Cannabis Investors Growing Faster Than The Deals

Debra Borchardt

Contributor

The growth of the marijuana industry may be slowing slightly, but that isn’t stopping the millions of investor dollars circling the sector. Marijuana Business Daily has forecast that marijuana sales could hit eight billion dollars by 2019, not its previous forecast date of 2018. The recently completed 2015 MBD Factbook cited issues at the state level as the cause for the the slower growth curve. California was mentioned for its struggles with regulating its cannabis industry that has resulted in the closings of dispensaries. Massachusetts and Washington were both noted for their delays in instituting their medical marijuana programs.

However, eight billions is still a huge number and for this reason investment firms are clamoring to be a part of this nascent sector. “It’s changed dramatically,” said Steve DeAngelo of the Arc View Group. Arc View helps to connect cannabis companies with potental investors and has 54 companies raise $21 million. “It wasn’t until we got into the election of 2012 that we saw a whole new wave of investors and entrpreneurs entering the industry,” said DeAngelo. “That was really a signal for people that it was a lot safer.” According to the MBD Factbook, the amount of capital for funding start-ups and expansions has risen by an estimated 900% or more. This is creating a potential bubble situation where there are too many investment dollars chasing too few worthy companies. Douglas Leighton of Dutchess Capital agrees and said, “There is too much money and too few deals.”

The strategy for these investments firms is to get in early and establish themselves as the experts in the field. While 23 states have legalized medical marijuana, investing in the group still remains somewhat taboo. The group is lumped into the “sin” category of finance that includes casinos and tobacco. Plus, it doesn’t help the group when the Securities and Exchange Commission suspends trading on several publicly traded cannabis stocks. Another concern is that some of these funds create great fanfare when they start their fund or open their venture capital firm, but then get very quiet. Still, some of these financiers are pulling in big money and scouring the field for good investments and these are some of the top names in the group.

Privateer Holdings – This investment company made headlines recently when it secured an $75 million investment from the Founders Fund, a San Francisco based venture capital firm. Founders Fund has picked some winners in the past including Facebook, Airbnb, Spotify and SpaceX. Getting an investment from this group is like receiving the investing seal of approval. This brings Privateer’s total funding to $82 million, which isn’t bad considering the company was just founded in 2010. It was also the first private equity firm to close a multimillion dollar funding round in 2013. Privateer has invested in the online cannabis review site Leafly and the Canadian cannabis grower Tilray. In addition to those, Privateer has invested in Marley Natural, a cannabis lifestyle brand that will sell cannabis and accessories. Privateer is the largest and most established of the funds. No secrecy here.

Dutchess Capital – This firm is not just a marijuana investor, but a manager for investment funds and was established in 1995 in Massachusetts. The founder Douglas Leighton decided to enter the cannabis space when Massachusetts legalized medicinal marijuana. Dutchess will be targeting consumer consumption devices and consumer use companies. Leighton said, “Our total portfolio is valued north of $25 million and we’ll probably add another $10 million in 2015. Dutchess has invested in the beverage company Dixie Ellixirs in its licensing side and the marijuana social media site Mass Roots (MSRT), which recently went public. Dutchess was able to return some value to its investors with a partial exit when Mass Roots went public. A trend that Leighton has noticed amongst his investors are that they tend to be in the 45-60 age group, are already successful businessmen and aren’t squeamish when it comes to investing in the sin category.

Poseidon Asset Management – This marijuana hedge fund was founded by the brother, sister team of Emily & Morgan Paxhia. The duo was drawn to the industry when they sadly lost both parents to cancer and the hospice treatment recommended cannabis. The fund was established in January of 2014 and they are hoping to raise $15-20 million, a more modest goal than Privateer. Emily Paxhia also expressed concern about the rapid increase in investors. “There is a lot of money circling the space and the deals aren’t always the best,” said Emily, “We want to find the ones that are worth it.” Poseidon’s focus is on the ancillary businesses. “One of our core beliefs is efficiency and utilizing technologies,” said Morgan Paxhia. So Poseidon is focusing on software for point of sale, seed-to-sale, lighting software and ways to help patients. The two also believe in good due diligence and are on the board of the Responsible Cannabis Public Companies or ARCPC.

Salveo Capital – Salveo is a private equity fund out of Chicago with Alex Thirsch as a Managing Principle. Thirsch initially applied for a pot dispensary license in Illinois, which he didn’t receive. So some of Salveo’s seed money is from the investors that backed him in his quest for a license. Salveo is still in the fund raising stage with a target of $16 to $25 million. Thirsch said, “I have no doubt we’ll hit that in a short time frame and I anticipate we’ll form a second and third fund.” Thirsch said he hasn’t had to do a lot of selling to find investors because “investors want to get in, but they aren’t sure how to do it.” He also hasn’t had to look hard for places to invest. “We’ve received more requests for capital and seen lots of business plans,” said Thirsch. “We have real money to invest.”

Greenleaf Joint Ventures – This company provides capital for cannabis and hemp start-up and existing companies. Greenleaf also does business consulting and is involved in real estate It has invested $250,000 in CrowdFundConnect, which will work with another Greenleaf company called CannaFundr for an equity based investment for accredited investors focused on cannabis. Greenleaf has also invested in Hemp Inc., Kraftwurx Technology and Common Bond Collective. It also posted a video on its Facebook site of a company called hempitecture that it helped fund. Hempitecture builds with hemp walls and was funded through Kickstarter. This very open and visible list of investment projects is definitely a positive sign for investors.

Emerald Ocean – This venture capital advisory firm was established in August of 2013. The management team includes Justin Hartfield the founder of WeedMaps.com and Doug Francis, the President of Ghost Group and a long time cannabis entrepreneur. Included in the team is Bonnie Goldstein, a doctor that specializes in cannabis treatments and is the Medical Director of Canna-Centers. Great lineup, but then very little information as to what the firm has done since it was established. Emerald says on its website that it will “acquire companies through vertical integration, own and operate the “Starbucks” and “Bacardi” of the marijuana industry, and be the first to market on many key industry verticals.” For now there is scant information on any companies that Emerald has invested in or helped fund. Emerald didn’t respond when asked for a comment.

High Times Investor – The High Times Growth Fund was launched in 2014 with plans to raise $100 million in 2 years. Investments are expected to be in the range of $2-$5 million making the company act like venture capital or private equity fund. The focus is said to be on ancillary businesses. However, there has been little information on the fund since it was established and requests for an update were not answered. The web page for the fund has no information regarding a portfolio or amount of money raised. In June, Bloomberg reported that the fund planned on raising $300 million. In October of 2014, MJ News reported the fund had looked at 30-40 deals, but again there is little real information regarding this fund.

All this investment money chasing small businesses is reminiscent of the dot com era and even the current silicon valley mood where start-ups are looking for funding even as they plan their exit strategy. The difference here seems to be the due diligence. These investor groups are very focused on the viability and future of their companies. They truly believe in this industry whether from an emotional point of view or from a strictly business outlook. “The cannabis industry is still young,” said DeAngelo. “There are great investment opportunities, but it takes time to find them. It takes experience and understanding,” said De Angelo, “and typically they require more management from the investor side than what you see in other types of investments.”

Cannabis Investors Growing Faster Than The Deals