The peaks and pitfalls of pot investing
by Amanda Drury | @MandyCNBC Friday, 18 Dec 2015 | 1:45 PM
It wasn’t so many years ago that the words “cannabis gathering” only meant a joint being passed around the room and some sturdy philosophizing about life, the universe, and the bounties of the magic leaf. The picture could not have been more removed from that at the Cannabis Private Investment Summit organized by Kahner Global in New York City a couple of weeks ago. This was a room full of professional suits. On the one side, there were private family offices and high net worth investors potentially wanting to latch on to the exploding legal cannabis industry. On the other side, individuals with established cannabis-related companies pitching their products or services, informing and educating everyone about the opportunities in the space.
I had the interesting job of moderating a fireside chat between ebbu co-founder Dooma Wendschuh and Privateer Holdings CEO Brendan Kennedy. While there was no fire, there certainly was a lot of heat in the room. After all, Forbes wrote earlier this year that the developing legal marijuana industry was not only “growing faster than ganja under grow lights,” but it may well be the best ground-floor opportunity since the early days of the Internet. In fact, Dooma boldly declared the market is “bigger than the Internet” during our chat.
So what are Privateer and ebbu? These are names that one day may be as ubiquitous as Apple and Google are to the tech world. Seattle-based Privateer is the first private equity firm focusing exclusively on the cannabis industry and is one of the best-funded companies in the business. Brendan announced at the summit that it’s currently raising another $100 million, which means it could potentially be one of the first billion dollar cannabis companies in the U.S. It’s behind global marijuana brands such as Canada’s Tilray and Marley Natural, the cannabis products company created by Bob Marley’s family. But Privateer also has an institutional investment from PayPal co-founder Peter Thiel, underscoring the gradual evolution of the industry’s investor profile to institutions and family offices. Keep in mind though, it’s not that easy to value marijuana companies. The industry is still very young, typical valuation metrics like revenues/profit margins don’t necessarily apply, and one change in legislation can quickly turn the risk/reward equation on its head.
Ebbu distills cannabis products to bring reliability to the cannabis experience. It dissects exactly which parts and combinations of the many chemical compounds in the cannabis plant lead to desired effects, and then bottle it up consistently-so you know what you get each time. The focus here is on the word “experience”, and Wendschuh detailed how ebbu enhances that. For example, whether you’re chilling by the fire, watching a funny movie, or need an extra creative kick to finish your book, ebbu promises to “curate your high” through distinct formulations called “Energy,” “Chill,” or “Giggle”. He hopes you will reach for an ebbu energy drink instead of a coffee, or an ebbu “Chill” instead of a beer. Responding to my question about whether well established cannabis product manufacturers like Dixie Brands would be competition, Wendschuh said Dixie is already a customer, and all he requires is the product use a little sticker with “ebbu inside” written on it, just like the “Intel inside” logo we all know. Ebbu’s investor base has also migrated upscale- a good thing when you consider it’s currently raising another $9 million despite the capital-raising frustrations of being based in Colorado, which has certain restrictions on out-of-state investment.
Both companies are helping to shape the future of the industry by trying to bring cannabis to mainstream acceptance, just like alcohol enjoys. In fact, a lot of money going into the sector is from investors who believe cannabis could one day challenge alcohol and are latching on to the fact that after prohibition ended in 1933, the brands that became the major beer companies of today made mega fortunes.
The difference that cannabis advocates like to point to is that alcohol kills brain cells, and they argue cannabis has healthier properties of cannabis over alcohol as your psychoactive of choice. But hang on, what exactly does cannabis do to the brain? A number of studies have shown regular marijuana use can affect the development of the teenage, or still growing brain, particularly in areas dealing with memory and problem solving. However, the Drug Policy Alliance, headed up by the summit’s keynote speaker Ethan Nadelmann, argues there is little evidence to suggest any of the active ingredients in the marijuana plant administered at doses appropriate for human consumption have neurotoxic effects. Obviously, doing one’s own reading on this topic is advised as more and more studies are being conducted.
