I have often joked with friends that I have gone into the wrong area of investing as the perks are lame. As a healthcare investor, I can get a free hearing aid or diabetes test whenever I want one, but who the hell wants something that just proves you’re old? It’s the guys who invest in entertainment, media, even technology that get all the good stuff: free iPads, concert tickets, meetings with celebrities. But lo and behold, there is a brave new world of venture investing out there where the perk possibilities are really unique.
In an article entitled Medical Marijuana Companies Chase Investors, Eye IPOs, Dow Jones’ reporters write one of the best opening sentences I have seen in recent financial services reportage, “In what was once a pipe dream, medical-marijuana companies are courting private investors and even planning public stock sales.” I will confess, I am listening to Van Morrison’s “And it Stoned Me” while I write this piece, which my daughter suggests cannot be coincidence.
The article describes a rapidly growing (pun intended) trend for investors to make seed and venture investments (or maybe it’s venture investments in seed?) in such totally bitchin’ enterprises as GrowOp Technology Ltd, a hydroponic equipment supplier, and Medicine Dispensing Systems, Inc., which has placed 60 medical marijuana vending machines inside dispensaries in 5 states. That last one is freaking ingenious, as you can package the Twinkies in the vending machine right alongside the Maui Waui. The whole article reminds me of the movie Pineapple Express, where drug-dealer Saul (James Franco) shows drug-buyer Dale (Seth Rogen) the three-tipped “cross joint” he has developed:
Saul: This. Is. The future, this is like the apex of the vortex of joint engineering. It’s rumored that M. M. O’Shaughnessy designed the first one – the guy who, uh, designed the Golden Gate Bridge. My second favorite civil engineer behind Hannskarl Bandel: Madison Square Garden… What you do is you light all three ends at the same time…
Dale Denton: Really?
Saul: – and then the smoke converges, creating a TRIFECTA of joint-smoking power. This is it, man. This is what your grandchildren are gonna be smoking. Future. That – future…
Anyway, back to the article, which features comments from a former Stifel Nicholas broker on the East Coast who is launching a hedge fund called Kaneabis to invest in the medical cannabis industry (company motto: “the cannibis industry from a financial perspective”). Really, I swear it’s true. Kaneabis’ Robert Kane (get it? Kane? Kaneabis? seriously?) is quoted as saying, “I’m launching it because the market has a need for it. There are people looking to get into this space.” He was undoubtedly misquoted; I am pretty sure he must have said that there are people looking to get spaced. I love the fact that among Kane’s career achievements is his former role as CFO at Cannibiz Business University. Is that the new name for Humboldt State?
Kane goes on to say that Kaneabis will invest in the five of nine publicly traded companies in the [medical marijuana] industry that meet his criteria, which are: strength of volume and share prices above a penny. Oh, and they provide a totally sweet buzz when they pay dividends.
According to the aforementioned Dow Jones article, “the industry is growing fast as more areas of the country permit pot prescriptions, and investors are slowly starting to explore where to best deploy their capital.” Ben Holmes, who is raising money for his Centennial Seeds venture, says that he is seeking seasoned investors not “dumb capital.” I am a little worried that his particular company may in fact own the recipe for turning seasoned investors into dumb ones. Directors may arrive at the Board meetings dripping strategy and leadership, but they better do the hard work early in the day. By noon they are all going to be contemplating their navels and making such profound statements as, “Dude, where’s my car?”
Dow Jones’ reporters note that, “…the primary sources of growth capital are likely to be angel investors, typically affluent individuals or small groups of people who are willing to take on risk for the chance at outsized returns.” I think that they have overlooked the most obvious investors: college students and rock stars who really understand the opportunity. Conventional wisdom says that investors prosper most by investing in companies they really understand.
Of course, investing in the medical marijuana area is fraught not just with the potential for limitless juvenile humor, but with actual legal risk. For those who may have forgotten, smoking dope is still a violation of federal law. I realize that those of us in California think that our way of life trumps the Federales, but not so much. As an investor, getting your money out of one of these ventures is tough if the primary use of capital is bail.
