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Seed funding cannabis

Despite regulatory hurdles, these 4 US cannabis investors are planting seeds for tomorrow

Bearish markets and high interest rates often cause private investors to turn away from anything resembling a risky investment. Yet, now is a very apt time to take another look at the cannabis opportunity in the U.S.

Quite a lot has changed since our previous U.S. cannabis survey from 2020. Recreational cannabis is now legal in a few more states, including New Jersey and New York, the latter of which has even launched a social equity program that aims to help communities affected by the War on Drugs. Despite the market downturn, the sector is growing — legal sales of marijuana and related products are slated to rise about 32% from 2021 to top $33 billion this year and reach $52 billion by 2026, according to MJBiz.

But cannabis startups still have a long way to go before they can begin to truly thrive in the country. The biggest roadblock is cannabis’ illegal status at the federal level, which makes things even more difficult and fragmented than in Europe.

As we learnt in our European cannabis survey, despite cannabis being illegal at a federal level in the EU, companies can produce cannabis in one country and sell to businesses across borders as long as they have the necessary licenses. It’s a stark contrast to the barriers to selling across states in the U.S., and the banking and tax headaches it creates.

The lack of access to traditional financing services — commercial banking, credit card merchant processors, etc. — is holding the industry back. “Banking reform is the key to unlocking access to the capital markets,” said Emily Paxhia, managing director at Poseidon. “Offering mainstream banking services to cannabis operators would break the market open and could change custody rules that prevent institutional capital from participating. It would also create better liquidity and efficiency for market dynamics around publicly traded companies.”

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No one has a clue when banking reforms, let alone federal legalization, could happen, so should investors just wait for more momentum? That’s perhaps what generalist investors are doing but not the specialists. No, indeed, they are looking to preempt institutional capital.

To turn today’s early bets into tomorrow’s lucrative investments, specialized firms like Entourage Effect Capital and Poseidon are deploying capital into so-called “plant-touching” and ancillary businesses. The latter refers to companies that are working on the infrastructure the sector will rely on once in full bloom, and the consensus among specialized investors is that they make for very worthy bets. Funds need funders too, however, and the lack of traditional LPs willing to write checks for this industry can be problematic even though investments are trending upward.

But VCs have found allies in family offices — a category of investors who are less constrained than their institutional peers and have plenty of capital to deploy. “We are seeing more and more first-time family office investors enter the industry at a pace we haven’t seen to date,” said Matt Hawkins, managing partner at Entourage Effect Capital.

We polled four active investors in the space to better understand the cannabis market right now in the U.S. and the regulatory hurdles the sector will have to overcome in the future.

    , managing partner and co-founder, Highlands Venture Partners , partner, Casa Verde Capital , managing partner and co-founder, Entourage Effect Capital , managing director, Poseidon Investment Management

Jacqueline Bennett, managing partner and co-founder, Highlands Venture Partners

As cannabis companies struggle to maintain their market cap in public markets and compete with the black market, what is keeping you excited about the space?

The backdrop for public cannabis companies remains bleak with no signs of a near-term recovery. That said, the fundamental business opportunity remains intact.

Weak markets and a challenging macro environment will test operators, expose misplaced strategies and tighten the wedge between cannabis capital (public or private) and liquidity.

While exhaustion is setting in and industry constituents long for a break, now is the best time for investors to discover talent and promising ideas. We saw record levels of M&A activity in cannabis over the past 12-18 months. Most of these acquisitions were paid for with large amounts of stock, and given where stock prices are trading today relative to 52-week-highs, seller’s remorse is the theme.

While economic loss is never fun, what this dynamic does promise is the re-entry of experienced talent in the market.

Have you seen a flight of generalist investors from this sector?

“Given regulatory hurdles surrounding plant-touching companies, investing in ancillary businesses has also provided us an opportunity to bring in more traditional investors into the space.” Yoni Meyer, partner, Casa Verde Capital

Any pullback from investors, I believe, is temporary and driven by current market conditions as opposed to loss of confidence in the sector. It feels impossible to not see opportunity after being submerged in the industry and exposed to the endless potential of both the plant and resulting innovation across verticals.

In the near term, what are you more interested in: Ancillary businesses or plant-touching companies?

I’ve never bifurcated the industry in this way for investing purposes. We have a good balance of ancillary and plant-touching companies in our portfolio, and this is reflective of the diversity in my partnership with Tahira [Rehmatullah] and our category-agnostic investment thesis.

What we won’t compromise on is: strength and experience of management, purpose-driven products or services and a TAM that expands at the intersection of industries.

Do you see any opportunities in this space that are being overlooked by investors and entrepreneurs?

Companies led by women, people of color and minorities. While not unique to cannabis, subconscious bias amongst investors and operators guarantees missed opportunities. Cannabis also happens to be an industry best understood by these overlooked demographics.

