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The Greed Rush: Venture Capital Enters Cannabis 

Wednesday, Apr 20 2016
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Meadow — an inventory management platform that also handles the patient recommendation intake and verification for the dispensary — solves both issues, and is now used by a significant portion of the dispensaries and delivery services. It's a perfect investment vehicle: It's software, so it can scale up almost immediately. And since it doesn't directly touch the plant, the risk is significantly reduced. All of this helped when Meadow won a "Crunchie" last year for Best Boot Strapped Startup from the tech news site TechCrunch.

Meadow exploits a market inefficiency in the cannabis industry, but it also follows the Silicon Valley model of having a team with some past success and a business model. His investors, Hua says, don't see it as a weed investment as much as they do any other business.

"They are people who invest in startups," he says. "They're looking at the team, and they're looking at the market."

But big money — the biggest money — is still staying away, in part because a company like Meadow is still too small to attract attention from the kinds of VCs who are betting on companies valued in the hundreds of millions of dollars.

The firms who publicly announce their interests in cannabis still look a lot like Poseidon Asset Management, a San Francisco firm that bills itself as the "pioneer cannabis hedge fund." Started by brother-and-sister Morgan and Emily Paxhia, both of whom dress and talk as if they were working in Manhattan, the fund works with individuals with a net worth of about $10 million who are willing to drop at least $100,000 into their pool of companies. (They won't name their partner companies, but note one does cannabis-laced dog-treats, and they also invested in Meadow.) For now, they are based out of WeWork, a co-working space on a formerly dodgy block in South of Market.

"This is a market that is super inefficient but yet has a lot of opportunity and a base of pent-up demand," Emily Paxhia says.

Many of the investors Poseidon and other fledgling cannabis funds initially worked with knew very little about the industry, allowing the funds to do the research for them. The funds, in turn, looked for teams that had business sophistication recognizable to veterans of other capital-backed industries. That was once a rarity in cannabis; that's changed.

"We are seeing many more Ph.D.s and MBAs and years of strong business experience coming in," says Al Foreman, a former JP Morgan investment banker who is now a partner in Tuatuara Capital, a New York City investment firm that announced a $26 million fundraising round last summer — followed by a partnership with country music legend Willie Nelson to sell a "Willie's Reserve" brand of cannabis in Colorado and Washington state.

Startups that touch the plant have to work harder to find the right investors, even if they have that kind of management team in place that's both attractive to capital and willing to take it on. It took Michael Steinmetz, another tech sector alum who is co-founder and CEO of Flow Kana — a farm-to-table delivery startup that hopes to enter the wholesale market as a brand of heirloom, outdoor organic cannabis — six months to fund his company when he was planning on only three.

"I got a lot of nos up front," he says, in a lightning-fast patter with a hint of an accent from his native Venezuela.

While he won't identify his backers or where they got their capital from, he describes them as older investors, with enough success behind them that they were willing to take a bet on something new.

"One told me, 'I'm too old to invest for money,'" he says. "'I want to see cool shit out in the world.'" (There were plenty of shark-like types from dubious firms and "accelerators" who may as well have been flipping housing, he added. But those meetings ended quickly. "They were scummy, bro.")

Flow Kana's business model relies on small farmers. Based in remote hills in places like Mendocino County, they are able to use the company's platform to get their names known — and perhaps to become brands — and to get their product to market.

California's small farmers may have the most to lose as cannabis takes on capital investment. Though none who would go on the record could be found, some of the biggest buy-ins have been in production facilities.

"Everybody and their mother is growing right now," Steinmetz says. "There are huge commercial grows ... the amount of cannabis that's going to come on line in the next few years is three to five times what it is now."

Competing with that kind of volume will require cooperation heretofore unseen in the state's cannabis-producing regions, where processing is still done on-site at small farms, by unskilled labor — the famous "trimmigrants" of the Emerald Triangle. To stay afloat, Steinmetz sees a co-op model similar to coffee or cacao beans, where multiple small farms share a production and processing facility.

Building something like that will take capital. In other words, to beat Big Pot, you have to play its game.

"Pretending we can build this industry without capital is false," he says. "There is so much that needs to get better. And the only way to do that is to get investor money."


The last time I spoke to Steve DeAngelo in person, the pigtailed and porkpie-hat-wearing co-founder and public face of Oakland's Harborside Health Center — by reputation and self-proclamation the biggest cannabis retail outlet in the country — was at the head of a protest, where an angry crowd holding signs calling for the federal government to lay off his business, which had just been served with an asset forfeiture lawsuit by the federal Justice Department.

When I meet him at his second-floor suite in a small office park near the Oakland waterfront on a recent morning, he's blasting Bob Marley from his Spotify account as his two Chihuahua mixes flit about the room in between resting on office chairs. Marley Natural will launch at Harborside the following week, and DeAngelo is trying to "reconnect" with Bob prior to the big day. (Not that Harborside needs the business; when I visit the dispensary, a few minutes away up the Oakland Embarcadero, it takes me almost half an hour to make my way through a 30-person deep line to one of the eight sales counters — in the middle of the day on a Thursday.)

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About The Author

Chris Roberts

Bio:
Chris Roberts has spent most of his adult life working in San Francisco news media, which is to say he's still a teenager in Middle American years. He has covered marijuana, drug policy, and politics for SF Weekly since 2009.

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