2013 was an interesting year for the people in Colorado and Washington. For the first time in history, the two states have become the first ones to legalize recreational marijuana, with retail sales starting in January 2014 in Colorado and later that year in Washington. The news not only pleased pot consumers in general, but also sparked interest in some non-smokers too, especially VC like Justin Hartfield, one of the first people who has been actively raising money to invest in the future of legalized, or recreational weed. But what exactly are investors investing in and what will the future of this industry most likely be? “A potential $200 billion industry,” Hartfield suggests.
The Business of Weed
Perhaps, most of us would think the business model of weed is simple: someone plants the cannabis, collects the leaves, and sends off the final products to the market. Much similar to growing corn, right? Yes, but only during the post industrialized-period. Once the US federal law legalizes marijuana, scientists and businessmen will transfer the whole industry, just as what they have done to corn, from constantly experimenting genetic alteration, to expanding the economy of scales in every aspect of raising weed, and in turn exerting impact on other industries.
“We are looking at all the opportunities that exist to the side of that [raising weed], in the ancillary business, particularly technology—both software and hardware—and also in medicine, product development,” Hartfield explains. He highlights that, besides using the plant directly, people should not only expect to see new product development like marijuana-flavored foods and drinks, but also a whole new business movement, where weed is the central theme.
For example, apparel designers can play around with the symbol of weed more; technology companies can build websites and mobile apps for weed related services; or bio-tech firms can research more about weed to include it in their current or future products. It is likely that legalization of marijuana will also affect the entertainment and retail industries.
This idea may sound wild but since the alcohol and cigarette industries—industries already associated with marijuana—have been impacting the entertainment and retail industries for decades, the opportunities for weed to influence these industries are there.
Despite the promising future of marijuana, before 2015, many investors were reluctant to give their money away because (1) the Fed might never legalize marijuana and (2) investing in pot, a sensitive industry, might harm their current reputation. As of April 2015, 23 states have legalized marijuana, 10 times increase in number since 2013. At this rate, pot-business owners are confident that the remaining states will more than likely legalize marijuana soon.
In terms of investor taste, Founders Fund, a VC firm from San Francisco, has changed the investing landscape. In January 2015, the management team at Founders Fund has invested an undisclosed amount in Series B—second round in a varied number of subsequent rounds—funding to Privateer Holdings, a private equity firm focusing on the legal cannabis industry. With this investment, Founders Fund implies that it will spend more capital and resources on the lobby floor, advocating for the legalization of marijuana.
Since Founders Fund was an early investor of Facebook, PayPal, and other current successful companies, such a move not only gives more confidence to current or interested investors, but also attracts attention from the general public. “They’re going to wake up in a panic and they’re going to say, ‘A bunch of smart people at Founders Fund have been looking at this industry for the past year and a half and made this investment,’” Brendan Kennedy, one of Privateer’s cofounders, concludes. “They will see it as a watershed event on the transition from the state of prohibition to a state of legalization.” In addition, by having a reputable firm invested in a sensitive industry, the problem of reputational risk could be mitigated.
Marijuana has come a long way
The idea of marijuana legalization is not new. In 1996, California was the first state that allowed people with prescription to buy marijuana, a practice that had initiated other states to follow. The history of using marijuana for medical purposes roots back to the 1850s, during which time the US Pharmacopeia claimed marijuana help mitigate some illnesses’ symptoms.
However, in the early 1900s, faced with public pressure in restoring the old American values, most states passed prohibition laws against marijuana and alcohol. And while the public’s prejudice towards alcohol has gradually lessened, their view for marijuana remained controversial.
However, in 2013, this public perception changed: More people supported the legalization of marijuana than ever (see graph, right). This change in public perception, which was validated by the adoption of commercialized weed in Colorado and Washington, could not escape the eyes of investors.
Now the law has favored the use of recreational marijuana, but is the business of pot ethically right? To answer this question, let’s first focus on what makes selling marijuana bad in the first place.
In the past, the most debatable argument against smoking marijuana was it caused addiction. However, after numerous studies and experiments, the argument is now proven invalid. In fact, it is one of the main reasons why weed is now legalized. The second argument comes from the harmful effects smoking weed has on its user.
Probably, the most intoxicating chemical in marijuana is THC (Tetrahydrocannabinol), which is said to cause impair in short-term memory, as well as decision-making ability, and depression in the long term. However, in exchange for these potential harmful effects, THC stimulates the user’s reward system in the brain, helping the user immediately experience moments of relaxation and calm. For those who value the old American value of individualism, this is clearly the matter of choice. That’s right, you have the right to do whatever you want, as long as it is legal and harmless to others.
Thus, the business of weed is not ethically wrong. However, as for any business whose jobs is to provide excellent products or services to its end-customers, it has the obligation to inform the customers everything they need to know about the provided products and services. Since we have encountered slogan like “Drink Responsibly” from alcoholic beverages companies like Heineken or Tiger Beer, we should expect to see boards of “Smoke Responsibly” around town soon.
Historically, legal concerns and public perceptions have hindered the development of the recreational weed industry. However, everything has changed and some investors are confident in the future of legalized weed. If you are interested in learning more about this subject, pay a visit to www.foundersfund.com or www.privateerholdings.com. Whether you support the idea or not, one thing you cannot deny: America is rolling higher and higher than before.