BY PETER HECHT
Isaac Dietrich was smoking marijuana at his best friend’s college apartment a few years ago when an entrepreneurial vision burst forth as heady as the most potent strains of Head Cheese or Ghost Train Haze.
“We had an epiphany,” he said. “Grandma doesn’t want to see me taking bong rips on Facebook. So we decided we needed a place where people could post about it.”
In 2013, Dietrich and his college pal, Tyler Knight, co-founded a social media platform that’s being hailed as the Instagram for pot consumers. And recently, Dietrich, now 23, commanded an audience of Silicon Valley financiers and other monied interests who packed a conference room at the Hilton Las Vegas Lake Resort to hear what the cannabis Internet CEO had to say.
Dietrich, of Virginia Beach, bounded onto the stage to the sounds of a new age drum harmony. He was part of the Investor Pitch Forum convened by The ArcView Group, an Oakland-based marijuana industry market research and capitalization group. ArcView seeks to match angel investors, including technology mavericks and money lenders, with pot businesses and startups.
Wearing a brown patterned jacket with elbow patches, Dietrich pitched with panache in this “Shark Tank” for marijuana ventures. Before would-be investors, he touted his Denver-based MassRoots social network, an application members use to find pot-smoking buddies, post plant and party pics or share marijuana news.
Behind him, a huge screen broadcast the announcement of MassRoots’ application to become “the first cannabis company” listed on the Nasdaq stock exchange.
“We connect cannabis businesses to their target consumers,” Dietrich said. He asserted that MassRoots, with 625,000 current users, would surpass 1 million members this year “and scale up from there,” while amassing advertisers and valuable market intelligence on customer preferences.
“We know what kinds of strains and what consumption patterns are most popular,” he said. “And in the next six months, we will begin to monetize that data.”
Since its launch, MassRoots has picked up $3.5 million in investments from 70 individuals and hedge funds, much of it raised through The ArcView Group. And on this day in November, Dietrich looked out at 200 cannabis-curious capitalists and boldly asked for $8 million more.
This is what the new digital-age cannabiz economy looks like.
Marijuana has become the next new new thing for “angels” in Silicon Valley and titans of the tech world. People who made fortunes in technology are making major investments in social networks, applications, business services and other ancillary products for marijuana consumers, dispensaries and cultivators. Venture capitalists and hedge fund managers also are looking to cash in on marijuana enthusiasts, as a half-dozen states, including California, are expected to vote on legalizing recreational use in 2016.
$2.7 billionAnnual U.S. market for legal cannabis
The anticipated California initiative has the backing of Sean Parker, Facebook’s first president and the co-founder Napster, and Justin Hartfield, an Irvine venture capitalist who struck it rich with Weedmaps Media, a website and mobile app that guides consumers to marijuana dispensaries.
The ArcView Group, which sells research data to industry investors, says legalization of recreational use in California could more than double the national marijuana market – currently estimated at $2.7 billion in annual sales in states with legal medicinal or social use. But the Golden State initiative is merely another unfolding chapter in the fast-evolving market for marijuana-related businesses in California, Colorado, Washington, Oregon, Canada and beyond.
Though many investors remain hesitant to fund marijuana cultivation, they’re putting money into startups that provide services for cannabis businesses. The industry also is attracting top talent from technology, banking and finance.
Among the industry upstarts getting funding are people such as Keith McCarty. The 30-year-old from Orange County was one of the early founders of Yammer, a business social network whose board members included Parker. Yammer was sold to Microsoft for $1.2 billion in 2012. McCarty more recently created an app-driven marijuana delivery service, Eaze, that is billed as the Uber for pot.
Eaze, based in San Francisco, neither sells nor handles marijuana, and it employs no drivers. But McCarty says tens of thousands of California consumers are using the app to order from a menu of cannabis selections, with deliveries typically promised within 15 minutes.
Eaze charges service fees to participating marijuana dispensaries, which hire drivers to ferry the orders. The company says the app is being used by medical marijuana patients in more than 85 cities, mostly in the Bay Area and Southern California, with plans to expand to Sacramento. “With Eaze, it’s all about getting your medicine delivered in one click,” McCarty said.
Eaze was founded in July 2014 and grew with $12.5 million in capital from DCM Ventures, a renowned Silicon Valley technology funder on Menlo Park’s prestigious Sand Hill Road. With 50 employees, Eaze recently added another feature: enabling consumers to get medical marijuana recommendations through video chats with doctors.
“We want to take this to every state with legal use,” McCarty said. “This is going to be a global product.”
