Last year former videogame entrepreneur Dooma Wendschuh began soliciting investors for what he viewed as a big idea: distilled marijuana extracts, developed by scientists, that could be used for “edibles,” such as brownies, and vaporizers. Rather than hawking flavors or strains of pot, his company, Ebbu, would aim to deliver consistent feelings, such as “chill” and “giggles.”
Raising funds wasn’t easy, to put it mildly. Wendschuh approached seven investing groups, by his estimate, made hundreds of presentations, and asked more than 450 individuals to put up cash. Four months of grueling effort yielded him $2 million. So far business has been good. Ebbu’s first line of extracts has been flying off the shelves in four Colorado dispensaries since it launched in April. The profit margins are huge: Ebbu makes its extracts for $2 and sells them for $35. “You can make a lot of money in marijuana,” Wendschuh says. “If you make it, it will sell. It’s unreal.”
A year after he struggled to raise money, the situation is far different. At a Marijuana Investor Summit in Denver, an April event that drew 1,000 investors, Wendschuh says he was besieged by millions of dollars’ worth of unsolicited offers to invest in his operation. Others pitched him marijuana-focused accounting, consulting, recruiting, or security services.
Call it the three stages of development: First comes the product itself, second come ancillary products, and third comes the infrastructure of related services. By that measure, the legal cannabis business is rapidly accelerating into stage three, as an ecosystem of financial and other services quickly grows up.
Sales of pot—the legal variety—soared to $2.7 billion last year from $1.5 billion the year prior, according to the ArcView Group, an investment and research firm focused on cannabis. Medical marijuana is now legal in 23 states and Washington, D.C., with five of those jurisdictions permitting recreational use. Next year voters in another half-dozen states will consider legalization. Meanwhile, there’s a bipartisan effort to remove federal restrictions on medical marijuana in the states where it is allowed. “There is going to be a massive, massive market,” says Troy Dayton, CEO of ArcView.
That has prompted ArcView’s 470 member investors to pour some $41 million into 54 weed companies of late. Recipients include Eaze, which aims to be the Uber of pot delivery (it got $11.5 million), and Medicine Man, a Denver dispensary that nabbed $1.6 million.
Today there are about 300 publicly traded cannabis companies vs. Just 13 in 2013. Among those 300, 40 raised a total of $95 million in 2014 and the first quarter of this year. (A few cannabis companies are sketchy: The Securities and Exchange Commission has delisted five stocks for pump-and-dump schemes.)
Until recently the reputational and legal risk kept institutional investors away. The window cracked open earlier this year when billionaire Peter Thiel’s investment firm Founders Fund made a multimillion-dollar investment in Privateer Holdings, which raised $82 million for its cannabis businesses, including Marley Natural (in partnership with the family of the late reggae singer Bob).
Today at least seven small financial firms, such as Poseidon Asset Management, Salveo Capital, and Emerald Ocean, are raising money to fund pot companies. Even some family offices are investing, according to Viridian Capital Advisors, a firm that tracks the category.
“The industry is losing its taint as a drug industry and is becoming a much more sophisticated market,” says Scott Greiper, Viridian’s president. Advanced lighting, soil, and cultivation systems are being developed. Data analytics promise to reveal what’s selling at retail and track marijuana from seed to sale. Biotech companies are trying to pinpoint the strains of cannabinoid that can benefit diabetes, epilepsy, and glaucoma. Those advances, he says, are in turn attracting more seasoned investors.
Like any other market, pot now has an industry association, trade publications, women’s entrepreneurship conferences, vocational schools (for growers), and a 13-week startup accelerator program called CanopyBoulder. This year CanopyBoulder will help 20 cannabis startups launch, offering $20,000 investments for 9.5% stakes.
There are marijuana-focused services like law firms, public relations firms, marketers, accountants, insurance companies—even janitorial services. They tout special knowledge about cannabis regulation or, in the case of the janitors, expertise in odor containment.
For all the excitement, getting a company started isn’t easy. Marijuana is still illegal in the eyes of the federal government. As a result many banks won’t do business with companies that touch the plant, forcing them to hop from bank to bank or pay vendors, employees, and taxes in cash. “I’ve lost five banks, and a colleague has gone through 19 banks,” says John Davis, owner of Northwest Patient Resource Center, a dispensary in Seattle. To avoid becoming a target for criminals, Davis spent $100,000 outfitting his operations with concrete walls and layers of security for the times he has to deal in cash. (Last month a federal bill was introduced that would shield banks from potential liability for serving legal marijuana businesses.)
The U.S. Tax code also prevents marijuana operations from claiming any business expenses on their taxes, and federal law prohibits distributing cannabis products across state lines. So if a company wants to expand, it needs to open a new plant in another state. “Everything in this industry is harder, and it’s constantly evolving,” says Privateer Holdings CEO Brendan Kennedy.
The prospect that the roadblocks will disappear appeals to pioneers, says Dayton. Competition meanwhile is limited. As he puts it, “The opportunity to be a market leader is wide open.”
A version of this article appears in the June 15, 2015 issue of Coins2Day magazine.
