Always follow the money as “Entrepreneurs eye emerging marijuana markets”
When James Howler created his marijuana-infused taffy in 2009, the Colorado entrepreneur had trouble finding an accountant willing to keep the books of a company making legally fuzzy medical marijuana candy. Now, five years later, venture capitalists from New York City want to shower him with money for a stake in his Cheeba Chews and a foothold in a $2.6 billion marijuana industry now operating in nearly half the country.
With medical marijuana legal in 23 states and Washington, D.C., and recreational marijuana legal in Colorado and Washington state, the market for weed is rife with potential, and the people in pinstripes have taken note. As the marijuana companies grow more sophisticated — and profitable — they are attracting the attention of investors and corporations.
Tapping into the green revolution, however, brings unique challenges for entrepreneurs and corporate honchos alike. States may have bucked federal law, which considers marijuana illegal for any purpose, but they have imposed their own complicated, lengthy lists of regulations meant to keep cannabis tightly under control and, in some cases, keep the corporate behemoths out.
But with so much money at stake, industry experts say, it’s only a matter of time before corporate giants, already eyeing the market, grab their share, too. “If leaders of these companies are not looking at the cannabis space, then they are not doing their jobs,” says Chris Walsh, editor of Marijuana Business Daily, a trade publication based in Denver. “Billions of dollars are here, and no seasoned business executive is going to overlook a billion-dollar industry that they might be positioned to tap.”…
If the crowd of 200 executives who jammed the marijuana panel at the Wine & Spirits Summit on June 5 in Denver is any indication, the alcohol industry is paying attention. “Some see it as a threat, and some are interested in being part of the industry,” says Emily Pennington, editor of Wine & Spirits Daily, an online trade publication that hosted the summit. “Either way, they are watching it very closely.”…
Most major tobacco companies, which explored the possibilities of marijuana in the 1970s, when federal legalization seemed possible, now deny any interest. “Marijuana remains illegal under federal law, and Altria’s companies have no plans to sell marijuana-based products,” says Brian May, spokesman for Altria, the company that owns tobacco company Philip Morris America….
R.J. Reynolds Tobacco also says it isn’t interested in marijuana. “We have no intention to have any involvement when it comes to marijuana,” spokesman David Howard says. “We have no interest in that industry.”
But tobacco giant Japan Tobacco International entered into a deal in December 2011 with Ploom, the San Francisco-based manufacturer of a pocket-sized smoking device that heats tobacco, vaporizing nicotine and flavor without producing smoke, to commercialize the product outside the United States. Although the company maintains its device is solely for tobacco, the latest version, called Pax, is popular among marijuana users.
At least two pharmaceutical firms, AbbVie and GW Pharmaceuticals, already produce medicines that contain active ingredients from cannabis. GW says it is a traditional pharmaceutical company that won’t be dabbling in what it calls the “artisanal” medical marijuana business.The company manufactures Sativex, a cannabinoid medicine for the treatment of spasticity due to multiple sclerosis….
Some states don’t allow non-residents to open or have equity investments in marijuana businesses. Colorado, which has more than 1,300 licensed marijuana businesses, requires marijuana investors to have lived in the state for at least two years. The owner, operator and employees must all be residents of the state. Non-state residents can lend money but can’t have an equity interest, says Colorado Department of Revenue spokeswoman Natriece Bryant. The state enacted those regulations specifically to keep the giant multinationals out, Bryant says….
Most federally insured banks have opted to stay away from the industry because of legal uncertainty about whether transactions for marijuana businesses could be considered money laundering. That means marijuana businesses have little access to small business loans or even payroll accounts. With banks out of the picture for now, most of the financial backing for growth in the marijuana industry has come from venture capital, angel investors and private loans.
“We’ve had bankers from New York City asking for a tour of the facilities and wanting to know how they can invest,” said Ralph Morgan, chief operating officer of O.penVAPE, which specializes in extraction of purified cannabis oil from marijuana and produces a vape pen that vaporizes the oil to be inhaled. O.penVAPE products are sold in Colorado, California, Washington, Oregon and Arizona. “There are tons of people dumping tons of money into the industry,” says Cheeba Chews’ Howler. “There is money to be made, and that’s why that big money is coming in.”…
Ultimately, once corporate America thinks the industry is safe, well-established marijuana companies will be targets for acquisition, says Steve Berg, chief financial officer of O.penVAPE. “By virtue of the success we’ve had and the powerful brand we’ve developed, we constantly get inquiries from individuals and companies looking to partner,” Berg says. None have come from Big Pharma, Big Tobacco or Big Alcohol, “but we feel like we can feel them out there,” he says.
“How could it be otherwise? This is a new industry that is growing very, very rapidly,” Berg says. “Any business-development division that has any similarity has to have their eye on this ball.”
O.penVAPE’s chief operating officer, Ralph Morgan, who worked in medical device sales before he and his wife, intrigued by the medical side of cannabis, decided to open a dispensary in Colorado, says there’s nothing mysterious about the marijuana industry. “All the regular business rules apply to the marijuana industry — taxation, regulation, human resources,” Morgan says. “It’s just a different widget.”
Morgan says recreational marijuana businesses are a natural fit for the alcohol industry, which is already accustomed to state-by-state regulation. Marijuana products “could be made and distributed in a similar fashion,” Morgan says. “The alcohol industry has done a good job of creating brands.”
Trip Keber, who four years ago founded Dixie Elixirs to make marijuana-infused drinks, chocolates and lotions, says he, too, has had inquiries from investment bankers, hedge funds and venture capitalists. And at conferences, he has fielded questions from alcohol industry executives. “Four years ago, I couldn’t get anyone to return my calls,” Keber says. “Now the tables have turned. We are too big to ignore.”
One of the biggest signs that the industry has matured is the influx of top-notch professionals — lawyers, accountants, advertising execs — willing to take jobs at the marijuana companies, Berg says. Full legalization in Colorado and Washington was a watershed event for many business professionals, who could then feel it was safe to join the industry, Berg says. “One of the major themes or trends in the legal cannabis industry is the professionalization of the industry,” Berg says. “Professionals are crossing over from the more conventional industries because they see a lot of opportunity and a lot of challenge.”…
Changes in societal attitudes toward marijuana caught attorney Barry Peek’s attention a few years ago. Peek, a labor and employment lawyer at the 65-lawyer New York firm Meyer, Suozzi, English and Klein, did some reading, attended a few conferences and then gathered a group of three or four attorneys in his firm to study the issues around medical marijuana. He concluded that medical marijuana would turn out to be big business. And if it’s a new business, Peek says, people will need legal advice.
When New York Gov. Andrew Cuomo signed the state’s medical marijuana law on July 5, Peek’s firm was ready. “We are advising clients on how to maneuver through those regulations,” Peek says. “We have a full-service law firm, so if there is a company that needs to get into the business, we can handle corporate issues, tax issues, land-use issues, whatever they need.”
Interest in New York is widespread, from farmers in Upstate New York who have idle land that could grow marijuana to doctors who want to dispense it, Peek says. “It will be a growing sector in the legal community,” Peek says. “And once the smaller companies get a foothold and become profitable, they will get bought out by larger companies.”