Medical cannabis legalization is gathering momentum across the US. At the end of 2014, New York State joined the 22 others that have legalized the marijuana plant for medical purposes, and Florida is largely expected to join them next year. Other states, which are not part of the 23, have legalized specific cannabis products such as cannabidiol in Georgia, so the movement is definitely expanding.
This is great news for the growing number of companies cropping up which hope to grab a slice of the pie. From cannabis brands in the name of famous reggae artists, to cannabis delivery apps, to social networking platforms centred around the drug, there is a whole world of innovation just waiting to get high on all the current, and predicted, demand.
Investors, never to miss a trick, are also increasingly getting in on the action.
PayPal founder Peter Thiel, for example, has invested in the $75 million Series B round of cannabis-focused private equity firm Privateer Holdings, through his venture capital arm Founders Fund. Privateer, in turn, is invested in leafly.com, the Yelp for medical marijuana, and Marley Natural, the cannabis and paraphernalia brand started by Bob Marley’s family.
Other investment firms betting on the industry include 4Front Ventures, a consultancy and investment manager, which has raised funds predominantly for high net worth individuals, to invest in production and distribution assets in the US, and Greenfield Capital Partners LP, a Maryland-based private equity firm, which recently launched a family office-dominated fund.
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US rapper Snoop Dogg has also famously launched a venture capital firm dedicated to the sector, Casa Verde Capital, which is invested in Eaze, a cannabis delivery company. He also recently announced that he was establishing Merry Jane, a lifestyle media platform, at Tech Crunch Disrupt in San Francisco last month.
But, while the increasing investor acceptance of the industry is positive, there is still a long way to go until the industry is fully fledged and the industry’s infrastructure is developed. This could mean the demise of many of the more consumer-facing cannabis-related products, argues Michael Devlin, partner at Greenfield Capital Partners, which made its first investment this week.
“There are some powerful analogies between the legal cannabis industry today and others such as the gold rush and the evolution of the internet,” says Devlin. “In the early stages of the internet’s development, it was the infrastructure companies that survived and provided returns to investors, not the early consumer dot coms. It wasn’t until later that companies like Amazon were really born.”
Devlin and his colleagues at Greenfield have therefore built a pipeline of investments around the infrastructure of the sector, from cultivation lighting technology, to private medical research, to software systems for cultivators, distributors and regulators.
And this week the firm made its first investment, a $5 million commitment to BioTrackTHC, a Florida-based company providing “seed-to-sale” tracking software using a barcode system.
For each potential client, BioTrack’s Enterprise System enables the management of inventory, patients, points-of-sale, and easy accounting reporting, while the Traceability system enables government agencies to track every gram of cannabis throughout the production lifecycle, including cultivation, harvest and cure, quality assurance testing, transportation, destruction, and sale.
BioTrack has won contracts with a range of state governments including Washington State, New York State, and Illinois, and the cannabis regulatory bodies in Uruguay and Jamaica. These governmental agencies are using the software to get real-time reporting on the local industry in order to assist them in enforcing regulations, collecting taxes and preventing the illegal sale of cannabis.
State governments are also requiring cultivators and dispensaries legally to use a tracking system like BioTrack as a means to show them a clear chain of custody throughout production. This is providing BioTrack with a large client base across the entire industry.
“To date, BioTrackTHC stands alone as the only company to successfully deliver cannabis technology solutions to government agencies and the private sector,” reads the website. “Our goal is to provide the industry with safe technology solutions that create transparency and accountability between growers, vendors, health care providers and regulatory agencies.”
The constantly evolving regulatory environment presents a big challenge for investors, who need to have a deep knowledge of the industry to ensure they are investing in the right opportunities; it’s not a booming industry in every state where it’s legal.
“Because it’s been legalized on a state-by-state basis, at the moment you have to look into each state’s rules to determine if the cultivation business represents opportunities,” he argues. “Some states limit the number of dispensary licenses that can be issued, and it’s critical to assess this compared to the number of patients in a state. You don’t want there to be too much supply.”
What qualifies a patient is also vastly different in each state. In Maryland, there is a very wide scope including severe and chronic pain sufferers, the largest group of patients, whereas other states like New York have a much tighter definition. “Investors have to be very cognisant of these drivers, as some states and areas will be less attractive than others,” added Devlin.
And what about the fact that cannabis consumption is still federally illegal?
“The perceived risk of the federal situation is a lot higher than the actual risk. The federal government has signalled that its stance on cannabis may evolve and a sponsored bill to legalize medical cannabis has been introduced to the floor of the Senate, which over 20 senators have signed, including New York’s Chuck Schumer,” says Devlin.
There are other good signals too, such as the federal move to allow war veterans with post-traumatic dress disorder to use cannabis.
As public support for the legalization of marijuana grows and more science is developed supporting its therapeutic applications, it will become a lot more difficult to derail the development of a legal cannabis market. But investors beware getting caught up in all the consumer hype. There’s still a lot to achieve from the ground up.
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