Following the Money: Analyzing Capital Flow into the Legal Cannabis Industry

At our recent cannabis conference, financial services experts gathered to discuss the evolution of cannabis-related investments. A panel consisting of Kyle Detwiler (Northern Swan Holdings), Jeff Finkle (ARC Angel Fund), Scott Greiper (Viridian Capital Advisors, LLC), and Harrison Phillips (Viridian Capital Advisors, LLC) talked about specific investor trends, and how these trends will shift as the industry begins to mature. Below are a few highlights from that discussion.

What are the current investor types? When will traditional VC and PE funds do more than “dip their toes?” 
Cannabis-related investments have grown exponentially since 2014, in large part due to the engagement of certain cannabis-focused venture capital funds, special-purpose vehicles, family offices, tech-focused VC funds ancillary to the cannabis industry, public companies, high net-worth individuals, professional angel investors, angel networks and funds, individual partners in VC and private equity funds, and even certain accelerators. While there has also been some traditional VC and PE fund activity over the last few years, this activity represents only 20% of the overall investments made, as the traditional VC and PE funds are still hung up on the obvious hurdles to the industry (e.g., regulation, legality, reputation, mature capital market environment, etc.).[1] As one investor representative from the panel described the state of the investment landscape, we are currently in “Version 1,” and it is not until we move into “Version 2” that the traditional VC and PE funds will be willing to do more than dip their toes in the water.

What are some of the challenges that VC and PE investors face in the cannabis industry?
One of the biggest hurdles to attracting steady VC and PE investment activity is the uncertainty surrounding the long-term solution to conflicting federal and state laws. While cannabis remains a Schedule I drug under the Controlled Substances Act, making it illegal under federal law, many states have legalized cannabis in response to the Rohrabacher-Blumenauer Amendment that was passed in the House of Representatives, which prohibits the Department of Justice from spending funds to interfere with the implementation by states of their own laws that authorized the use, distribution, possession, or cultivation of cannabis. Federal authorities still have the power to close a cannabis dispensary and seize its assets, and this is what seems to be keeping traditional VC and PE funds on the sidelines. Other factors include reputational concerns, inconsistency with investment fund mandates, limited partners (e.g., state pension funds, endowments, universities, unions, etc.) restrictions, banking, and risk tolerance.

What’s next?
Given the cannabis industry’s numerous—including agriculture (growing and cultivating), retail, software, biotech, and various ancillary services (e.g., infrastructure, energy, manufacturing, etc.)—and the move to “Version 2,” the opportunity for mainstream VC and PE funds to invest in cannabis and cannabis-related companies will continue to grow exponentially, as it has since 2014. As such, we are likely to see VC and PE funds begin to get more creative in tackling the stigma associated with industry participation, to attract committed investors and be early-movers in the space.

[1] Viridian Ventures Fund I, LP

Image courtesy of Marijuana.com