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Will 2017 Be the Year of the Institutional Investor in the Cannabis Industry?


To say it’s an interesting time to be in the cannabis industry would be an understatement. With laws and regulations in flux, the transfer of the illegal cannabis market into the light of legality is often chaotic and uncertain.

There are, however, a few things we know for sure. One is that the legal marijuana market is growing at an astounding clip, over 30% from 2015 to 2016 alone. Another is that several more states are poised to join the group of states that have legalized and regulated the sale of marijuana to anyone 21 years of age and older.

But perhaps the most important thing we know when it comes to legal cannabis is that there are tens of millions of people who are already buying marijuana on the illegal market, just waiting for a chance to buy it legally. Not since the end of alcohol prohibition has a legal industry had such a large customer base chomping at the bit to buy what they’re selling. That’s a massive market for those willing to seize their share of it.

Is Now the Time to Jump In?

For many investors, getting into the cannabis industry is not a matter of if but when. And for institutional investors – investors who are established in other areas like banking, stocks or insurance – it’s critical to pick the right time to jump in. Come in too early and legal hassles might derail your investment; come in too late and risk losing market share to others who took the risk before you did.

To get a better handle on the state of the cannabis industry and whether or not the time is right for institutional investors to jump in, we were fortunate enough to speak with 2 partners in the venture capital firm Sensible Alternative Investments (SAI), a fund that is investing in the “leafless” side of the legal cannabis industry and is one of the investors behind the media brand MERRY JANE, which was started in part by rapper Snoop Dogg.

One of the partners The Marijuana Times spoke with was Allen St. Pierre, whose name might be familiar to many in the cannabis community as the former Executive Director of the National Organization for the Reform of Marijuana Laws (NORML). He recently joined SAI and brings his years of expertise when it comes to the cannabis community with him. The other partner we spoke with was Mark Slater, a well-known growth company investment banker and investor who brings expertise from the institutional investor side of things.

“It’s estimated by Arcview, if their general estimates are correct, that there’s about $22-$25 billion dollar a year legal business for cannabis right off the bat and right now, there’s about $7-$8 billion dollars coming in the door, then there still needs to be quite a bit more capitalized businesses to service the need for that $25 billion ultimately worth of cannabis to be legally sold and taxed and regulated,” Allen told The Marijuana Times about the current state of investment in the legal marijuana industry. And while, as Allen pointed out, much of the early investment in the industry has come from either small investors who borrowed money from their family and friends and maxed out their credit cards or from those who made their money in the illegal cannabis industry, we are now starting to see bigger, more established investors look into the growing legal cannabis market.

Allen says he saw this trend during his last years at the helm of NORML, when conferences focused on the business side of marijuana ballooned from 500-600 attendees to audiences numbering in the several thousands.

“As Allen said, there is a lot of institutional money either starting to migrate into this space or evaluating it and some – I think we’ve started to see the first entrance from an institutional perspective really start to get interested, and you start with venture capital funds like ours and other financial players like some hedge fund who are interested in looking at it, then it will gradually expand over time,” Mark told me. He said one of the reasons SAI is focused on the leafless side it that they have seen so much activity on the leaf side, leaving out “everything from welling and hydroponic supplies, which can be very capital intensive to build out and sell to people, and also digital media, and any of other things that would be non-flower, non-THC, non-CDB themselves but are required to either grow and distribute or consume product, and so we’ve been focusing on that.”

For now SAI is focused on the “leafless” side of the market and according to Mark, many investors feel more comfortable in that space for a variety of reasons, though both sides of the industry have their advantages. “From our perspective, we think both of those, leaf and leafless, are both attractive, but…from our investors who are coming into our fund, there is a sense of two things,” he said. “One that there are risks in the leaf side of the market, then while many of them, in fact, if not the majority in them are in fact investors in that side of the market, they feel more comfortable doing that hands-on where they feel they have a greater degree of control over what’s happening at each of the individual growing sites or dispensaries. A venture capital fund like ours is not well-suited to address that because we take minority positions in companies. We’re not going to have that kind of control, and…there are some investors who will look at some 280E [tax deduction] problems and some of the other issues that come up with Class I.” Mark told us that a combination of risk-mitigation and opportunity on the leafless side makes it a good place for new investors.

What About President Trump?

A huge unknown that currently hangs over the legal cannabis industry is the new Trump Administration. But even under the worst case scenario, Allen said, only a small amount of businesses could be targeted by the feds.

“I think people who are already in [the industry] are probably trying to learn from prior experience with medical marijuana on the West Coast and that is if the government pushes in one particular area and takes one club down, then it would be best to form three others immediately, and that replicated itself to a point where clearly the federal government could only make arrests that could be best described as symbolic,” Allen said, pointing out that – statistically speaking – the odds of being raided would still be quite low.

He also pointed out that even though some activity might be barred by federal law, if it’s activity that is mandated by state law you enter a legal area that is hard to prosecute. As an example Allen put forth “the idea if the state mandates by law that there must be a software tracking system otherwise known as seed-to-sale, and you get in that space, and you were to be harassed or arrested by the federal government, one can make a pretty strong argument that you are only engaged in legal commerce that was mandated by the state itself. How could it be criminal if it was mandated by the state?” So how could it be criminal if it’s something that is mandated by the state you’re operating in? For these and other reasons, Allen thinks the feds can only have so much impact on the situation.

And while President Trump brings uncertainty to the industry, his election also creates an opportunity for those who are willing to take the risk. After all, if Hillary had been elected and moved to progress legalization on a federal level, the industry would have been flooded with investors and filled with capital fairly quickly. As it is, Trump’s election has opened up an opportunity for those who are willing to take on the added risk of uncertainty from the federal government.

There’s Still Time

In the end what this all means is that there is still time for institutional investors to take their place at the table. “…it’s not as if investing windows shut suddenly,” Mark told us. “There is not a – it’s not like one day everything’s great, it’s great to investors, a  little bit of risk and the next day it’s all gone. It’s never that simple but typically for those who are willing tolerate more risk if financial theory is right, it has usually worked out well, the rewards are great but you’ve got to do it.”

In the end you can’t wait for risk to evaporate if you want a part of the new legal cannabis market, whether it’s on the leaf side or the leafless side. It could be a perfect storm of circumstances in the marijuana industry that might make 2017 the Year of the Institutional Investor.