Pubdate: Mon, 08 Apr 2013
Source: USA Today (US)
Copyright: 2013 USA TODAY, a division of Gannett Co. Inc
Contact: http://mapinc.org/url/625HdBMl
Website: http://www.usatoday.com/printedition/news/index.htm
Details: http://www.mapinc.org/media/466
Author: Tim Mullaney
Page: 1A

THESE GUYS ARE HIGH ON POT

They Might Not Use Marijuana, but They and Other Investors Predict an 
Industry Worth Billions of Dollars

Brendan Kennedy and Michael Blue are nice boys. Really. They're 
bankers. Yale MBA classmates. Wearers of ties. And, if luck and 
changing laws cooperate, they'll be drug barons of a certain kind.

Kennedy, 40, and Blue, 34, are in the vanguard springing up to seize 
the market for legal marijuana, which is accelerating with last 
fall's legalization of most personal pot consumption in Colorado and 
Washington state. They're running a Seattle private-equity fund, 
Privateer Holdings, designed to buy up the smaller marijuana-related 
businesses to create one big fat one.

After Washington and Colorado, the pot business is, if not 
mainstream, at least ready to push toward it. Advocates hope to 
legalize personal use in another 14 states by 2017, mostly among the 
16 states besides Washington and Colorado where medical pot is legal 
(it's also legal in Washington, D.C.). Industry estimates say today's 
$1.5 billion legal market could quadruple by 2018.

The public is trending toward legalization. In a Pew Research Center 
poll released Thursday, a majority of Americans (52%) favored 
legalization, the first time that threshold has been reached since 
polling on the issue began in 1969.

What's striking is how conventional many of the business people's 
backgrounds - and their plans - increasingly are. Instead of backing 
marijuana dispensaries, investors such as Privateer and San 
Francisco-based ArcView Group are rushing to find consulting firms, 
software companies and insurance agencies to serve the new market. 
Even Privateer's strategy of merging small companies to form a big 
one is familiar: In traditional buyout shops, it's called a "roll-up."

Just don't say that word to Kennedy, unless you want him to blush. 
Scratch the term "growing the business" - he catches that one in 
mid-sentence, correcting his wording to "expand." And forget weed, 
ganja or pot. He uses the scientific term, cannabis. And the cannabis 
business is good, he says.

"We're building the first all-inclusive name brand in the cannabis 
business," Kennedy declares earnestly. "And it doesn't include Bob 
Marley, or the Grateful Dead, or ..."

"Or puns," Blue says drolly. "There are so many."

Jokes aside, the striking thing about the new gold rush in pot is how 
familiar it sounds to people used to the technology business.

Just like Silicon Valley entrepreneurs, start-up pot investors such 
as Kennedy, Blue and ArcView CEO Troy Dayton - whose company runs an 
angel-investor network matching companies with rich activists - talk 
about how big and fragmented the market is, and how the relative 
handful of legal businesses out there lack the leadership and tools 
they need to (sorry, Mr. Kennedy) grow the industry. That leaves the 
field open for people who can bring capital and experience, they say.

That part is true. The best way to estimate the potential size of the 
legal market for cannabis begins with the illegal market - which is 
somewhere north of $18 billion a year in pot Americans consume 
already, says Harvard economist Jeffrey Miron. The trade journal 
Medical Marijuana Business Daily says the $1.5 billion legal market 
could reach $6 billion by 2018.

The challenges are myriad. Some are specific to selling a product 
still illegal in most states. But others are very ordinary, thanks 
partly to the business' Bohemian roots.

"It's not an industry loaded with operating talent," says Josh Rosen, 
a former Credit Suisse stock analyst who runs Phoenix-based MC 
Advisors, which backs renewable-energy companies and is, well, 
experimenting with pot. "But the economics are very similar to other 
businesses. You can run a Harvard Business School analysis."

It's hard to say exactly how many people are trying to make pot a 
business like any other. About 2,000 legal dispensaries are open 
around the United States, estimates Kris Krane, managing director of 
Phoenix-based consulting firm 4Front Advisors. Privateer and Dayton's 
group are the biggest publicly announced clusters of investors. There 
are even a handful of public companies: The most valuable, San 
Diego-based Medical Marijuana, is worth about $200 million.

Increasingly, the cultural overlap between the pot business and just 
plain business is occurring because they're attracting the same people.

Adam Wiggins, a member of Dayton's investor network, sold 
softwareas-a-service company Heroku to Salesforce.com for $250 
million. Alan Valdes, chairman of Seattle-based Diego Pellicer - 
which plans 24 upscale marijuana shops as the anchor of what he hopes 
will become a Harley-Davidson-like lifestyle brand - is director of 
stock-exchange-floor operations for DME Securities. He appears 
sometimes on CNBC, talking about stocks. Kennedy, meanwhile, came 
from Silicon Valley Bank.

