After an estimated $5 million in sales the week after the New Year’s Day launch of Colorado’s adult recreational marijuana industry, investor interest in the cannabis sector is higher—and more direct—than ever.
In the wake of a U.S. Justice Department decision to back off on marijuana prosecutions in states where the substance is legal, forward-looking investors are starting to invest in businesses that cultivate and sell marijuana plants and in companies that produce products made from the plants.
“A lot of the increase in interest has occurred in the direct businesses. The pie has gotten bigger,” says Troy Dayton, co-founder and CEO of San Francisco-based ArcView Group, which runs the ArcView Angel Investor Network. Founded in 2010, the network matches accredited investors with entrepreneurs seeking funds for cannabis-related businesses.
An example of a direct business that ArcView members recently funded is Medicine Man Denver, which operates the largest single medical marijuana dispensary in Colorado, according to its Web site. The company, a 2012 High Times Cannabis Cup Winner in the “Best Sativa” category, opened its store for recreational sales on January 1. Medicine Man pitched ArcView investors several months ago and raised over $1 million in unsecured debt, according to Dayton.
Six months ago, ArcView permitted only ancillary cannabis businesses to pitch to investors at its Shark Tank-style events. These businesses don’t grow, process, distribute or otherwise handle marijuana plants. Ancillary businesses that have been funded by ArcView investors include horticultural equipment manufacturer Radiant LED Growth Systems, consumption device/vaporizer maker Uptoke and security services provider Canna Security America.
Because selling and possessing marijuana remains illegal under federal law, most investors still prefer to back ancillary businesses. However, the U.S. Justice Department announced last year that it would defer to states such as Colorado and Washington that have legalized marijuana use for adults and established tight regulatory schemes.
“That’s big,” Dayton says of the new federal policy. “It’s changed how investors see this industry in terms of risk profile. There’s a lot more money flowing into the direct businesses now, which tend to deliver a faster, more reliable return.”
One reason direct businesses can be more profitable in the short run is because legitimate growers and retailers must receive state-issued licenses that are difficult to obtain and issued in limited numbers.
“Once businesses get those licenses, they’re pretty likely to do well. But they need capital to expand their operations and meet the demand for product. They’re willing to give 20 percent, sometimes 25 percent, interest rates to investors who lend them money because they can’t go to traditional banks,” says Dayton.
Magic Market