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High Spirits at Pot Party for Investors

(Bloomberg) -- Inside a Brooklyn ballroom, investors smoothed their suits and opened their iPads, preparing for a day of sizing up hungry entrepreneurs and impassioned lobbyists.

One after another, startup founders took to the stage, making their cases for a round of venture capital. There was a building materials manufacturer, a catering company and, as one would expect, the inventor of a vaporizer.

It was high time to monetize pot.

Here at the Investor Pitch Forum this week, hosted by the cannabis industry investment and research firm The Arcview Group, some 200 investors Arcview described as "high net worth" met with dozens of companies looking to cash in on the promising new market of legal recreational marijuana.

Cultivating Spirits, a caterer that pairs organic dishes with fine wines and just the right weed, got the attention of more than a dozen investors. Philip Wolf, who started the Silverthorne, Colo., company in early 2014, melded laid-back Colorado with high-powered New York in a snappily fitted suit and long hair coiffed in a bun.

Mule Extracts, a cannabis-oil extraction company, generated some buzz, too. Chief Executive Officer Rachel E. Kurtz made it through a Shark Tank-style wringer and came out the other end to applause, hopeful of finding an investor at the forum.

It's a good time to be investing in the space, at least in terms of market expansion. Recreational weed is already legal in Colorado, Alaska, Oregon, Washington, and Washington D.C., and it's on the ballot in nine states in November. If California legalizes it, the industry could triple in size, to $18 billion. Analysts expect it to balloon to $50 billion by 2026.

Investors at the forum constantly and animatedly discussed the legalization efforts, which will have a big impact on their returns. Arcview CEO Troy Dayton stressed the importance of lobbying efforts in key states, including California, and expressed frustration with the Drug Enforcement Administration, which has maintained marijuana as a schedule 1 drug. Such was the animus in the room against benighted drug policy that at one point it took Dayton halfway around the world to the Philippines for a weary, unexpected aside about President Rodrigo Duterte and the nation's harsh anti-drug measures.

The fieriest speech was delivered by Ellen Flenniken, managing director of development at the Drug Policy Alliance, an organization that pushes for legalization, seeking to "roll back the excesses of the drug war ... and promote sensible drug policy reforms." Flenniken asked investors to donate to lobbying efforts that could turn the vote in their favor in such battleground states as Nevada and Arizona. There, legalization faces opposition from casino magnate Sheldon Adelson, a longtime opponent, and the pharmaceutical industry, whose prescription painkillers could be undercut by marijuana.

Following her plea, the emcee asked if anyone in the crowd would donate $100,000 to the cause, a request met with crickets. The ask was lowered to $50,000, then $25,000, before several bit at $10,000. More donations rolled in at $5,000 and $1,000, and others were written down privately, without the fanfare of a public announcement in a room full of peers.

The caution shows the divide between the cannabis movement as inspired by principle and as driven by commerce. It doesn't make business sense for entrepreneurs and investors to push too hard for federal legalization. As it is, the fledgling industry enjoys protection against the giants of tobacco, pharma, and alcohol.

Although a recent poll found that most Americans support legalizing marijuana, it remains to be seen how many will dabble in recreational use. A review of about 40,000 legal marijuana purchases made in Washington State from September 2014 to July 2016 found that the average consumer spent $647 annually on the pleasure/vice. The yearly expenditure on tobacco smoking is $2,555 and $1,560 for alcohol, according to data from Bankrate.

And fast-growing industries are prone to shakeouts. Investor-members of Arcview, which was founded in 2010, have put $83 million into 130 companies in the cannabis industry, drawing from more than 500 investors. If distributed evenly, that isn't much capital per startup. Out of so many seeds sown, a few may flourish and provide big returns. The people who wind up funding the many that don't make it will be disappointed.

Investors might be wise to get in on weed before it sweeps the nation. But it has a long way to go before it catches up with the more than $200 billion in revenue that alcohol brings in every year.

To contact the authors of this story: Polly Mosendz in New York at [email protected] Jennifer Kaplan in New York at [email protected] To contact the editor responsible for this story: Peter Jeffrey at [email protected]

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