March 4, 2016
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In many states, the costs to obtain and maintain a business-related marijuana license are very high. For example, in Connecticut, a marijuana grower has to pay a $25,000 application fee, a $75,000 registration fee, and a $75,000 annual renewal fee. Connecticut dispensaries have to pay a $1,000 application fee, a $5,000 registration fee, and a $5,000 annual renewal fee. None of these fees are refundable. In other words, there is not only a big barrier to entry in the marijuana industry, but there is also a big barrier to growth. That barrier is access to capital.
Since marijuana is still illegal at the federal level, most banks and creditors won’t touch marijuana businesses. What does a company do when it can’t get a bank loan or a line of credit? Even companies that don’t actually grow or sell marijuana themselves but rather provide products or services to the marijuana industry could find themselves facing obstacles when they try to obtain the funds they need to develop and grow.
Enter venture capital. As Sean Adams of The Motley Fool suggests, “Venture capitalists could wind up leveling the playing field for marijuana retailers, growers, and processors by providing the access to capital that’s mostly lacking.”
Venture capital firms invest in businesses with a high potential for growth. They want to see a significant return on their investments. The marijuana industry is certainly poised for growth. It reached $3 billion in 2015 and is expected to grow to $22-$29 billion by 2019.
If federal laws related to legalization, banking, and taxing of marijuana-related businesses change, the growth could be exponentially higher and much faster. If laws don’t change (or reverse), the story could play out very differently. That’s a big risk for an investor.
Despite the inherent risks (and what investment doesn’t have risks?), investors want in on the marijuana industry as the growing number of cannabis investors demonstrates. Dozens of venture capital firms and thousands of angel investors are actively looking for marijuana-related business investments in both startup and scaling companies.
Within the past year, some big name investors have entered the marijuana industry. Last year, Snoop Dog launched Casa Verde Capital, LLC which is focused on marijuana startups. In January of this year, Peter Thiel’s Founders Fund venture capital firm invested heavily in Privateer Holdings, which is the cannabis industry’s first investment firm and has investments in the Bob Marley marijuana brand (Marley Natural), Leafly.com, Tilray, and more. Privateer Holdings was also named one of the 10 most important companies in the cannabis industry in 2015 by Cannabis Business Executive.
If you’re not familiar with Peter Thiel and why his investment in the marijuana industry through Founders Fund is such a big deal, it’s based on his reputation and track record of success. Thiel co-founded PayPal. He was one of the first outside investors in Facebook (Wallace Langham portrayed Thiel in The Social Network movie). He has also invested (personally or through Founders Fund) in LinkedIn, Quora, Asana, Yelp, and many more. In other words, he knows his stuff. When he invests in something, people take notice.
In 2015, venture capital firms invested more than $215 million in marijuana-related deals according to a report from CB Insights. The number of deals jumped by 56% from 63 deals in 2014 to 98 deals in 2015. It will likely climb even higher in 2016. Venture capital firms see the potential in the marijuana industry, and they’re getting into the opportunity as early as they can.
Today, venture capital firms are investing in a wide variety of marijuana-related businesses. Whether it’s investing in manufacturers and retailers or a startup providing products to marijuana growers and dispensaries (such as lights, packaging, and so on), the bottom-line is money, and there is a lot of money to be made in the marijuana industry.
