Inside the Cannabis New-Money Dating Game

As one of the fastest growing sectors in America, legal cannabis and its ancillary markets are attracting investors eager to take part in the “green rush,” and opportunities for partnerships  abound.

“2014 was the year where the cannabis industry went from being an interesting cocktail conversation to something any serious business person has given a fleeting thought,” said Troy Dayton, cofounder of The ArcView Group.

Earlier this year, Founders Fund, an early investor in Facebook and Airbnb, joined a Series B round of funding worth $75 million for private equity firm Privateer Holdings, which invests in the cannabis space. And tech entrepreneur Justin Kan, who sold Twitch.TV to Amazon for $970 million in 2014, recently voiced his support for investing in the marijuana industry as the keynote speaker at The ArcView Group’s marijuana investment forum this past January in San Francisco.

Unlike other new industries, the demand for cannabis and related products already exists, driving the sector’s rapid growth. The industry grew from $1.5 billion in 2013 to $2.7 billion in 2014—a 74% increase in one year, according to The ArcView Group’s latest market analysis report.

“This isn’t like the tech boom, social media boom, or organic foods,” Dayton said. “Those industries had to convince people to use the product. Here, the market already exists.”

But finding the next hot startup or existing business to invest in can be likened to dating, with myriad factors influencing whether the relationship will bode well for both parties.

A lot of people think they understand the cannabis industry or think they understand investing, but very few are well versed enough in both to make good decisions, Dayton said, stressing the importance of quality partnerships. “This industry is ever-changing and nuanced,” he said. “There are a lot of land mines here.”


See Reward in Risk

Eventually, most companies likely plan to exit either through an acquisition or IPO, but since that has not yet happened in this sector many investors are putting their money into something where there are “zero comparables,” Dayton said.

“They are betting on a dream,” he said. “It is a fair dream—a fair bet, but still a big bet.”

State and federal regulations present some of the biggest challenges for those investing directly in the plant.

“We could have a president in 2016 who opposes this and everything we have could disappear,” he said. “We’re on thin ice. That’s a risk. But any investor investing in this sector is putting their money behind the belief that marijuana prohibition will end. They want it to end and see their investments as impact investments.”

The challenges that deter some investors are the same that attract others to the space. “The challenges make it interesting to a subset of investors, and they’re not competing with those people” who were deterred by the risks, Dayton explained.


Don’t Overlook the Newcomer

Because the industry has grown so fast, there are very few companies that have a good, long-standing operating history. “That means those companies really get to name their price,” Dayton said, noting their valuations are going to be high. “[Investors] would rather pay a lot for the top player who is ahead of the game than roll the dice on an unknown.”

But what some nascent companies lack in operating history they make up for in ingenuity. “The quality of startups in this space are increasing in quality at a very rapid rate, and they have a good chance of ousting some of the leading companies in the near future because they recently got into the game,” Dayton said.

Seed-stage business accelerator CanopyBoulder raised $1.2 million to invest in 20 early-stage startups providing ancillary products and services to the legal cannabis industry, the company announced mid-March. “Over 115 entrepreneurial teams from all over the world applied to be part of our first class. We may have discovered the next Uber, the next Nest or the next Facebook to emerge in the legal cannabis industry,” said Canopy cofounder and managing director Patrick Rea, in a statement.

Ultimately, successful partners are driven by a desire to change the system, and appreciate challenges as opportunities within the ever-evolving marijuana industry.

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