The Future of Cannabis Funding

Cannabis investingA couple weeks ago, I attended a Marijuana Investor Summit in San Francisco, during which cannabis companies pitched their businesses to a group of investors who were then asked two questions.  First, would you invest in this company?  And second, is this company ready to go public?  Only one company received a unanimous “yes” to the second question posed, but the same investors also cautioned the company that while it could go public, they recommended it did not.

Cannabis investing is an issue high on the minds of those in the cannabis industry, especially those looking to launch or invest in a marijuana business in the upcoming year. The potential for profits in the marijuana industry continues to grow at astounding rates, and that growth is only expected to increase as states like California consider legalization measures this year. The 2016 Marijuana Business Factbook predicts the cannabis industry will grow from a $14-$16 billion market in 2016 to a $44 billion market by 2020, which is an increase of about 300% in just four years.

So it’s not surprising that funding for cannabis-related startups is becoming more central than ever. A record high 30 deals were reported in the fourth quarter of 2015, up from the 2 deals reported for the same quarter in 2013. A total of 98 deals were completed in 2015, which is a significant increase from the 63 deals completed in 2014. Noteworthy deals in the cannabis space include a $75 million Series B financing by Privateer Holdings in 2015, partly funded by an investment from Founders Fund (more on the basics of investment rounds here). Privateer Holdings was the first U.S. private equity firm to focus solely on cannabis-related investments and its portfolio includes well known companies such as Leafly, which it acquired in 2012, and the Marley Natural brand, which it launched in 2014. Companies such as Leafline Labs and Palliatech have managed to secure funding of $10 million or more and several other cannabis-related companies have received funding totaling at least $1 million.

The increase in funding these past years may be attributed to a lessening of the stigma previously associated with cannabis companies. We are beginning to see investments from more mainstream sources, such as Founders Fund mentioned above, which is a venture capital firm better known for its investments in conventional startup companies such as Facebook, Airbnb, Lyft, and SpaceX. And we can expect to see even more growth as new opportunities open up through previously outlawed sources of funding. Effective in May of this year, non-accredited investors will for the first time be able to invest in cannabis startups through an “equity crowdfunding” exemption under Title III of the Jumpstart Our Business Startups Act (JOBS Act). Crowdfunding is already expected to surpass funding through venture capitalists this year.

As the home of Silicon Valley, California is poised to be at the heart of future cannabis funding and deals. California is in the midst of overhauling  its medical marijuana market and there are several measures in the works likely to increase investment within the state. These measures include the potential for a legalized recreational market in California that will lead to increased revenues and thus profits for investors, an amendment to explicitly authorize for-profit entities in the state that will allow for more traditional equity structuring (more on the basics of equity financing here), and the possibility of a state-chartered bank that will give California cannabis companies the much needed ability to conduct more of their transactions through bank accounts instead of through cash.

Now considering the stats and information above, how you would you respond to the following question: “Would you invest in a cannabis company?”