In the 19th century, American prospectors headed west to make their fortunes mining gold. Today, from California and Colorado to New York and Massachusetts, US states are seeing a “green rush” as entrepreneurs and investors stake their claims in the legal marijuana market.
Legal sales of cannabis for medical purposes and “recreational” consumption in the US grew about 75 per cent in 2014 to $2.7 bn, according to ArcView, an investor network. Medical marijuana is legal in 23 states and the District of Columbia. Colorado, Washington, Oregon, Alaska and the District of Columbia permit some recreational use by adults.
While marijuana remains illegal under federal law, ArcView predicts sales will reach $10.8bn by 2019 as more states end prohibition. “It’s a massive opportunity,” says Brendan Kennedy, chief executive and co-founder of Privateer Holdings, a Seattle-based private equity fund focused on cannabis. “It’s the first time anyone in our lifetime is seeing a $40bn-50bn industry transition from illicit to legal.”
Like the gold rush, the pot boom is luring people hoping to get rich quick. Many ventures fizzle out, but some entrepreneurs say they are working to build businesses with global ambitions and winning the backing of venture capitalists and Silicon Valley billionaires. Peter Thiel’s Founders Fund, which invested in Facebook and Spotify, was part of Privateer’s latest $75m funding round. It marked the pot industry’s largest private capital raising to date.
“This is the time to try to build businesses,” says Leslie Bocskor, an investment banker in Las Vegas who is spearheading efforts to develop what advocates say is the next big consumer sector. His firm, Electrum Partners, is raising $25m for its own cannabis investment fund: “We should have an exemplary industry that’s run by professionals as we transition from the black market to the white market.”
Terra Tech: Wall Street to weed
In 2010, amid fallout from the financial crisis, Derek Peterson left Morgan Stanley to start GrowOp Technology, a company selling hydroponic equipment to marijuana growers in California. The company became Terra Tech and he took it public in 2012. Shares trade over the counter rather than on an exchange, and the company has expanded into medical marijuana cultivation and dispensaries. It posted $7.1m in revenue and a $21.9m net loss in 2014.
Late last year, Terra Tech became the first company to win approval from the US Securities and Exchange Commission to use the money it raises on the stock market to cultivate and sell marijuana. It is setting up dispensaries in Nevada and applying for licences to operate in New York’s new medical market, following the state’s legalisation of some medical cannabis last year. Mr Peterson is eyeing Florida, where the legislature is considering a medical legalisation bill.
“It’s a land grab right now to get permits to operate medical marijuana facilities around the country,” he says. “If we have penetration in the biggest markets, when federal prohibition goes away, we’ll be well positioned for geographic dispersion around the country.”
Like Privateer, which partnered with Bob Marley’s estate on a line of products bearing the reggae singer’s name, Terra Tech wants to build brands to win customer loyalty. It recently launched IVXX, a line of cannabis products including joints, oils and plants.
But even as more states permit the sale of its products and public support for marijuana legalisation swells, Terra Tech and its peers face big hurdles. Banks remain wary of handling money from companies involved with a drug that federal law still classifies as a controlled substance alongside heroin and LSD. “We lost our [bank] account,” Mr Peterson says. “We pay our sales tax in cash. That’s a concern. It invites money laundering, theft, a criminal element.”
High There: cannabis connections
Cannabis already has a rich subculture. Todd Mitchem thinks cannabis needs a social network. Two months ago, the entrepreneur from Denver launched High There, a smartphone app to connect marijuana users. It has been dubbed “Tinder for pot smokers”, after the dating app, but Mr Mitchem says his aim is to make it easier for cannabis users to find like-minded friends as well as potential romantic connections. “It’s also for people like my mom, who is a two-time cancer survivor, who used marijuana medicinally, and who didn’t have anyone to talk to about it,” he says.
The app was initially only available to consumers in US states where marijuana consumption is legal. But High There recently won approval from Apple and Google’s Android app stores to go global.
Mr Mitchem has funded the company with about $300,000 of his own money and a small investment from a friend, but is in the middle of raising a first funding round from outside investors. He is no stranger to “cannabusiness”, having worked at OpenVape, which makes marijuana vaporisers.
In Colorado, he was involved with the industry’s efforts to work out regulations when pot became legal last year. That experience proved useful when lobbying the tech companies to get his app broadly approved.
“The acceptance of cannabis is evolving quickly,” he says. “The idea that people can now seek out other cannabis users is becoming more mainstream. But the industry is going to have to get really sharp about consumer safety, product quality, interaction with law enforcement. They have to start behaving like grown-up companies.”
PotBotics: research and robotics
Father and son Boris and David Goldstein saw the beneficial effects of medical marijuana with their own eyes. In 2011, David Goldstein’s grandmother began treatment for cancer, but the pain medication diminished her quality of life. Then she tried pain relief using cannabidiol, one of the main components in cannabis. He says: “She could get up in the morning rather than being bedridden.”
Mr Goldstein, a college graduate working in marketing, and his father, an expert in artificial intelligence and robotics, wanted to know why the cannabis treatment worked.
“We want to quantify some of the claims being made in the medical market, ” he says.
In 2013 they founded PotBotics, based in Palo Alto in California and New York. They have raised about $2m from friends and family. The company, which has not yet generated revenue, will launch its first product this year: PotBot, a virtual “budtender” — the industry’s term for workers at dispensaries who sell cannabis and educate customers.
Medical patients can use the PotBot app on their smartphones, computers or in-store kiosks to answer questions about ailments and symptoms. PotBot will recommend the right kind of cannabinoid, what strains of marijuana have the appropriate levels and how best to consume it, whether by vaporising, eating or using a skin cream or oil.
“Our goal is to add transparency to the industry,” David Goldstein says. “We hope to be pioneers. As states see the hard scientific research, their arguments against it being a medicine will be drawn into question.”
PotBotics is also working on BrainBot, a wireless electroencephalography helmet that doctors would use to see how patients’ brains are affected by using marijuana. A third area of interest is agriculture. PotBotics plans to develop technology to read plant DNA that growers can use to improve their yields.
“Our investors have a long-term vision. We are trying to create a company that is positioned as a technological innovator for the medical cannabis community,” says David Goldstein.