As sellers of a product deemed illegal by the federal government, many marijuana entrepreneurs are often denied bank loans or deposit accounts and struggle to attract financing from private investors. But with nearly half of state governments legalizing marijuana for medical and recreational purposes, investing in marijuana-related businesses is becoming more popular.
Private investors once reluctant to open their pocketbooks have now signed partnerships with marijuana entrepreneurs in Colorado. “People are realizing that this is the next great American industry,” said Troy Dayton, co-founder and CEO of ArcView, a San Francisco-based network connecting investors with marijuana-related companies.
When Dayton launched ArcView in November 2011, growth for the business looked bleak. At the same time, federal agents were launching a series of raids on California medical marijuana dispensaries. Needless to say, investors were discouraged from opening up their pocketbooks.
In 2011, the medical marijuana industry alone was estimated to be worth about $1.7 billion. In Colorado, medical marijuana sales were more than $181 million in 2010 and employed 4,200 state-licensed workers.
Brendan Kennedy is an investor in the marijuana industry. After six months of research and interviews with growers, dispensaries, trade publications and political organizations, he estimates the American marijuana market is worth $50 billion. An investment in marijuana benefits more than just those growing and selling the plant, he says — other businesses such as insurers, lawyers and agricultural-equipment firms also benefit.
“Call it the ‘green rush,’” said Derek Peterson, CEO of GrowOp Technology, an online retailer of products used in the cultivation of indoor plants. “The industry is expanding, and there are all kinds of investment opportunities.”
Investment fears
Dan Williams is the president of Denver-based Canna Security America, a firm that installs security systems at marijuana dispensaries and grow operations. He said it has been a struggle to find funds to grow his business because he has not been able to access traditional sources of financing — even though his company has no physical contact with marijuana.
Williams started his business in 2009 and said he didn’t even bother applying for a bank loan because banks are afraid to back marijuana-related businesses out of fear they will be punished.
“We were a zero-capital startup,” Williams said. “We would do a job so that we could go buy a ladder. Then we would do another job so we could buy business cards.”
Marijuana entrepreneur Tripp Keber experienced something similar. When he started Dixie Elixirs & Edibles, a wholesaler of pot-infused foods and beverages, he had to use personal funds from non-marijuana business ventures and didn’t draw a paycheck for about 2.5 years.
“I couldn’t go to Wells Fargo and get a business loan,” Keber said.
But Dayton and others in the industry were inspired to keep going by the announcement that voters in Colorado and Washington would consider ballot measures to legalize recreational marijuana in November 2012.
“Either we were going to commiserate together or celebrate together,” Dayton said. “Before [Colorado’s ballot measure passed], we looked like an industry contracting. Now the energy is palpable.”
Though the federal government has not yet announced how it plans to handle state-level legalization of marijuana, it appears many marijuana-related companies are preparing for an announcement in their favor. A pro-marijuana announcement from the Obama administration would also likely result in a plethora of investors ready to contribute, since the likelihood of a federal raid against a dispensary or recreational marijuana store would drop.
California legalized medical marijuana in 1996, but has been a hotbed of activity for the federal government’s crackdown ever since. Some cities in California have banned dispensaries, since the state Supreme Court has ruled each city is free to decide whether to implement the state’s law or follow the federal ban.
The process to open a dispensary varies in each state. In California, opening a legal dispensary costs between $30,000 and $500,000 depending on location and the size of the business — and that’s if the owner does all of the paperwork and manages legal compliance issues themselves. If an owner opts to hire a contractor, the costs increase to between $100,000 and $200,000.
In order to comply with California state legislation when opening a dispensary, one must:
— File articles of incorporation under the Corporations or Food and Agricultural Code.
— Obtain the proper forms to open the business.
–Regulate dispensary membership.
— Only buy and sell marijuana from dispensary members.
— Not earn profit off of marijuana sales.
— Keep track of marijuana from the time it’s planted to the time it’s sold.
— Establish security practices.
Even if a dispensary follows all state laws, there is still a risk of federal prosecution. And since a dispensary could cost a minimum of $30,000 to open, only a handful of relatively wealthy marijuana advocates have been able to successfully open dispensaries without loans from a bank or investors.
Things are looking up
Earlier this month, ArcView announced its first investments — $2 million worth — would be split among five companies, including Williams’ Canna Security America.
One company, MJ Freeway, has benefited directly from these ArcView investments and has recently become an investor itself. Like Canna Security America, Colorado-based MJ Freeway doesn’t handle marijuana directly, but provides software to track marijuana from cultivation to sale.
“It was not easy at all to get started,” MJ Freeway co-founder Jessica Billingsley said. “We were bootstrapped, self-funded. There were a number of times when we had to double down on our investment.”
“We thought that as software providers, we wouldn’t face this degree of (financing) challenges,” co-founder Amy Poinsett said.
Three years later, MJ Freeway has hundreds of clients in 12 states, Washington, D.C., and Canada. Its projected revenue for 2013 is between $1 million and $2 million.
“When you invest in cannabis,” Keber said, “you invest in America.”