Fund-raising in Cannabis, Initially Slow, Is Going Higher and Higher
This year, 2016, is shaping up to be a milestone for the cannabis industry, with its legal branches (both medical and recreational) continuing to show growing demand and increased revenues.
Just last year alone, market estimates for legal cannabis sales, including both medical and recreational (adult use only), were pegged at $4.4 billion. For 2016, estimates, according to the Ackrell Capital U.S. Canabis Investment Report 2016, show a 30 percent increase, to $5.7 billion, as the industry matures and new markets like Oregon open up.
Another growth indicator bears mentioning: With this year’s election, we’ll see a number of prominent states, such as California and Nevada, voting for complete legalization, and other large states like Florida voting to enact medical laws.
Despite all this market potential, however, the cannabis industry is not without its difficulties, and fund-raising is one of them. Certainly, there has been a significant positive trend of more active investment in the space, but instances of traditional VC financing are still few and far between, albeit with some notable exceptions.
The limitations of traditional fund-raising
The biggest limitation to investment in cannabis has been its federal legal status. The Drug Enforcement Agency classifies drugs into one of five different groups based on their potential for abuse; among those groups, “I” is classified as the most dangerous, and “V” is the least.
Currently, cannabis is listed as a Schedule I drug, alongside some of the worst offenders, like heroin and LSD. This classification means that the federal government regards cannabis as an illegal substance. It also means that many limited partners of VC companies won’t go near a cannabis investment.
Another limitation for VC entry is the complex patchwork of state laws, which might result in scaling difficulties. Varying state legislation makes it complex for companies to operate in more than one region, and the result is a reliance on brand-licensing agreements with local players; that makes quality control and consistency of the product difficult.
This fragmented legal framework impacts those companies in particular that work directly with cannabis — less so ancillary services. Because traditional VCs often make big bets, hoping for big returns, the inability to scale directly and rapidly puts a damper on investment interest.
Exceptions to the rule
Even with these limitations, though, there have been some notable exceptions. There was, for instance, the investment Founders Fund made in Privateer Holdings, a cannabis private equity fund (disclaimer: Privateer Holdings acquired my own previous company, Leafly).
The Privateer Holdings investment brought with it a flurry of media attention and was one of the first, big VC-structured deals in cannabis. Other traditional VC firms that have invested in cannabis-related companies include Tao Capital out of San Francisco, DCM Ventures in Menlo Park and Dutchess Capital in Boston.
Alternative fund-raising methods
With traditional VC investments few and far between, a new opportunity has arisen for cannabis-dedicated funds to step in and support the industry. These include groups like MJIC, Anslinger, Poseidon Asset Management, Tuatara Capital and Tress Capital (disclaimer: Poseidon, Anslinger and Tress are investors in Headset).
These funds are laser-focused on building a portfolio dedicated to cannabis-based companies.
Other routes of financing which have worked in other tech verticals include accelerator and incubator programs. One newer entry is Gateway, based in Oakland, California which helps companies turn their initial ideas and products into something that’s ready for prime time, in exchange for a small percentage of equity.
In addition to these accelerator programs, there are specific groups such as ArcView, which have the capacity to get your company in front of a group of cannabis-friendly investors for demo days and pitch competitions.
Individual angel investors have also shown a real interest in and willingness to invest, as shown by recent investments in Meadow. Meadow is a platform for dispensaries to manage delivery operations; involved with the company are Y-Combinator partners Justin Kan and Alexis Ohanian and Reddit CEO and co-founder Steve Huffman.
Family-office investments are another channel for investing, as illustrated by events like the Cannabis Private Investment Summit, which discusses and showcases cannabis investment opportunities for high net worth investors and family offices.
Investing in cannabis has come a long way
Just a short number of years ago, you would have been hard-pressed to find any investment outside of small family-office groups or the small angel investor willing to take big risks. That all changed once Washington and Colorado legalized and people saw a real way forward in the industry.
Today, in contrast, countless opportunities for investment capital exist, and with 2016 shaping up to be a pivotal year and more states looking at legalizing cannabis for medical and adult use, we’ll undoubtedly see even more capital entering the market.