Finance

In the investor community, cannabis is smoking hot

By Bonnie Halper 21 June 2017
Summary

Tech investors are turning to cannabis – giving seed capital a whole new meaning.

When you hear that the 4th Annual Cannabis World Congress and Business Expo is in New York City and taking over a corner of the Jacob Javits Center – the 12th largest convention center in the US – attention must be paid.

Now the writer of this article is allergic to cannabis, and was quite expecting to encounter sorts ordinarily found toking up outside an East Village bar, but au contraire: a quick scan of badges revealed that this crowd hailed from the real estate industry, law firms, medicine, recruiting firms – and finance.

There were also a fair share of attendees from data science, biotech, hardware and distribution.

Then again, cannabis is legal in 31 of the US states, either medically, recreationally or all of the above, according to New Frontier Data, a research company that provides the cannabis industry with real time information.

Of course the stoners were there too: who else would you expect the industry experts to be, at least in part?

Who else would come up with a vape pen where you place crushed leaves in a chamber and voilà: your cannabis is fired up electronically?

But beyond those who partake for medical reasons, or live in legal in states, keep in mind:

For most, cannabis is an illegal, Schedule 1 drug at the federal level.

How cannabis got its bad rep

Cannabis, or marijuana as it’s more colloquially known, has been a global political football since it was made illegal in post-Prohibition America, thanks, in no small part, to Harry Anslinger, an ambitious young bureaucrat who rose quickly through the US Bureau of Prohibition.

Once Prohibition was repealed, he was promoted to head the newly created Federal Bureau of Narcotics (FBN), but faced a quandary: he needed a big market on which to focus.

Now cannabis tinctures and powders had long been produced by pharmaceutical companies, including Eli Lilly, Parke-Davis (now owned by Pfizer) and Squibb (as in Bristol-Myers Squibb) to treat ailments including epilepsy, ‘female problems’, migraines, mental illnesses, addiction and sleeping disorders.

But Anslinger also noticed that smoking ‘marihuana’ had become popular with artists, jazz singers and musicians, and Mexicans, all of whom he considered ‘undesirables’.

Anslinger had found his target and launched a very successful propaganda campaign, blaming the drug for inciting people to, among other things, engage in rape and murder, as he describes in a paper he later published (1961).

With the help of yellow journalist and San Francisco Examiner publisher William Randolph Hearst, Anslinger’s lobbying efforts succeeded in getting Congress to pass the 1937 Marijuana Tax Act, which was only his first shot across the bough.

The damage was done. Marijuana became both demonised and criminalised.

The US fell in line with Britain which – despite a history of cannabis dating back to the 1500’s – had made cannabis illegal in 1928 as an addendum to the Dangerous Drugs Act 1920.

Cannabis: the gateway opportunity

That was then, but today in 2017, it was a full house for the Seasoned Investors: Let’s Talk Money! panel.

Here, Jeanne Sullivan, co-founder of venture capital firm Starvest Partners, spoke to an attentive crowd.

The investor, who spent 30 years investing in enterprise technology before moving on to cannabis investing, first noted that cannabis is currently a multibillion dollar annual industry – and a potentially missed opportunity.

“I moved from SaaS [software as a service] to grass. This is your second chance. Here comes the next wave,” said Sullivan, who is part of the 650-member Arcview Group, an angel investment consortium whose sole focus is cannabis investing.

Still, the biggest challenge for the modern cannabis scene is the mostly negative perceptions and potentially thorny legal ramifications that give many investors pause.

But perceptions and legislation are changing, globally.

Shifting views around the world

According to Wikipedia, as of 2017, Australia, Bangladesh, Cambodia, Canada, Chile, Colombia, Costa Rica, the Czech Republic, Germany, India, Jamaica, Mexico, the Netherlands, Portugal, South Africa, Spain, Uruguay, and some US jurisdictions have the least restrictive cannabis laws.

That isn’t to say that those are the only countries where cannabis has been decriminalised.

“Public companies are on fire in Israel, Canada and Australia,” said Alain Bankier, longtime technology investor and co-founder of the New York Angels – one of the 10 most active angel groups in the world.

“It’s a whole ecosystem,” said Bankier, who’s been investing in the cannabis space since 2013.

“Licensing, processing, retailing – you’re not touching the plant. But resist FOMO (fear of missing out): If you don’t feel right about it, get educated. Go to the conferences. Walk the floor. Ask question. And make sure to have an unfair advantage. Investing is about making money. The key is not to lose money.”

There are many layers of financial and regulatory considerations to bear in mind – and to be aware of, he warned.

One thing’s for sure: the investors wouldn’t be there if there wasn’t money to be made.

The already $50bn annual market is clearly growing.

Even Peter Thiel’s Founders Fund is investing in the space, having written a cheque to Privateer Holdings, which owns and operates a handful of cannabis-related companies.

“The negative perception will be abolished over time in the UK, just as they were in the US,” Sullivan suggested.

“Through job creation, tax revenues, revenues from sales of ancillary products as well as cultivation, extraction and retail sales.”

“Cannabis products are creating a sea change – it is the fastest growing sector in the US today.”

FOMO

Today traditional companies like American lawn care company Scotts Miracle-Grow are investing in the space – $500m to date, according to the panel.

Scotts products, including soil, fertiliser, and tools, are a natural complement to the industry. Why not cultivate relationships early on?

“Look at the ancillary products that can be marketed across state lines,” said Sullivan.

But companies that ‘touch the plant’ aren’t necessarily the biggest or most immediate opportunities.

There are companies that are serving the industry – with big data, recruiting, HR and benefits, dispensary, distribution, et al, that larger companies won’t currently get involved with.

“That’s a big opportunity,” said Bankier. “Larger companies not currently in the business will be forced to buy that company.”

Are you being a luddite?

There’s no doubt that cannabis has emerged from the days of being grown in basements, covered sheds and closets – and that it’s still relatively early days for the industry, and investment.

But opportunities are out there, as are long-held beliefs, pro and con, about the product itself.

Think luddites: it’s the wild, wild web all over again, and disruption of a different stripe.

Considering the fortunes that were made and lost during the early halcyon days of dot-com investing, it’s not really all that different.

Investors, as always, will either do their due diligence and walk away a big winner.

Or, just as when the dot-com bubble burst, it’ll all go up in smoke.