We recently took a trip around the Pacific Northwest to do some “research” into the legalization of marijuana in the United States and cannabis startups. What we saw was shocking to say the least. In a good way. At least what we can remember of what we saw. Things have gone from zero to “full blown cannabis industry” in almost no time at all. The question that kept crossing our minds was which strain is best for our active lifestyles: Space Cheese, Critical Cure, or Dawgy Treats? The second question that kept crossing our minds was the following:
Who the hell is making all the money off of the legalization of cannabis?
We’ve seen a tremendous amount of interest from the general public about investing in cannabis stocks, and that’s not just because they’re avid users of the product. That is because the opportunity that cannabis presents itself here is massive. Here’s an excerpt from the recent IPO filing of the first cannabis-related company to IPO in the United States, Innovative Industrial Properties:
According to ArcView Market Research, or ArcView, nationwide sales of legal cannabis grew to $5.4 billion in 2015, up from $4.6 billion in 2014, of which approximately 92% consisted of medical-use sales. Demand is expected to remain strong in 2016, with legal markets projected to grow to $6.7 billion, according to ArcView, a 24% increase over 2015, as new state medical-use markets, including Nevada, Illinois, Massachusetts and New York, continue to expand. According to ArcView, by 2020, legal market sales are expected to grow to approximately $21.8 billion, of which estimated medical-use sales are expected to be approximately $10.2 billion.
What they’re saying is that, by 2020, the recreational use of marijuana will account for $11.6 billion. Intuitively, that number sounds way too low. Here’s an estimate from Duchess Capital that puts the black market for cannabis 4X higher at around $45 billion:
If we look at the amount of alcohol and tobacco sold in the United States, it looks something like this:
- 2015 Alcohol Sales: $219 billion
- 2015 Cigarette Sales: $94 billion (assumes $7 a pack)
If recreational cannabis captured just 15% market share from the alcohol and tobacco industries, you’re right at the estimate given by Duchess Capital. There is a lot of money to be made by any account, and where there is money to be made, startups will sprout up like weeds and institutional investors will come sniffing around. Here’s a look at a chart put out by the bright minds at CB Insights which shows first round funding for cannabis startups in 2016:
These cannabis startups aren’t funding themselves. Each has one or more investors backing them. While many of these investors choose to remain “undisclosed”, some had the cajones to just say “yes there is a new exciting opportunity to make money and we’re investing in it”. Here are some of the firms focused solely on investing in cannabis and putting a whole new meaning to the term “seed investment”.
This firm is one of the biggest cannabis-focused venture capital networks out there. Not only that but they’ve positioned themselves as the leading market research firm for the cannabis industry. In fact, they’re who we were citing information from earlier. What have they done with that research? Well, for one, they used it to identify 135 different companies to invest $91 million into. If your an accredited investor, you should join the 600+ other accredited investors who’ve signed up for their platform.
This is the Snoop D-O Double G himself, Calvin Broadus, who raised $25 million to invest in cannabis-related startups. Snoop has had his paws dirty before in the VC world having invested in the likes of Robinhood and Reddit. So far Casa Verde Capital has invested in the “Uber of weed” which is a company called “Eaze”, FunkSac which sells smell-proof packaging (what good is that?), and Merry Jane which is a cannabis lifestyle site. That’s about all we know on what the doggfather’s getting up to.
MJIC is a California firm that does market research in addition to investing in startups. They also operate the “Marijuana Index” which tracks and reports on over 100 publicly traded cannabis-related equities. Let’s hope they warn retail investors that the majority of over-the-counter (OTC) “cannabis equities” are nothing but garbage. They’re also selling a fair number of reports on the cannabis industry in addition to managing their portfolio of investments.
We started investing in the marijuana industry in 2014, two short years ago. To date our portfolio has grown by over 450%.
That’s the sort of statement you may want to qualify a bit given that, in our experience, many of the people looking to invest in cannabis ventures are first time investors. They might not understand that until you have an exit event, you haven’t made isht. Canopy also offers a 16-week business accelerator which is a great idea given that many of these startups are probably run by cannabis aficionados with some great ideas and drive as opposed to experienced unicorn-level entrepreneurs.
