Venture Investors Light Up Cannabis Startups

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Editor’s Note: Christine Magee is an editor for CrunchBase.

As American lawmakers legalize cannabis in a handful of states and decriminalize it in others, “potrepreneurs” are emerging from the shadows to bring tech to the cannabis community.

There’s Weedmaps, the Google Maps for tracking down dispensaries, Leafly, the Yelp-like rate and review platform for various strains of the plant, and MassRoots, the social network for marijuana enthusiasts.

Not surprisingly, venture capitalists had taken a (puff puff) pass on investments in cannabis startups – until now. Recently, all signs point to a revolution budding in the cannabis tech industry.

In the past year, CrunchBase has recorded 29 venture investments in cannabis startups for a total of nearly $90 million in capital committed – and this is not including the reported $75 million Series B for Seattle-based Privateer, rumored to list Peter Thiel’s Founder’s Fund as an investor.

Granted, the majority of this money is going into companies based in Canada, where medical marijuana use has been federally legalized. But participation from U.S. funds is rising, and networks like ArcView Group are growing quickly with a mission to facilitate investments in the cannabis sector.

And for good reason. Over 12 million Americans are daily or near daily cannabis consumers. Medical and non-medical use is legal in four U.S. states – Washington, Oregon, Colorado and Alaska – with additional states voting on the issue again in 2016. Cannabis has very high profit margins, and the attention to detail from both the producers and consumers of the product leaves a lot of room for tech innovation.

“We started looking at the cannabis space about 2 years ago. It took us a really long time to get comfortable, both from the federal level and the maturity level of the startups and entrepreneurs in the space,” says Douglas Leighton of Dutchess Capital.

Then Leighton met Isaac Dietrich, a finalist for Peter Thiel’s 20 under 20, who immediately caught his attention. Leighton’s Dutchess Opportunity Fund contributed to a Series A for Dietrich’s MassRoots, a social network for marijuana users.

Deitrich started MassRoots last April for his friends who were unable to post about marijuana on Facebook or Instagram. “I wouldn’t want my grandma seeing a picture of me taking bong rips on Facebook either,” Dietrich acknowledges.

But a year and a half later, MassRoots has proven it’s much more than just a social platform for stoners. “We are up to 3 million posts now on our network, and tens of millions of data points across all of the posts that we can analyze to help dispensaries carry what consumers want, but also help investment funds make decisions based on data,” says Dietrich.

“LinkedIn is your professional profile, Tinder is your dating profile, and MassRoots is your cannabis profile,” says Leighton. Dutchess has recorded 14 investments in cannabis startups in the past year, from vaporizer companies to licensing companies.

“It’s a less mature space, and you’ve got some stigma to get over, but I think that the bow has broken on the talent problem — we’re entering into a space where we’re starting to see some more really quality teams going after this,” says Troy Dayton, CEO of cannabis investor network ArcView Group.

ArcView helps cannabis startups leverage their membership to grow, from weekly webinars to quarterly pitch-offs in front of an investor audience. “For the most part ArcView’s not involved in the deals,” says Dayton, “but in the last year or so there’s been over 18 million dollars invested in 34 companies (that we know of) that have pitched from ArcView.”

ArcView’s members range from real estate investors to organic food industry leaders, but Dayton reports that they’re seeing a lot more involvement from tech entrepreneurs and investors in the past year.

“While there is a stigma against the cannabis industry from the public perspective overall, that’s something that’s going to change,” says Brian Sheng, Founding Partner at Fresh VC.

Fresh VC is one of the few broadly focused venture firms to invest in a cannabis startup, contributing to a $1.5 million seed round for medical marijuana delivery startup Eaze earlier this year. “As an on-demand delivery company, Eaze is part of our investment thesis, we really believe in Keith the founder, and we think at the same time that this is a vastly growing industry,” says Sheng.

Founded by Keith McCarty, one of the first employees at Yammer, which was acquired by Microsoft in 2012, Eaze represents a new kind of startup in the market — one with an executive who comes from a seasoned tech background.

“We were really bullish on the on-demand service industry, so we started to look at pillars that made companies like Uber successful, with the underlying tech being on-demand,” says McCarty, “and cannabis kept coming up.” Eaze launched in late July, and McCarty says they had little trouble raising money despite the stigma around the industry.

Still, Eaze is not technically “touching the plant” — an important distinction that separates companies that are dealing with the physical product or handling transactions from those that are not.

“The industry has sort of bifurcated into two parts of investing – one is touching the plant, and one is not. A lot of people will not make an investment that is touching the plant because of the federal implications,” clarifies Leighton.

Eaze, for instance, partners with dispensaries, so the drivers making the deliveries and collecting the money are employed by the dispensaries, not by Eaze. By operating in San Francisco where medical cannabis has been legalized, and verifying that all users hold a medical cannabis card, Eaze is legally in the clear.

But the stigma is beginning to wear off, and companies that are touching the plant, like Privateer, are becoming increasingly more appealing to venture investors.

“It’s both an opportunity and a drawback from a business standpoint,” says Dayton. “If you believe at some point in the next three years that those barriers are going to go down and that federal legalization will occur in the next 5-7 years, then the fact that there are current barriers now is a huge opportunity because it gives the little guy a chance to really make a play at this in various regional markets without competition from big multinational companies taking over the space.”

“And for a startup that’s great — it’s great to have a niche where the big state doesn’t have a chance to play.”

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