I’M LOOKING AT MARIJUANA RIGHT NOW. YOU CAN’T STOP MONEY.
Jenny Tran, CEO of venture capital firm KHL investment
Brendan Kennedy, a former director of the analytics division of Silicon Valley Bank in San Francisco, already has taken his cannabis ventures global.
Kennedy, 43, has a degree in architecture from UC Berkeley and an MBA from Yale; he used to do venture capital valuations for Tesla Motors Inc. and numerous tech firms. Now, he is the CEO of Seattle-based Privateer Holdings, a private equity firm exclusively funding marijuana-related businesses.
Kennedy and his founding team, including former Silicon Valley Bank sales director Christian Groh, spent a year researching the marijuana industry and concluded it represents “the greatest opportunity” for new investment, Kennedy said.
In 2011, Privateer bought Leafly.com, a cannabis news and culture site whose user-generated reviews of pot dispensaries and products have elevated the site as the Yelp for marijuana. Three years later, Privateer announced a partnership with the family of late, pot-savoring reggae singer Bob Marley to produce cannabis skin creams and accessories in what it bills as the world’s first international marijuana brand.
Under the agreement, “Marley Natural” marijuana is to be grown and processed by small producers and made available for retail sale in states where medical or recreational marijuana use is legal. Privateer also invested $26 million in a Canadian company, Tilray, whose British Columbia production facility produces “pharmaceutical grade” marijuana for Canada’s medicinal market, Kennedy said.
Soon after the Marley Natural news, Privateer announced in January that it had secured $75 million in investment from the San Francisco-based Founders Fund of billionaire Peter Thiel, co-founder of PayPal and a key financial backer of Facebook. Cannabis industry advocates hailed Thiel’s participation as the arrival of the first major institutional investor in the pot economy.
Privateer Holdings now employs 225 people, including many from the tech industry – “smart professionals from places like Amazon and T-Mobile and Microsoft that are waking every day to build companies and brands to end marijuana prohibition,” Kennedy said.
Two years ago, one prospective candidate summoned Kennedy for a furtive meeting at a Starbucks in Portland, Ore. The man handed over a business card from the Drug Enforcement Administration. “That got my heart going a little bit,” said Kennedy, who said he felt more nervous when the man shoved an envelope his way. It contained a résumé for Patrick Moen.
Today, the former federal narcotics supervisor in the DEA’s Portland bureau is the general counsel for Privateer.
Despite expanding legalization, investment in the pot economy remains far from risk-free.
Four years ago, the notion of sinking millions into pot cultivation and services seemed particularly daring when a core group of marijuana advocates met with some significant business figures at a law office in San Francisco. California’s Proposition 19, which would have legalized recreational marijuana use, had been defeated in 2010. In 2011, federal authorities had launched sweeping raids and property seizures against medical marijuana dispensaries in California.
And yet in November 2011, The ArcView Group set out to begin capitalizing marijuana business startups.
The ArcView co-founders included Steve DeAngelo, CEO of Oakland’s vast medical marijuana emporium, the Harborside Health Center dispensary, and Troy Dayton, a former Colorado renewable energy executive who had helped found the pro-legalization Students for a Sensible Drug Policy in 1998 while at American University.
They assembled a meeting with a handful of guests, including venture capitalist Steve Berg, a former managing director of Wells Fargo Bank’s capital markets group, and Joby Pritzker, heir to the Hyatt Hotels family and a board member for the Washington, D.C., pot decriminalization group, the Marijuana Policy Project.
There, the group agreed on a plan to persuade wealthy individuals – people with $1 million or more in net worth and companies valued at $5 million or more – to invest in a responsible, politically engaged and profitable marijuana industry, Dayton said.
Berg, one of ArcView’s first investors, is now CEO of a Denver company, O.pen Vape, a manufacturer of vaporizers that allow people to consume marijuana or hash oil without lighting up.
Pritzker, managing director of Tao Capital Partners in San Francisco, this year announced a major investment in a Denver company, MJ Freeway, that provides sales tracking and inventory control applications for marijuana retailers, processors and food producers in legal-use states. Pritzker is also part of the Sean Parker group backing California’s anticipated 2016 initiative, which would legalize possession of an ounce of marijuana and impose a 15 percent state tax on recreational pot sales.
To date, ArcView says it has signed up 510 member investors and generated $56 million in capital for marijuana-related businesses and services.
NINETY PERCENT OF COMPANIES ARE GOING TO GO TO ZERO. THEY DIDN’T HAVE BUSINESS MODELS ... THEY HAD PRESS RELEASES.