Founded in 2013, Poseidon Asset Management is working towards “Pioneering the Efficient Frontier of Cannabis Alpha“. If you work in finance, just how cool is that tagline? The firm was founded by two siblings whose father died of cancer and was unable to medicate with cannabis due to the stigma associated with it. Respect. The principals refer to themselves as a “cannabis hedge fund” and demonstrate a solid understanding of finance concepts such as diversification and risk management (on the website, at least). The firm has invested in 25 holdings across all “industry segments”.
iAnthus Capital isn’t your traditional VC but rather a publicly traded Canadian company (CNSX:IAN) that’s been scooping up private assets in the U.S. Get this. Breckenridge is a ski-town of 4,600 people where a company called Organix has a 40% market share selling weed to snowboarders. They raked in $4.4 million in 2016 on margins of 30%. Yeah, there’s money in cannabis. iAnthus bought them for $4.375 million, a purchase price that also includes a 12,00 square foot grow room.
Not a whole lot out there about Phyto Partners except that they have a pretty nice website and they’re trying to coin the term “Cannabis as a Medicine” or CaaM (rolls eyes). Not a whole lot about what investments they’ve made other than Leaf which sells “plug ‘n plant” growing apparatuses. Phyto is run by two dudes who have lots of “investment banking performance”. Ahem.
CJV Capital invests in smart people solving difficult problems in the emerging cannabis industry. That’s it man, that’s all we know.
It’s so damn hard resisting drug puns and these guys are no exception. Their goal is to help “budding companies be successful in commerce, technology & people power”. Hypur Ventures has made about 6 investments across cannabis business intelligence and compliance. They also have invested in Willie Nelson’s brand and Dope Magazine. The founders have solid executive experience with one of them having managed several $1 billion hedge funds previously.
Spanish private equity firm Merida Capital Partners has been working with cannabis companies since 2009 and investing in them since 2012. The firm has competed for and won limited licenses in two of the strictest medical-only states in the United States demonstrating that they know how to navigate all the red tape in the industry. Not much else is said about what they’ve invested in except for a startup called BioTrackTHC which offers a business intelligence platform for the cannabis industry.
Founded in 2014, Tuatara stands out as one of the biggest players in the game with $93 million in funds raised to invest in ventures like Willy Nelson’s cannabis startup. The other thing that stands out about Tuatara is that their executive team has solid experience; one of them was an MD at Guggenheim and one worked in investment banking at J.P. Morgan. With that said, we’re going to nominate Tuatara for our “favorite cannabis executive group picture” award. Maybe it’s just us, but can’t you just hear the cameraman saying “try not to look so stoned, guys”?
Cannabis IPOs and Acquisitions
Whenever we write cannabis-related articles, we get grief distributing them through our social media channels. There is still a massive taboo around cannabis and that might be because it’s a Schedule 1 controlled substance that is illegal. With that said, some people need to evaluate their “assumption stacks” (HT Bryan Johnson). But most people won’t, especially in the old-school world of boring old-finance people like us. So what exactly can we expect for exit events? Acquisitions? IPOs? While we did see a cannabis related REIT have a successful IPO recently, Bob’s cannabis farm with 20,000 plants is probably going to raise some eyebrows when they file their S-4. That’s our biggest concern with investing in any of these funds.
One good sign is that not only do we see these 10 funds dedicated to investing in cannabis startups, we also see established venture capital firms giving up the green. Some of the names include 500 Accelerator, 500 Startups, Base Ventures, Slow Ventures, Winklevoss Capital, Dutchess Capital, Liquid 2 Ventures, Cap-Meridian Ventures, N-Squared Management, Founders Fund, Tao Capital Partners, Perceptive Advisors and Kentucky Seed Capital Fund. Great job everyone on adjusting those assumption stacks.
In future articles, we’ll deep-dive into various aspects of the burgeoning industry, in particular, which of these cannabis startups are getting the most funding and have the best chance of dominating any particular area of the industry.
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