are united on this single issue. That’s one of the few things that gives me hope about the mess in Washington, D.C.”
Steve DeAngelo, president of the ArcView Group, agrees. “The federal government is holding on to an outdated, archaic position on cannabis,” DeAngelo told Capital. “I think we may well see change in the the next presidential administration.”
The star of “Weed Wars” and owner of Harborside Health Center in Oakland, Calif., DeAngelo owns the largest cannabis clinic in the world with $30 million a year in sales. DeAngelo has been a leader of the legalization movement for decades, and with Willie-Nelson-like braids, looks the part.
His ArcView Group brings together entrepreneurs with angel investors willing to put in at least $50,000 to startups, including Kashit, a ganga gadget company, and MassRoots, a Colorado social network for the thus-far medical marijuana community.
“There’s just an explosion of creativity out there now,” DeAngelo said. “But the businesses have been underfinanced. Can you imagine what can happen when they’re not?”
ArcView’s annual report, “The State of Legal Marijuana Markets,” predicted a 64 percent growth in legal cannabis markets in 2014.
“It’s a proven market; it’s a huge market—in the billions. Cannabis is not a new product. Take a look at what happened in Eastern Europe with the falling of the Berlin Wall, or when China opened itself up to global markets. The market is already there.
“Our investors at first were high-net-worth individuals who supported various cannabis reform efforts over the years,” DeAngelo told Capital. “But more and more, they are coming from an investment background, outside of the cannabis community.”
Will this lead to the marijuana-industrial complex? Will we see Bubba Kush packed like cigarettes and distributed by Anheuser-Busch-sized companies to Quicky-Marts? Will there be Super Bowl commercials for Purple Urkle with Rebelution soundtracks and the slogan, “Things Go Better With Dope?” Will Alice B. Toklas brownies end up on the Dollar Menu at McDonald’s?
Harvard professor Jeffrey Miron told CNBC that a legal pot industry would look like that of beer: megacompanies side by side with artisanal brewers.
Still, I’m scared.
“Cannabis can do almost magical things,” DeAngelo said reassuringly. “It has hundreds of compounds that have been found to help our immune system, help with pain, cancer, epilepsy, Alzheimer’s..... more. On a spiritual note, it reduces conflict, it helps us enjoy music more... It reawakens our sense of wonder and play. No, it would not be appropriate for a clerk at a cash register to just hand cannabis to somebody without being knowledgeable. This is an amazing plant.”