Morgan Paxhia, co-founder, Poseidon Asset Management
And its Pitch Forum near Lake Las Vegas is just one recent example of an industry budding with investors. Days later, two other pot-business events filled convention centers near the glittering Las Vegas Strip. The exuberance at the conferences seemed unbridled, despite the fact that some California marijuana advocates were advising patience and prudence for investors in what remains a largely unregulated economy.
At the Marijuana Business Conference & Expo at the Rio Convention Center, a California-themed panel called Big Changes for a $1 Billion Market warned that new oversight measures signed into law by Gov. Jerry Brown in October will take considerable effort to construct and two years to take effect.
“After 20 years of unregulated commerce in California, it’s a pretty big mess,” said panelist Hezakiah Allen, executive director of the California Growers Association, which advocates for pot farmers seeking access to the regulated market.
The cautious tone didn’t deter Jenny Tran, CEO of KHL investment, a venture capital firm with offices in Irvine and Beijing that has specialized in real estate and technology startups. “I’m looking at marijuana right now,” she said, adding that she has investors on both sides of the Pacific Ocean who want in on the state’s cannabis trade. “You can’t stop money.”
Last summer, Bloomberg Intelligence market research identified 55 publicly traded companies with marijuana-based business interests totaling $3 billion in capitalization.
Yet pot stocks, many sold over the counter at valuations from 10 cents to less than $10, have been notoriously volatile. A year ago, after a huge uptick, the market crashed amid reports of penny-stock scammers with ill-conceived cannabis ventures.
“The early indexes that are trying to follow this industry are down 70, 80, 90 percent,” said Morgan Paxhia, co-founder of Poseidon Asset Management, a San Francisco hedge fund specializing in cannabis business investment. “Prices were completely out of whack. Ninety percent of companies are going to go to zero. They didn’t have business models. They had no products. They had press releases.”
A private investment portfolio manager and former municipal bond trader, Paxhia, 32, founded Poseidon with his sister Emily Paxhia, 35, a corporate branding consultant. As many speculators fled a crashing marijuana investment market, the two corporate professionals jumped in. Their upstart Poseidon fund advertises that it “navigates uncharted waters” to find “attractive opportunities” where “timid souls dare not tread.”
Poiseidon, an early investor in MassRoots, has helped capitalize 27 pot ventures, including marijuana laboratory testing, sales technologies and other services in 10 states. It has also invested in medical marijuana cultivation in Canada.
So far, Poiseidon had avoided direct ownership in any pot farms in California due to lack of state regulations. Yet Morgan Paxhia said the firm recently made strategic loans to two Northern California cultivation ventures. He said they were selected in anticipation of a future state-governed medical marijuana market and potential recreational legalization.
“They are well-run operations, forward-thinking, that we think will transition through this gray world we’re in now,” he said.
Back at the ArcView pitch forum, the only gray world seemed to exist in the billowing cloud of cannabis vapor projected onscreen.
That was the backdrop as Neeraj Bhardwaj and Andrew Bleloch took the stage. The partners in Loto Labs Inc. in Redwood City were pitching their “smart vaporizer” called Evoke, which they said uses patented magnetic technology to enhance the inhalation experience.
Bhardwaj is a former business development manager for National Semiconductor in Santa Clara. Bleloch is a professor of physics from Liverpool University. Their presentation underscored the nascent marriage of pot and tech, as inventors and innovators made glitzy presentations, using words like “phenomenon,” “monetize” and “dominate.”
But it was Dietrich from MassRoots who particularly shined on stage. This was his fifth appearance before the ArcView investors. Each time, he reaped increased capitalization for the social network, in which member “buds” with names such as “puffingmama” share photos of their crystalline pot strains and risqué toking experiences.
MassRoots’ over-the-counter stock was then trading at $1.25 (and recently hovered near a dollar) and the company had yet to post a profit. But Dietrich said he was hiring prized people from technology firms, lured by the promise of lucrative stock options. He exhorted the gathering: “I need to have an indication tonight as to how much you are willing to invest.”
His demand for $8 million turned out to be overly audacious. But Dietrich wasn’t disappointed. He walked away a day later with $1,018,000 in new investments, his biggest take to date.
“That’s a million dollars, still,” he said with a smile. “I’ll be back on the stage again, and raising more money at a higher valuation.”
Photo: Keith McCarty was one of the early founders of Yammer, a business social network that was sold to Microsoft for $1.2 billion. More recently, he founded Eaze, an app-driven marijuana delivery service in use in 85 cities. Manny Crisostomo firstname.lastname@example.org