Health equity and innovation in women’s wellness is slowly unlocking in parallel with the cannabis industry, and we see significant synergies in R&D and product innovation. The challenge I pose to myself and my peers is to pause, look up and break habits.

There is significant trapped value in cannabis, and until we acknowledge and remove bias from business, we will continue to miss opportunities for justice and innovation.

Cannabis production is still illegal under federal law, which means companies in this industry can’t use traditional financial services. How much of a roadblock is this to the industry’s growth, and how do you advise your portfolio companies to deal with these restrictions?

Restricted [access to] financial services is a massive impediment for the industry and affects every industry participant in a material way. The silver lining is that we get creative, collaborative and deepen a sense of community. These are the same traits we look for in our portfolio teams and so it becomes a self-fulfilling prophecy!

Cannabis is not for someone needing a well-trodden path void of obstacles. People join and stay in cannabis because of a connection that extends beyond business. It’s the mission. At least that’s true of myself and many of the wonderful folks I’ve been fortunate to meet.

With New Jersey legalizing recreational use, several U.S. states could legalize medical or adult use this year. Do you expect these milestones to impact valuations? Are you watching for any changes in regulation that would break this market open even wider?

Following the 2020 U.S. election results, the markets showed us what could happen with regulatory change at the federal level with an immediate uptick in valuations. Since then, Congress has made little to no progress toward federal legalization and cannabis stock prices barely flinch at news of regulatory advances at the state or federal level.

All this is to say that I believe the markets are now waiting for the actual implementation of legislation that has potential for sustained value creation in the industry, like SAFE Banking.

Has the type of LPs willing to invest in cannabis-related funds changed at the pace you hoped?

There has absolutely been an evolution in LP community interest in cannabis. Cannabis remains one of the very few industries with guaranteed growth for many years to come. The challenge is understanding where to find this growth and be comfortable with locking up cash for longer-than-expected periods.

We still meet LPs with strict policies that do not allow investment in the industry, mostly on the plant-touching side. LPs who previously held back because of sentiment or lack of knowledge have been gradually crossing the floor.

My strong advice to new capital in the industry is to partner with experienced cannabis investors. You cannot prepare for the degree of surprise in the space. Never a dull moment!

NY is creating a social and economic equity program as part of its retail license attribution. Are you seeing investors adopting an equity-minded approach to open up the space to communities harmed by legacy drug enforcement policies?

We are gradually seeing more investors and operators acknowledge social equity and the importance of creating and prioritizing opportunities for communities harmed by the War on Drugs and other social injustices.

How do you prefer to be approached, a cold email, or a warm pitch?

Funding Platforms for Marijuana Startups

Brett Relander is a serial entrepreneur with 10+ years of experience in marketing strategy, investor relations, leadership, and business development.

Dr. JeFreda R. Brown is a financial consultant, Certified Financial Education Instructor, and researcher who has assisted thousands of clients over a more than two-decade career. She is the CEO of Xaris Financial Enterprises and a course facilitator for Cornell University.

Pete Rathburn is a freelance writer, copy editor, and fact-checker with expertise in economics and personal finance. He has spent over 25 years in the field of secondary education, having taught, among other things, the necessity of financial literacy and personal finance to young people as they embark on a life of independence.

The legal marijuana industry may still be in its infancy, but its potential for growth has many investors taking notice. Funding platforms with the goal of supporting marijuana-related startups are on the rise, with a number of them headed up by Silicon Valley veterans.

Among the primary factors now attracting investors to the still-fledgling cannabis industry is that there is still ample room for innovation. In this article, we examine some of the most promising pot-related startups around.

Key Takeaways

  • Marijuana is legal in more than a dozen countries, while others have mixed laws that allow for its use recreationally or for medical purposes—or both.
  • The global marijuana market was estimated to be worth $21.3 billion in 2020 and is expected to grow to $55.9 Billion by 2026.
  • Demand and support from celebrities are helping propel the industry even further.
  • Startups like Weedmaps and Leafly have attracted attention from big investors.
  • Some of the industry’s most promising companies include Confident Cannabis, Eaze, and LeafLink.

The Marijuana Sector: An Overview

Marijuana is legal in seven countries while others have mixed/localized laws that allow its use for either recreational or medical purposes—or both. Uruguay was the first country to legalize it for recreational purposes. Jamaica decriminalized cannabis in 2015 and the country saw its first medical dispensary open up three years later.

In October 2018, marijuana became legal for recreational and medical use in Canada. As of July 2021, 18 states, two territories, and the District of Columbia legalized recreational marijuana. A total of 36 states and three territories legalized medical marijuana.

The global marijuana market was estimated to be worth $21.3 billion in 2020 and is expected to grow to $55.9 billion by 2026. This growth is expected to be fueled by an increase in demand (thanks to the increasing degree of legalization around the world) along with a rise in the use of medical marijuana.

