No to Marijuana Stocks, Yes to Weed Investing

Unless you’re living under a rock, you’ve probably heard that marijuana is now legal in some states in the U.S. hinting at a future where cannabis is no longer illegal at all. The end of prohibition for marijuana in the U.S. would be hugely disruptive and create the potential for a great deal of money to be made off of marijuana legally.

While historically people may have “invested in weed” by buying a pound and then selling it off in smaller quantities, or jamming a few grow lights into their closet over some slowly growing pot plants, there now exists a legitimate business opportunity which is attracting expert and novice investors alike. The problem is, that even though there are no opportunities yet for retail investors, the niche has still managed to attract scores of novice investors such as your average stoner who thinks that the legalization of marijuana would make a great investment, only because he smokes so much of it and knows nothing about how easy it is to get scammed by buying OTC stocks.

The reality here is that there are no legitimate marijuana stocks to invest in right now except for over-the-counter (OTC) companies which are trying to attach themselves to the story and the legitimate Canadian growers. We always make it a point to warn investors that almost all OTC companies will lose you money and you should avoid each and every OTC company like the plague, especially the marijuana stocks being offered right now on the OTC market with names like Medical Marijuana, Inc. (OTC:MJNA), Medbox Inc. (OTC:MDBX), or Rapid Fire Marketing, Inc (OTC:RFMK), These OTC “marijuana stocks” have been cropping up everywhere, and the problem became so bad at one point that FINRA had to issue this warning about investing in marijuana stocks:

FINRA_Warning

If you want to invest in marijuana by buying stocks, just be warned that every single OTC company trying to attach itself to the legalization story will likely lose you money as an investor. So is there any money to be made by investing in marijuana at all? There could potentially be loads of money to be made, and we can see that by looking at a startup in this space which is being backed by the co-founder of Paypal, Peter Thiel.

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Founded in 2010, Seattle based Privateer Holdings has taken in $84 million in funding so far to make money off marijuana legalization by building or acquiring dominant brands. Here are the three fundamental beliefs of the Company:

1.     Cannabis is a mainstream product consumed by mainstream people;
2.
     The end of cannabis prohibition is inevitable; and
3.
     Brands will determine the future of the cannabis industry.

The company was founded by three visionary entrepreneurs with decades of experience in investment banking and venture capital. Their staff includes Ivy League MBAs, PhD research scientists, marketing professionals and operators from world-leading brands, and even former federal law enforcement professionals. Perhaps the most compelling thing about Privateer Holdings is just how high profile one of their investors is. Peter Thiel, the co-founder of Paypal and the first outside investor in Facebook, has taken a stake in Privateer Holdings through their Series B funding round as seen on the below timeline:

Privateer_Timeline

His firm, Founders Fund, has $2 billion in assets and is the first high institutional investor to invest in legal cannabis giving this niche some real legitimacy. Privateer believes that the dominant brands will win, and has already put together a portfolio of three brands; Tilray, Leafly, and Marley Natural.

Privateer_Brands

Look how well they’ve sewn up the market with these verticals. They bought the world’s biggest pot related website and now they have the attention of pot smokers worldwide. They claim to have built the most sophisticated legal pot growing operation in the world, and they’ve managed to create a brand using the name of one of the most iconic heroes of pot smokers everywhere, Bob Marley. If cannabis continues to become legalized in the U.S, this company stands ready to capture some serious market share through both organic growth and acquisitions. But just how big of a potential market is there here?

In an article published by Forbes about a year ago, the Co-Founder and CEO of Privateer is quoted as saying that the potential market for legal cannabis “is worth $50 billion in the United States and four times that worldwide“. To put this into perspective, sales related to legal cannabis were about $2 billion in 2014. In the same article, Founders Fund partner Geoff Lewis talks about how the due diligence on Privateer lasted 18 months–as much time as it took to study one of their many high profile investments, SpaceX. Mr. Lewis goes on to say:

“This will shake out similar to the alcohol industry or the soft drink industry, where economies of scale are very important,” argues Lewis. “You want to have first-move advantage, and I think it will be aggregated to just a handful of companies.”

As for Founders Fund’s reputation becoming obscured by a cloud of smoke: Lewis blows that notion away. “We don’t worry what people think about us,” he puffs. The goal, more than ever for venture investors and private equity alike: roll in the green.

There is still a taboo around the whole topic in general, but some of the most sophisticated investors in the world see a legitimate opportunity here. For retail investors, the takeaway is don’t buy OTC stocks ever, much less the ones claiming to be attached to the “end of marijuana’s prohibition”, unless you want to see your money go up in smoke.

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