Here's a question for all you capitalists: What do you think the chances are that institutional investors would want to invest in one of the nation's fastest growing legal industries? This industry grew by 64 percent from 2013 to 2014 - a faster growth rate than seen in the global expansion of smart phones - and is expected to exceed $10 billion by 2018.
If you guessed investors would be flocking to get in on this market, you would be wrong. And that's because the market in question is the legitimate marijuana industry.
According to ArcView Group, the legal U.S. cannabis industry was worth $1.5 billion in 2013 and is forecasted to reach $2.6 billion by the end of 2014 and $10.2 billion by 2018. So why aren't institutional investors adding their capital to this positive growth trajectory?
Despite the industry's exceptional numbers and predicted growth rates, investors have sidelined themselves for one reason: social stigma. Yes, the stigma historically associated with marijuana is the primary reason that large sources of capital, including private equity, hedge funds and institutions, are not entering the sector. They are paralyzed by the fear that their portfolios might fall apart if it became known they were seeking to profit from cannabis.
This is the reality I recently confronted when I launched a drive to raise investment capital for my company. With six years of experience in the legitimate marijuana business, I'm the Managing Partner of MedMen, the only turnkey management company in the cannabis industry. I'm a serial entrepreneur with extensive experience building successful businesses, so I expected investors to respond favorably to the numbers I had at my fingertips.
Our industry is on fire; demand for the product is unquestionable; and our company is uniquely positioned with the infrastructure and personnel that usually make investors see dollar signs - lots of them. Guided by our CFO, the former Corporate Controller of Chobani Yogurt, who oversaw Chobani's growth from $260 million to $1.2 billion, we have skilled leadership with corporate backgrounds, a solid business plan, an excellent track record and strong financials.
It turns out that for most institutional investors, none of that matters. We are a WEED business.
Despite the numerous challenges, we were able to officially close the first round of our capital drive at the beginning of December, having raised $3.75 million, and are now working on Round Two. Most of our initial funding came from a family office in Florida. (Family offices are private companies that manage investments and trusts for a single family.) This firm was very interested in the space and ended up loving our model. It may have taken hundreds of leads to find them but we now have an exceptionally strong financial partner.
What I learned from this experience is that family offices are the closest thing to institutional investors in our industry. Luckily, some of them are large and well-capitalized. And they have greater leeway to invest creatively because they generally serve only one family. These firms don't have to worry about how their other investors might feel about the space - they have no other investors.
Finally, the reluctance of traditional institutional investors to enter the cannabis market isn't going away any time soon. Although our industry has billions of dollars on the line, those seeking to capitalize on it will have to do so through non-traditional means. That being said, those who succeed will likely be standing at the top of a very tall mountain. The stigma will then fade and the big boys of institutional capital will want to come play. They'll just have to pay a little more to get in. That's how capitalism works.