The Rise Of Cannabis Capitalism

Men in suits swarmed everywhere, but not one spliff or bong could be seen. Any doubts that the legal marijuana (or cannabis) industry is now a serious business soon disappeared after a few hours at the Arcview Investor Network forum in Denver on June 26th.

PhDs and Harvard MBAs networked with investment bankers and hedge-fund managers to raise money for businesses covering every aspect of marijuana commerce, from consumer guides to insurance. Some eager punters discussed the secrets of emerging brands, such as those associated with those two legendary singers and weed experts, Willie Nelson (who announced in April that he is launching his own brand) and Bob Marley. Others debated how to make use of hemp, a crop closely related to weed but, unlike it, indisputably legal to buy and sell, and marvelled at all the jobs being created by the new industry.

A wide range of firms are talking up their potential. Meadow is an online market for medical marijuana. Highest Reward is a cannabis-centered human-resources firm. Leaf has designed a fridge-sized home-growing system that can be operated remotely by mobile phone. Ebbu is a cannabis distillery, selling "feelings not tastes" in five varieties, "chill, bliss, create, energy and giggle". Many of the startups are based in Colorado, including several from CanopyBoulder, a recently opened cannabis business incubator in that city, which offers firms $20,000 and several weeks of training and mentoring in exchange for a 9.5% ownership stake.

Colorado has gone further than any other state in accepting and regulating the business of catering to people who just like smoking marijuana, as well as to those who (officially) consume it as a medicine. The state is an active regulator. Labelling rules have been changed four times in the past two years, complains one entrepreneur—before adding that this makes Colorado a likely model for the cannabis industry in other states as legalisation, he hopes, spreads across America. Oregon legalised marijuana on July 1st, and regulators there are sharpening their pens.

The legal cannabis business is the "fastest-growing new industry around", says Troy Dayton, the chief executive of ArcView, a network of cannabis investors, predicting sales of $3.5 billion this year (not including related products such as vaping devices), up from $2.7 billion last year and $1.55 billion in 2013. This is not like the early days of the internet, where new consumers have to be convinced to buy; legalisation will simply bring lots of existing cannabis-users into the legal market, says Steve DeAngelo, the co-founder of ArcView—and one of the few attending the meeting who looked like a throwback to pre-legalisation days, though he is clearly also a very sharp businessman.

As investors have gained confidence in the industry, publicly traded marijuana companies have soared to well over 200 from a handful two years ago, says Frank Marino, boss of MJIC, which publishes an index of cannabis stocks. Most of these firms are small; by value, the index is dominated by two out-of-state medical-marijuana firms with multi-billion-dollar valuations. Such rapid growth in both numbers and value is already producing signs of frothiness.

Capital flowing to cannabis has increased rapidly in the past year, especially since Founders Fund, an influential Silicon Valley venture-capital firm, invested in Privateer Holdings, which has a stake in companies such as the one developing the Marley brand. Most of the investors so far are not mainstream venture capitalists from California but wealthy individuals from other parts of the country, says Emily Paxhia of Poseidon Asset Management, a hedge fund focused on cannabis.

Much the biggest risks facing the industry are political, says Mr Dayton. He was a drug-reform activist before he started ArcView, in part because he thinks a profitable industry will be better equipped to wage war against opponents of cannabis. One danger is complacency about the legalisation referendums that are on the ballot next year in several states, he says. The other is that next year's presidential race may be won by a committed enemy of cannabis. Ms Paxhia agrees. "My nightmare scenario is President Chris Christie," she says. The governor of New Jersey, now a Republican candidate (see Lexington), has made no secret of his hatred of weed in all its forms—even if legal, branded and marketed by a man in a pinstripe.

The Rise of Cannabis Capitalism story originated on The Economist