Regardless, you can bet your bottom dollar that the alcohol industry won’t like the idea of being replaced, and I asked both Kennedy and Wendschuh if they’re worried about Big Alcohol, Big Tobacco and Big Pharma, with billions of R&D dollars at their disposal, breathing down their neck. Brendan pointed out these big players are already making cannabis industry investments, and Wendschuh replied that one of the reasons he’s decided to go down the recreational, or “adult use” road, as opposed to the more mainstream-accepted medicinal route, is because of the risk that pharmaceutical companies will ultimately take over the medicinal side of the cannabis industry. Kennedy also sees the industry increasingly appealing to more age and economic demographics. Think of your mom and dad on the deck with their septuagenarian friends vaping together; it’s something that’s already happening in recreation-legal states like Colorado.
In an industry that used to be illegal, beset by sub-standard business practices and stoner stigmatization, Wendschuh stressed the need to remove the businesses in this new legal world from the image of the past by creating safer and healthier products with a recognizable brand name. And Kennedy, with his expanding portfolio of brands, naturally wants to get the widest distribution possible. But here’s where politics can get in the way: rules apply on a state-by-state basis, which can impede distributing those brands into more hands across state lines. Kennedy also sees risks for the industry in the form of what he believes are many questionable publicly-traded pot stocks, (many are non-profitable micro-caps traded over-the-counter with little regulation), not to mention government changes. But could everything unravel come next November, when a new possibly less pot-friendly President of the United States is elected? Wendschuh doesn’t think so because he thinks this genie is out of the bottle, and that legalization inroads have been fought for and paved to the point where they would be unlikely to unravel. But he also doesn’t necessarily support rapid legalization as that would just open the door to more competitors, especially from Big Pharma and Big Booze.
So how big is this market? It’s actually hard to pinpoint due to so much moola still passing through the black or grey market. It’s also off the grid of traditional banking due to cannabis’ illegal status at the Federal level. Kennedy estimates the cannabis market is at $50 billion domestically and $200 billion globally,but that also scoops up the black and grey markets. Troy Dayton’s Arcview, which connects investors to cannabis businesses, estimates legal U.S. cannabis sales generated $2.7 billion in sales in 2014, up 74% from 2013. Dayton further estimates that if legalization continues, it will lead to at least double-digit percentage point growth for the rest of the decade.
Countries around the world are going the legalization route, either medicinally or recreationally, like dominoes. Both Kennedy and Wendschuh recently returned from Europe, and Kennedy says the continent today feels like the U.S. was three years ago. He believes Australia and Germany could move to implement legal medicinal marijuana programs next year,but predicts Canada will be the first nation to fully legalize recreational marijuana in the next 6 to 9 months. One of new Canadian Prime Minister Justin Trudeau’s key campaign promises was to legalize and regulate marijuana. Wendschuh also sees Canada and the U.S. domestic market as the areas of greatest immediate opportunity, and he thinks markets like Portugal and Spain are now on the radar.
The summit’s afternoon session featured a legal panel discussing banking laws, tax issues, and the “Cole Memo” which encourages federal enforcement agents not to enforce the Controlled Substances Act in states that have legalized cannabis as long as distributors follow a set of reasonable guidelines. The day ended with attendees getting treated to a live pitch session from a range of marijuana companies like Botanix Pharma, that treats acne with key cannabis ingredients called cannabinoids. Indeed, even though it has been scientifically proven that CBD can help relieve symptoms of ailments ranging from MS, cancer, arthritis and psoriasis and epilepsy, we have barely scratched surface of the extent of the health efficacy of cannabis.
Another pitching company was HelloMD – which, for $49 per year, can prescribe you a Medical Marijuana Card over a skype-like service with a certified doctor, should you qualify. Who was the winner? Based on the rather non-scientific assessment of audience applause, it was a near-tie with ebbu inching ahead of runner up HelloMD.
Bottom line, my key takeaways from the summit were that this is a fast-maturing industry, that Kennedy described as being very eager to shake off what he aptly described as the “budtender sticking his hand into a pickle jar” image. Secondly, while the opportunities for investors in this space are currently growing literally like weeds, this isn’t a dart board where anything you throw will be an instant hit. An awful lot of research and due diligence needs to be done first, and regulatory and legal risks have to be taken into account. And like any sudden boom of a red hot product, whether it’s gold, oil, tulips, post-prohibition alcohol, or dot-com stocks, fortunes will be made, and shirts will be lost. The explosion of new companies will result in a period of consolidation and a whole lot of busts. But for now, this “Green Rush” is blooming.