The industry is made up of a number of different companies, including:

  • Plant touchers (those that deal directly with and handle plants)
  • Ancillary service providers (dispensaries and manufacturers)
  • Breeders and cultivators
  • Extractors

Growing Demand

Legal marijuana companies are able to leverage one important advantage, which makes them slightly different from those in the tech sector. While tech companies often need to create demand or to educate their consumer base, marijuana startups face no lack of demand—especially in North America.

Investors who once backed tech firms are now funneling capital into the cannabis industry. PayPal co-founder Peter Thiel’s Founders Fund became the first institutional investor to put money into the legal marijuana industry. The fund was the lead investor in Privateer Holding’s Series B funding worth $75 million in April 2015. Privateer Holdings has multiple cannabis investments.

Calvin Broadus, a.k.a. Snoop Dogg, is another notable investor in the industry. The rapper makes no secret of his affinity for marijuana and is the director of Casa Verde Capital, a venture capital fund that invests in cannabis startups. The company’s portfolio includes names like Dutchie, Green Tank, and Cannalysis.

And he’s not the only celebrity seeing green. Singer Justin Bieber partnered with California-based Palms to release packs of pre-rolled joints called Peaches in October 2021. Martha Stewart launched her own brand of CBD products, including wellness gummies and oil drops, after partnering with Canopy Growth. Stewart released the line in September 2020.

Americans who believe marijuana should be legalized.

Marijuana Startups

Venture funding for marijuana startups seems to be pouring in from all directions. Commonly referred to as pot-preneurs, marijuana startup leaders are betting heavily on the potential for increased legalization.

Weedmaps

Weedmaps was founded in 2008 and is based in Irvine, California. It expanded and now has offices in New York, Barcelona, Denver, Tucson, and Toronto.

Weedmaps was the first marijuana tech and media brand and provides cloud-based software and data solutions to those within the marijuana industry. It also offers an app that connects consumers with dispensaries. The company was acquired by Grow One in 2015.

Leafly

Leafly allows consumers to rate and review cannabis strains, kind of like a highly specialized version of Yelp. Created by a trio of former Kelley Blue Book employees, the company started out as a simple side project in 2010. Within a year, it became a full-time enterprise and attracted the interest of Privateer Holdings. The company raised almost $41 million in three rounds of financing.

After the 2011 acquisition by Privateer, Leafly expanded with the aim of becoming a place for all types of marijuana users to find out more about everything related to marijuana, including which types of products are right for them and finding the dispensaries that sell what they need.

Promising Companies

With so much growing interest in the growing marijuana cottage industry, it isn’t surprising that so many venture capitalists have turned their attention and funding to a rapidly evolving cannabis tech industry. The following are just a few cannabis startups that have raised more than $10 million:

  • Confident Cannabis: A company that promises to make the cannabis industry more transparent. Producers and retailers can share real-time data about the quality of their products to sell at a better price. The company raised $15 million over three rounds of financing as of January 2019.
  • Flowhub: This Denver-based company provides cannabis software for retail dispensaries. Its services allow retailers to conduct point-of-sale transactions, as well as compliance and inventory tracking, along with others. Flowhub raised over $45 million in financing as of Oct. 12, 2021, in four different rounds of funding.
  • Eaze: Eaze is a tech and marketplace platform that connects consumers with retailers through safe delivery services, just like Uber Eats. The company raised $202.5 million as of Feb. 25, 2020.
  • Parallel: This company is also known as Surterra and Surterra Holdings. The company grows and processes medical marijuana. As such, it’s considered to be a promising cannabis-based therapy company, raising $355.7 million as of January 2021.
  • Canndescent: This startup grows, packages, and sells cannabis flowers. It raised $57 million before being acquired by Power REIT in February 2021.
  • LeafLink: A wholesale management platform for the legal marijuana industry, has raised $339 million, as of December 2020.

The Stigma of Cannabis Investing

The bulk of investment money going to marijuana firms is actually making its way north of the border to Canada, where the federal government has legalized medical marijuana use. But U.S. investments are on the rise. According to the National Institute on Drug Abuse, more than 35% of high school seniors reported having used marijuana in 2020, showing that the market will only continue increasing.

Not all investors are so quick to jump on the bandwagon when it comes to investing in these startups. Many of them remain hesitant because of the stigma associated with these investments. Some do not want to become involved with investments that directly involve the production and sale of marijuana. Whether a company actually touches the plant or not is a distinction that is vital in the marijuana industry.

Still, there are numerous investment opportunities in ancillary businesses for investors concerned about the stigma associated with marijuana. Such ancillary businesses include firms that provide security for medical marijuana dispensaries. As the profit potential for marijuana-related businesses continues to rise, more investors are willing to be open regarding their interest in the growing cannabis industry.