But in case you were paranoid, now there is an entity called the ArcView Group, which looks and sounds just like a traditional investment advisory firm, and which connects angel investors with marijuana ganjapreneurs that don’t violate the federal drug laws. Guys that connect people with money to people with drugs used to come from Columbia and Mexico and have names like Pablo Escobar, but these ArcView guys have names like Troy Dayton and Steve Berg and come from San Francisco. Their bios read like typical financial services guys except for the notes about their involvement in the burgeoning marijuana industry. Best line I found: “CNN profiled Troy [Dayton] as part of a special on the science of happiness, in which he discussed how his responsible drug use supports his ongoing mental well-being.” Indeed. The guy was apparently inspired by Jeff Spicoli in Fast Times at Ridgemont High—“All I need is some tasty waves, a cool buzz and I’m fine.”
As reported in a recent MSNBC’s article entitled Medical Marijuana Becoming Blockbuster Drug, the annual revenue associated with the legal medical marijuana industry is now a $1.7 billion, according to a report released Wednesday by See Change Strategy, an independent financial analysis firm that specializes in new and unique markets. “To put that number in perspective,” the article states, “sales of medical marijuana rival annual revenue generated by Viagra, a $1.9 billion business for Pfizer.” Holy hydroponics Batman! Here I am thinking that weed is a drug that makes you want to go to Blockbuster but in reality it’s a blockbuster drug when sold legally or quasi-legally in only 15 states. I wonder if my firm’s definition of healthcare could use some expanding? You may not be able to make a better return on investment in marijuana, but really, will you care? Just crank up the Jack Johnson music and it’s all chill.
My best friend, Lynne, said to me, “Straight faced business articles about the pot business always crack me up. Like the whole population of Joe Stoners out there gives a damn about investment. To them, the term “seed money” is the change leftover from a midnight munchie run to 7-11 that they can use to buy their next batch of smoke.”
But Lynne, that is not what the so-called ganjapreneurs say. According to Jeremy Miller, founder of the Cannabis Farmers Markets in Washington State, “Most of us in this industry have been fighting for the cause for years. I have been active in the marijuana movement for over 20 years, so it has become part of who I am,” Miller said. “Sure, I want to make money, but my activism is core to my business principles…At this stage in my business, I am more concerned about building a viable ecosystem of commerce than I am about profits.”
Let me state for the record that this attitude is not going to go over well with institutional investors, particularly if the profits from these marijuana investments go up in smoke (nice Cheech and Chong reference, eh?). Eventually the VCs are going to have to show their own investors that the 5 magic beans they bought with their millions are making more than just 5 magic brownies. As Hunter S. Thompson once said, “When the going gets weird, the weird turn pro.” So all those altruistic, peace-loving, twinkie-munching ganjapreneur-backers are going to eventually have to buckle down and turn into old-fashioned, calculator-wielding finance guys if they are going to run hedge and venture funds that turn weed into gold.
Personally, I have a hard time imagining a world where large-scale venture investment is routinely made in the medical marijuana field. Will investors measure their success based on their cash-on-kush return? Will venture syndicate partners look at each other and say, “dude, don’t bogart my IRR*”? I realize there is probably money to be made here, but it’s hard to imagine the Limited Partner meetings. I guess you’ll know they’re over when the refrigerator door hits the attendees on the back of the head.
No matter what I think, the potential for investment returns from medical marijuana will soon be put to the test. General Cannabis, which describes itself as “a rapidly growing, technology driven company that is defining the multi-billion dollar cannabis industry” and whose subisidiaries include WeedMaps Media, Inc., General Health Solutions, Inc., General Merchant Solutions, Inc. and US Cannabis, Inc., filed a March 1, 2011 notice with the Securities and Exchange Commission of its intent to raise $10.5 million in an IPO. General Cannibis, which sounds to me like the name of a guy who leads platoons of Grateful Dead fans to war (battle hymn: What a Long Strange Trip it’s Been), had 2010 net income of $1.2 million on revenue of $7.7 million, according to the IPO filing, and is growing like, well, a weed. No doubt they are looking for their stock price to open strong and go even higher.
*IRR will henceforth be defined as “I’m Rolling Reefer” instead of Internal Rate of Return.
This post was featured May 13, 2011 in PEHub.com