By John Schroyer
The rise of recreational cannabis, the federal government’s easing policies on the industry and growing public support helped fuel record investments in the marijuana sector last year.
But you ain’t seen nothing yet: Investment dollars are expected to continue to flow this year and could even outpace 2014’s growth rate, fueled by new MMJ markets in several states including Nevada, Illinois and Massachusetts as well as progress in Oregon and Alaska’s emerging rec industries.
Doug Leighton – founder of Dutchess Capital, which invests in the industry – estimated that there will likely be at least $2 billion spent by the industry over the next 18-24 months, based on how much it costs the average cannabis company to get set up. Serious investors will be looking for opportunities to cash in.
“Just in Las Vegas alone is 2.8 million square feet of grow space” coming online, Leighton said. “If you divide that by the number of lights needed, watering systems, consulting, construction, you’re well over $1 billion.”
The amount of venture capital and private equity dollars flowing into cannabis companies totaled $104.5 million in the 2013 and 2014 fiscal years, according to one report. The lion’s share of that total was raised last year, when investments rose 941.5%, the report said. Other studies arrive at different numbers but also show significant growth.
“With the expansion of adult use in (Colorado and Washington State in 2014), it created a tremendous amount of capital,” Leighton said.
He also credited organizations like The ArcView Group, a network for investors, for helping to reduce the social stigma of the marijuana industry and easing the fears of many potential players on the investing front.
“If someone else is doing it, it must be fine, which is kind of an odd concept, but I think there’s some truth to that,” Leighton said.
ArcView itself helped facilitate more than $15 million in investments among its members into cannabis companies last year, according to an official with the group.
The federal government had a big role in changing the investment climate overall as well. After essentially giving the all-clear to cannabis businesses in states with well-regulated marijuana industries in August 2013, federal officials attempted to ease the difficult banking situation for the marijuana industry early last year.
These two developments signaled that the government is taking a more relaxed position on the cannabis industry – lowering overall risks for businesses and investors. That helped loosen the flow of money into the industry.
Marijuana in general also gained more acceptance by the public, which eased the stigma surrounding cannabis and helped convinced more investors to get involved.
“The more pervasive the industry becomes, the more socially acceptable it becomes – and that’s happening daily with all these news reports that are debunking all of the previous misconceptions around (marijuana),” said Emily Paxhia, a founding partner of Poseidon Asset Management in San Francisco. As a result, “people are going to feel more and more comfortable investing.”
2015 Predictions and Trends
Wealthy individuals, angel investors, hedge funds and venture capital firms will likely be behind the continued investment boom. But don’t expect institutional investors to get too involved just yet, Paxhia said.
“Institutional money is going to have potentially a longer runway because of the whole issue with it not being federally legal,” Paxhia said. “Until there’s a tipping point there, we don’t see institutional money coming in massively.”
Leighton agreed, adding that he wouldn’t be surprised to see cannabis-specific hedge funds being set up in the coming months.
“It’s going to be continue to be high net-worth individuals, as they get comfortable with (marijuana), and there’s more and more either hedge funds or new funds that are popping up that will be ‘green only,'” Leighton said.
Paxhia predicted two side effects of the investment boom this year.
First, more investing money raises the bar for entrepreneurs and business owners seeking capital.
“The amount of investment looking to enter the space is going to require entrepreneurs to really step up to the plate, because there’s going to be people looking to place capital, but they’ll want to place it with the right teams and the right companies,” Paxhia said. “There are still a lot of (companies) out there who are just kind of fly-by-night, get-rich-quick, here’s my scheme, but they don’t have anything to back it up.”
And second, big-time investors could have a serious influence on the political future of cannabis.
“Money moves politics,” Paxhia said. “If the money is flowing in, politicians will see their constituents voting with their dollars, and they’re likely to follow with their policies.”
John Schroyer can be reached at [email protected]