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Money to Burn: Investors Want to Put Money in California's Marijuana Industry. The Problem Is Figuring Out Where.


http://www.sfweekly.com/sanfrancisco/chem-tales-marijuana-investing/Content?oid=3103026

By Chris Roberts@cbloggy Tuesday, Aug 19 2014


Unlike cigarettes, marijuana can be legally bought out of a vending machine.

Behind the counter at a San Jose-area dispensary sits a $25,000, climate-controlled, heavily-armored box, the lone unit that West Hollywood-based startup Medbox has sold in the Bay Area.

Buying weed the same way you buy a bag of chips hasn't quite taken off (that could also be why 35-year-old company founder Vincent Mehdizadeh now markets the machine as "an inventory control system"). But for a moment, a weed vending machine looked just as smart — that is, insanely lucrative — as sending messages that disappear on delivery.

For four years after the company's founding, Medbox wasn't going anywhere. Its stock traded on the same exchange you find penny stocks for $2 to $3 a share. Then a funny thing happened: Colorado and Washington legalized marijuana in November 2012.

Medbox rocketed from $2 to $205 by Nov. 15, a little over a week after the election. The crash was just as fast — it dropped to $20 the next day and is now, almost two years later, trading at $11.23 — but this is not a parable about tech or weed bubbles.

There is a flood of capital that's itching to invest in the cannabis industry. And this money is clean, coming from investors who know an emerging market when they see one — such as the 38 million Californians who, all bettors say, will be enjoying a legal adult marijuana market in 2016.

"We're in another green rush," a marijuana attorney told me recently. He's busier than ever. And as with every rush, there are losers and winners — and suckers and hucksters. There's a fortune to be made out there — but how?

With his friendly round face and sharp eyes, Troy Dayton has the look of a born salesman. And he is — though the product he's pushing sells itself.

Dayton is CEO of ArcView Group, a hub of marijuana companies looking for funders and the accredited investors looking for marijuana companies to fund. On a recent evening, Dayton met me in the startup space on Eleventh Street from which he manages the 300 investors who, so far, have sunk $12 million into 17 firms. This shared-workspace arrangement is likely to be temporary.

"There are entire floors on Wall Street evaluating this industry right now," says Dayton, fresh from Martha's Vineyard, where he'd addressed a meeting of "family offices" — managers who oversee investments for wealthy families. This old money is interested in weed. And unlike earlier weed rushes, these investors are no half-interested gawkers: They're educated, he says, and want to invest.

But right now, options are limited. You can't directly invest in a marijuana grow or buy into a cannabis dispensary. There are two reasons why: enormous risk (federal law enforcement raids, sure, but also the lack of a way to legally bank. Marijuana-affiliated business in California are either cash-only or deal with financial institutions on the down-low) and California law requires operations that directly handle marijuana to be nonprofit collectives or cooperatives.

Capital has to take a back door. Investors can float weed sellers high-interest short-term loans, the only way a dispensary can fund rapid growth. Or they find an ancillary industry, a firm that provides products to marijuana holders. A Colorado-company that markets bags initially designed for dog shit is a perfect example.

The bags hold in odor, which makes them perfect for weed. Rebranded "FunkSac," the company plans to reap $2 million in revenue (in half a year), has been contacted by dispensaries in 17 states, and received a writeup in The New York Times.

The best way in may be through something proprietary and professional that can easily be ported to other states. A branded edible, for example — or tech.

The key is just finding the right company. Most efforts, Dayton says, are either legends in the weed game who have no idea how to run a business, or business types clueless about cannabis.

Veterans of Silicon Valley are already sinking tech capital into the weed game. Eaze, a marijuana-delivery app that promises to send a bag your way in as little as 10 minutes, is the idea of Keith McCarty, an early Yammer employee (and a likely millionaire several dozen times over after Microsoft bought his company for $1.2 billion in 2012).

Eaze is only in S.F. for now, but since it's an app, it can easily be ported to to Denver or Seattle — or New York City or Chicago, once those medical markets come online.

All of this, however, is foreplay, jockeying for position before the real start. California's medical cannabis market is already worth $1 billion or more. Taxing and regulating that beast could bring in $400 million in state tax revenue, state bean-counters say. After legalization, the market could be worth $2.6 billion, if Colorado's example is any indication.

California has seen several green rushes before. But people see more potential now than ever. Now, there's even money in dog-shit bags.