Investors smell profit in marijuana
ballot measures
Send a link to a friend
[November 04, 2016]
By Peter Henderson and Jilian Mincer
SAN FRANCISCO/NEW YORK (Reuters) - With
marijuana legalization measures on the ballot in nine states Tuesday,
investment opportunities are attracting money from Wall Street, Silicon
Valley and publicly traded companies.
Much of the new money is avoiding direct investment in marijuana
cultivation and sales, which remain illegal under federal law. Instead
of getting their hands "green," new investors are putting their money
into ancillary products, such as fertilizer, grow lights, software and
payroll services.
Investors new to the sector said they are eager for a piece of a market
that, by some estimates, will reach $50 billion over the next decade and
are looking for ways to claim profits while minimizing legal risks. (For
a graphic on states voting on marijuana, see: http://tmsnrt.rs/2fBzYmV)
Philadelphia sports empire scion Lindy Snider said she invested in
startup Kind Financial, a firm that makes software to keep growers and
retailers in compliance with shifting regulations. Silicon Valley angel
investor Fulton Connor said he put money into a web marketplace linking
growers and stores.
Scotts Miracle-Gro, a publicly traded gardening product manufacturer,
has spent hundreds of millions of dollars to acquire companies that sell
soil, lighting, fertilizer and other products to marijuana growers.
Scotts’ chairman and CEO Jim Hagedorn told Forbes that marijuana was
“the biggest thing I’ve ever seen in lawn and garden.”
![](http://archives.lincolndailynews.com/2016/Nov/04/images/ads/current/LPL_small%201.gif)
And Microsoft Corp is partnering with Kind Financial to develop the part
of its compliance software that will allow government regulators to
track marijuana from farm to market.
Investors said they hope getting in early will serve them well in the
long run. If California legalizes recreational marijuana use Tuesday,
“we think it would triple the size of the legal market,” said financial
services firm Cowen and Company analyst Vivien Azer.
If the federal government also were to legalize marijuana, large
corporations would likely flood the zone, and getting a foothold would
be far more difficult, said Connor, the angel investor. At that point,
he said, new entrants would “want to buy rather than build” new
companies, and early investors would be able to sell their businesses
and reap the profits.
A GROWTH INDUSTRY
After growing steadily in 2013 and 2014, marijuana-related investment
surged in 2015 when the number of U.S. industry deals more than doubled
over the previous year; the 99 deals totaled more than $200 million in
new investment, according to data compiled by CB Insights.
This year, the pace has slowed a bit as investors await election
outcomes, but the analytics firm calculated 2016 is on track to post
about 80 deals totaling nearly $100 million.
Large Wall Street firms also have started to take notice and provide
guidance to their clients. Merrill Lynch issued a report on medical
marijuana opportunities last year, and, in September, Cowen released an
encyclopedic look at the industry, projecting the legal market would
grow to as much as $50 billion in a decade, up from $6 billion now.
For investors to realize marijuana’s full potential, the Cowen analysts
and others have concluded, federal law would need to be brought into
alignment with state legalization laws.
Federal tax and banking rules, as well as federal narcotics laws, make
operating dispensaries and growing marijuana difficult and
unpredictable, even in states where such businesses already are
sanctioned. Many banks won't work with them because their operations
violate federal law.
Still, several marijuana investment funds are near or have exceeded $100
million. Private equity firm Privateer Holdings announced this week it
had finished raising $40 million this week, taking its total to $122
million.
FINDING A NICHE
The new investors in marijuana-related industries have a variety of
reasons for putting money into the sector. Snider, an entrepreneur whose
late father owned Philadelphia sports teams and stadiums, said she
invested in several companies and funds after she founded a line of
skincare products for cancer patients and became interested in
marijuana’s potential for skin care.
[to top of second column] |
![](../images/110416pics/news_k21.jpg)
An unnamed worker waters cannabis plants on Steve Dillon's farm in
Humboldt County, California, U.S. August 28, 2016. REUTERS/Rory
Carroll
![](../images/ads/current/richardson_lda_090916.png)
She was an early investor in Kind Financial, the Microsoft partner
that makes compliance software because she saw an opening to help
marijuana companies become “more businesslike."
Snider said she expects to make other investments as well.
“Right now I’m looking at about nine companies," she said. "There
are so many good ones.”
RISK TOLERANCE
Some investors are moving closer to the leaf than others. Former
Goldman Sachs health industry banker Rick Kimball, for example, has
put about $1 million into marijuana companies, including Chooze,
which is creating new pot brands.
The company will not actually handle the marijuana. But it will sell
vaporizer pens with Chooze's LucidMood brand to licensees who will
sell them after loading them with company-approved extracts of THC,
marijuana's physiologically active ingredient.
"It allows you to produce products, which are cannabis products but
let somebody else, the licensees, deal with the regulatory issues
and the regulatory conflict we have between the feds and the
states," Kimball said.
Chooze CEO Charles Jones said the company is confident it can avoid
federal laws banning marijuana sales, but he acknowledged
prosecutors could try to build a conspiracy case.
“If the feds ever decides to go after people, you know, we won’t be
in the first round,” Jones said.
He said the company’s business plan will allow it to be nimble,
moving quickly into new markets as they become legal.
New companies sometimes have to adapt to thrive, however, and that
can add risk.
![](http://archives.lincolndailynews.com/2016/Nov/04/images/ads/current/aaa_lda_FFARM_2016.png)
Connor led a group of Silicon Valley “angel” investors who focus on
young companies into marijuana investments. The Sand Hill Angels
group focused on ancillary enterprises, including software and
biosciences, making a six-figure investment in Tradiv, an online
marketplace that connects growers and stores, Connor said.
Tradiv does not handle marijuana itself, instead contracting out
deliveries. Recently, it has begun considering bringing distribution
in-house in light of what Chairman Aeron Sullivan described as
"tacit consent" from federal law enforcement.
While federal law prohibits the sale and distribution of marijuana,
the U.S. Justice Department has said it would defer to states that
sanctioned the drug, so long as the states set up and enforce
"strict" regulatory schemes.
Still, Connor said his angels were not interested in testing such
murky legal waters.
“For us it’s a technology play,” he said. “We don’t want to be
breaking the law.”
(Editing by Sue Horton and Lisa Girion)
[© 2016 Thomson Reuters. All rights
reserved.]
Copyright 2016 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |