By Omar Sacirbey
Tuatara Capital’s recent success at raising a record $93 million for marijuana industry-related investments signals that deep-pocketed investors increasingly are embracing cannabis businesses.
Moreover, the U.S. Drug Enforcement Administration’s decision to keep marijuana on its list of the country’s most dangerous drugs isn’t expected to curb that investor enthusiasm.
That’s good news for marijuana entrepreneurs seeking funding at a time when many banks and big institutional investors are on the sidelines of MJ financing, given that cannabis remains a Schedule 1 controlled substance.
On the flip side, Tuatara’s deal – announced last week – may even stoke interest among institutional investors in the cannabis industry, said Steven Gormley, CEO of 7th Point, a canna-centric investment firm in New York City.
“I think most people in the financial sector understand that the cannabis space is growing and that it has a tremendous amount of potential,” Gormley said. “But many will still have to work through their flawed preconceptions of cannabis as being something to avoid, be it for consumption or commercialization.”
Tuatura, a New York-based private equity firm, raised the $93 million from about 100 investors, mostly individuals.
Al Foreman, the firm’s chief investment officer, told Marijuana Business Daily some “quasi” institutions also ponied up money. He described these as “professional organizations who are managing capital on behalf of large family and other professional investors.”
Tuatara originally had planned to raise $80 million, meaning the firm surpassed its goal by about 16%.
The amount is significantly larger than the $75 million raised by cannabis-focused private equity firm Privateer Holdings early last year.
Getting comfortable, mostly
“Investors are definitely getting more comfortable with cannabis companies. Banks still are not,” said Tom Quigley, CEO of The Gluu, an online B2B marketplace in Tampa, Florida, which serves marijuana companies.
Referring to companies like JPMorgan Chase and Merrill Lynch, Quigley added: “It’s not that banks don’t see the potential; it’s that the current regulatory climate still makes it too risky for institutional money.”
Maxim Jacobs, director of Healthcare Research for North America at Edison Group, an investment analysis firm, predicted institutional investors will remain sidelined as long as marijuana is a Schedule 1 drug. “They’ll be holding back until there’s some sort of rescheduling,” Jacobs said. “Schedule 1 is death. There’s nothing you can do with Schedule 1.”
In fact, Jacobs speculated, “a lot” of existing investors may prefer that marijuana is still a Schedule 1 controlled substance – at least for now. “If it gets rescheduled or becomes legalized, then instead of having 10 or 20 competitors, they’ll have hundreds of competitors,” Jacobs said.
That lack of widespread competition is good news for cannabis-focused investment firms like Tuatara. They gain a greater share of the rapidly growing market to themselves, and more leverage in setting the terms of their investment deals.
Tuatara launched in 2014. Last year, it completed a fundraising round of nearly $26 million.
The investment firm already has invested in two companies. It was the lead investor in Willie’s Reserve, the cannabis brand named after country music legend Willie Nelson. And it was an investor in Teewinot Life Sciences, a Florida company involved in the synthetic production of cannabinoids.
The firm plans to build a portfolio of about 10-15 high-growth cannabis companies in the research and testing, cultivation, processing, consumer and retail sub-sectors.
Tuatara executives said they would not give their portfolio companies the money all at once, but instead disburse it at various junctures in their growth.
“Our goal is to position ourselves as a long-term partner with our portfolio companies. And being a long-term partner, we’re going to need to provide capital across different stages of growth,” Foreman said.
“Making an investment and walking away is not a successful strategy. Our intention is to provide financing at the onset of a company, but to also grow with them, as they expand to new markets or add new disciplines or new areas of focus that will require additional downstream capital.”
Foreman added that Tuatara plans to spend the money within two to four years.
The news was hailed by industry investment analysts as a major breakthrough.
“What you’re seeing is just the beginning, as $93 million is just a drop in the bucket as far as how much will need to be invested in order to build the infrastructure for this industry,” said Leslie Bocskor, president of Electrum Partners, a cannabis investment analysis firm in Las Vegas. Deals like this, he noted, are no longer exceptions, but becoming the norm.
The Gluu’s Quigley noted the MJ industry saw an increase in investments after Privateer’s announcement last year that it had raised $75 million.
“We saw an influx of investors wanting to get in after the Privateer deal,” Quigley said. “When you start seeing those types of numbers, it raises the level of interest.”
More opportunities for entrepreneurs?
Will the influx of capital also make it easier for entrepreneurs seeking capital to get their ideas off the ground? Much will depend on whether these upstart companies have a genuinely viable business plan in place.
There are enough stories of past investors getting burned in the cannabis space to make today’s investors more cautious than before about how they wager their money.
“More available capital does not mean there are more viable companies to invest in,” Quigley said. “We’ve seen a significant amount of capital earmarked for cannabis investment sit on the sidelines simply because the deals aren’t there.”
Jeanne Sullivan, president of investment analysis firm Sullivan Adventures, agreed.
“The only entrepreneurs who will win an investment must prove they know what to do and how to do it,” she said. “That is a high bar.”
Omar Sacirbey can be reached at [email protected]