Pot of Gold? Some investors are seeing gold in pot.
The retail market for marijuana is set to open in less than two weeks but the Cannabis Control Commission of Massachusetts is in no hurry to issue licenses. The board was authorized to start issuing licenses from June 1st but no commercial licenses have been awarded yet.
That, however, hasn’t stopped startups and investors from courting each other. As the retail adult-use industry begins to take shape, a lot of startups have mushroomed to create the next innovative pot product. They know the market exists and that their product will find an audience, and yet it’s still hard to find investors to co-parent their baby.
This is not new to cannabis entrepreneurs — they are accustomed to being turned away by mainstream venture capital investors who are skittish to invest in something that is still illegal at the federal level — and entrepreneurs realize that de-stigmatization is a long, arduous but a necessary struggle. But until then, they may have to keep knocking on the doors of family offices and hedge funds.
The usual suspects in marijuana investing right now are big pharma, tobacco and alcohol companies, each clamoring for their piece of this green pie. Vivien Azer, analyst with NYC-based financial services firm Cowen Group, was quoted in Investor Business Daily as saying “Vaping is one of the fastest-growing segments in both nicotine and cannabis. Upon federal legalization, Big Tobacco could leverage its expertise to explore the legal cannabis market through vapor.”
Case in point: Philip Morris International invested $20 million in Syqe Medical, an Israeli startup that developed a medical cannabis inhaler specifically designed to enhance dosing precision.
But for first-time entrepreneurs venturing into the business, the journey of becoming an attractive investment can be a little harder. Trella Technologies, a company that developed a plant-training prototype for indoor growing, decided to go the crowdfunding route for its seed funding. After she began pitching the business, Trella CEO Aja Atwood found interest among curious high net-worth individuals. “So far, the people who have shown interest in investing are doctors, lawyers who want to dip their toe in the business and make small seed investments.”
For Shanel Lindsay, who heads Ardent Cannabis, seed funds to develop the at-home decarboxylator (a machine that activates THC from raw cannabis flower) that her company sells, came from her mother and a colleague. Lindsay noted that the advantage of approaching angel investors and family offices is the absence of red tape. “At family offices, investment decisions are more streamlined and quicker since it’s usually just one or two decision makers.”
Hedge funds and family offices recognize the opportunity to jump into the gap left by mainstream investors. Another draw is that it’s a $20 billion black market that’s about to become legal — that’s a huge existing opportunity for a product that doesn’t need any testing. “It’s not a new business, but an existing one becoming legal. Unlike life sciences or tech where the market has to be carved out, cannabis companies already have an existing market and the trepidation about the product working is non-existent,” said Keith Cooper, CEO of Revolutionary Clinics, a medical marijuana dispensary based in Somerville.
These private wealth management companies are not shy from embracing the opportunity. “Just in the last 3 years, family offices have gone from ‘It’s an illicit business, no way am I investing in it’ to at least 1% of them investing in non-plant-touching businesses every quarter,” said Ryan Ansin, president of Connecticut-based Family Office Association. Ansin noted that in the past two years, 20% of family offices have looked into and/or participated in the cannabis market where they will usually club resources and pool in about $30-$40 million. “Of late, the size of these funds are touching north of $100 million,” Ansin said.
But thanks to rapid legalization, the investing environment is about to get a lot more competitive, especially given the ease of business between US and Canada, which became the second country after Uruguay to legalize cannabis. According to data from Pitchbook, VC investments into cannabis companies are rising steadily. Prominent investors include Phyto Partners, a Florida-based marijuana investment fund which has closed 14 deals in the last five years. Others include Poseidon Asset Management, Slow Ventures, Altitude Investment Management and, ArcView Investor Network.
With changing laws, the profile of investors in the business is also changing. “The landscape for investing in cannabis has changed over the past several years from HNW risk-taking investors to institutional investors both cannabis specific and special situation funds," said Douglas Leighton, managing director of Dutchess Capital, a Boston-based hedge fund that invests in cannabis ventures. "More Institutional investors are becoming comfortable investing in the space and it will continue to proliferate as the legalization continues to sweep across the country."
Until then, cannabis entrepreneurs may have to hound family and friends.
