Cannabis decriminalization sparks up new investing craze


Helen Avery
Published on:

Amid political pressure to reduce cannabis-related crime, the legalization of the drug for medical usage could create a $40 billion industry in the US alone, opening up new investment opportunities – with Portugal, Spain, Israel, Czech Republic and Canada also on the radar for venture capitalists. Some even describe the opportunity as a new form of social-impact investing.

In 2010, 12 US states and Washington DC had legalized the medical use of cannabis. Now that number is 18, with projections for most other states to be on board by 2016. It is an issue that more than half of Americans, regardless of political leaning, wealth or age demographic, agree on – that marijuana for medical purposes should be legalized. According to the FBI, some 750,000 arrests are made a year for marijuana possession – that is one every 42 seconds – and the social implications and costs to taxpayers of imprisoning individuals for possession of a soft drug are garnering greater attention.
Recent high-profile advocates of legalizing marijuana for medical purposes include George Soros, the Koch Brothers, Ron Paul and Barney Frank. “People talk about it as the next gay marriage – only there is no opposition,” says Brendan Kennedy, CEO of Privateer Holdings. Kennedy believes the medical cannabis industry is a considerable investment opportunity. In 2010 he left his position of COO of SVB Analytics – a subsidiary of Silicon Valley Bank, and a bank for venture capital firms – and started private equity firm Privateer. “I spent a year talking to growers, accessory product providers like LED light companies, dispensaries, activists, lawyers and political campaigners and realized that this was a huge industry,” he says. “Revenues of the medical marijuana industry at the moment are about $2 billion annually and are expected to reach $9 billion by 2016. But the entire US cannabis industry is estimated to be valued at more like $40 billion – as a crop, it is bigger than corn.” It is a challenged industry, says Kennedy, which makes it ripe for opportunity. “There are no venture capital, private equity firms or Wall Street firms that will invest,” he says. “It is a fragmented industry that is often unprofessional and has branding issues. It’s seen as taboo, which is off-putting for individuals who require cannabis to help them manage illness.
Brendan Kennedy, CEO of Privateer Holdings
“Where the opportunity lies is as the industry becomes clean, transparent and informative – no longer associated with clichés such as the Grateful Dead, Snoop Dogg or Willie Nelson but rather a place where it is not difficult for a 65-year-old woman to obtain cannabis for glaucoma. And that is where the industry is heading.” Privateer’s first investment is in data firm Leafly, of which it is now full owner. Leafly provides research on the 500 to 2,000 strains of cannabis in existence, providing details on which illnesses each strain is suited to, the pros and cons of each strain, and pricing guidance. While doctors recommend marijuana for certain ailments, they do not specify which type of cannabis, so Leafly provides an informative and trustful forum whereby users can also share their reviews. Leafly also offers details on local dispensaries for each strain and, again, has reviews of the providers. Its revenue is generated from dispensaries that pay to be listed on the site. At present, there are 4,000 dispensaries in the 18 states that have legalized medical marijuana. The site has 2.3 million users a month. Its revenue is growing at 25% a month. Last month, Leafly had 50,000 new downloads of its iPhone and Android app. Kennedy says there is no shortage of investment opportunities in firms such as Leafly who are professional businesses within the cannabis industry. Since November, Privateer has received more than 200 investor pitches. “These could be from LED lighting companies for growers, or security firms for dispensaries, software providers for dispensaries, or companies that manufacture containers for products,” says Kennedy. Privateer will make six to 12 investments during the next 12 months. Investors are high-net-worth individuals who are not only interested in the monetary return but predominantly see the investment as having a social impact – they seek an end to the social harms caused by cannabis prohibition. “I’ve learned the hard way that the most comfortable investors are those over 60 or under 40,” says Kennedy. “Those in the mid-forties with teenage children are least comfortable with investing, even though they may like the story and opportunity.” Opportunities for investments are not limited to the US. Portugal decriminalized marijuana in 2001. Cannabis social clubs operate in Spain, France, Germany, the Netherlands, Belgium and New Zealand. Leafly also covers dispensaries in the Netherlands, Canada and Israel. Leaders in Uruguay have hinted at support for medical marijuana, and the Czech Republic is also moving towards legalization. Predicts Kennedy: “In 10 to 20 years’ time, the world will not regard natural cannabis as illegal.”