"The industry has grown up a lot since we launched in 2011," says 
Chris Walsh, editor of Medical Marijuana Business Daily. "It was the 
activists and hippies. We're seeing more grown-ups over the past two 
years, and accelerating in the last six months."

Others involved still have an eye on the politics of the industry, as 
well as the economics. Dayton, for example, was chief fundraiser for 
the pro-legalization Marijuana Policy Project until 2010. Wiggins, 
who's on MPP's board, says they're not mutually exclusive. "Almost 
any software you can think of is made by someone who enjoys a toke," he says.

BUT STILL DIFFERENT

Even so, selling pot is a federal crime - something that seeps into 
business conversations like smoke wafting under bedroom doors.

Many investors, including Privateer, plan to cut their risk by not 
buying and selling marijuana itself, Kennedy and Dayton say. MJ 
Freeway Software Solutions helps pot dispensary owners document 
supply chains once considered evidence of conspiracies, while Krane 
advises them on how to adapt best practices on prosaic issues such as 
store design and human resources policy from top retailers such as Old Navy.

Privateer's first buy was Leafly, a Yelp-like website and mobile app 
that reviews 500-plus strains of cannabis, luring 2.3 million monthly 
visitors. The heavy traffic has allowed Leafly to begin selling ads. 
Several help pot entrepreneurs who can't otherwise buy insurance 
because most insurers think their businesses are too risky, says 
Patrick McManamon, managing director of Cleveland agency Cannassure.

The people at the most legal risk, Kennedy and Blue reason, are 
marijuana dispensary owners, because the federal government could 
raid the stores and confiscate the investment. That stance may 
represent an abundance of caution: President Obama, whose memoir 
paints him as a regular pot smoker in his high school days, said in 
December that prosecutors have "bigger fish to fry" than recreational 
pot users.

"We've never seen a consulting firm become a target," Krane says.

Citing a 2009 Department of Justice memo that said federal 
prosecutors shouldn't use resources to pursue marijuana businesses 
clearly complying with state law, he says he should be safe if he 
only serves clients licensed in their home states. But a different 
DOJ memo in 2011 said large-scale pot growing, even for medical 
marijuana shops, is still illegal, even when federal law allows it. 
Attorney General Eric Holder told a Senate committee last month that 
the department is still working on its response to Colorado's and 
Washington's new laws.

For Amy Poinsett and Jessica Billingsley, who run Denver-based MJ 
Freeway, helping store owners keep track of valuable product from 
field through the cash register is a valid software market: They sell 
to about 400 legal stores in the 16 medical marijuana states, making 
their 2year-old company profitable.

Wiggins was impressed enough to agree to invest in MJ this year. Its 
software illustrates that pot markets will behave like other markets 
- - they'll get more capital-intensive, more concentrated and more 
professional, assuming legalization spreads, he says. "I'm definitely 
a capitalist," he says. "And the operations technology always tends 
to be where the biggest change comes.'"

STILL A GAMBLE

Nothing about the rapid growth of marijuana markets, or even the 
hands-off-the-pot business strategy, is an automatic winner.

Clearly, the feds could cripple the business. Even the strategy of 
profiting from marijuana without touching it could run afoul of 
money-laundering laws, if those services are bought with drug 
proceeds, says UCLA professor Mark A.R. Kleiman, who is advising 
Washington's liquor board on regulating legal pot stores.

There's also a good chance that a legal pot market won't expand 
consumption as much as entrepreneurs think, Miron says. Colorado and 
California have already seen a sharp consolidation of 
medical-marijuana shops opened by people who thought the market would 
take off faster. A referendum on the ballot in Los Angeles in May 
would limit the number of shops to 135 that opened by 2007. Careful 
regulation could also hurt a business that, like the alcohol 
industry, stands to make most of its profits from the few people who 
consume too much, Kleiman says.

"To the extent that there's money to be made, a lot of it is already 
being made," by illegal operations, Miron says. "The notion that 
there will be new wealth is exaggerated."

That uncertainty doesn't bother those lining up for a green rush.

The marijuana business is packed with people who aren't much on 
conventional opinion, and pot smokers are used to legal risk, Rosen says.

Wiggins says the open-source software industry that made him rich 
"used to be a long-haired hippie business, too." Risk means less 
competition, because the weak-kneed won't jump in, Rosen says. "The 
extra layer of risk is where the opportunity comes from," he notes.

And, yeah, for some entrepreneurs and investors, a joint's lingering 
ability to shock is also part of the appeal.

Take Billingsley, MJ Freeway's chief operating officer. The 
35-year-old mom lives in red-state Georgia, works on one of the most 
boring pieces of the drug business imaginable and looks basically 
like any other small-business owner who has spent a dozen years doing 
information technology consulting. Yet she gets her own little buzz 
from messing with neighbors' heads, strategically doling out the news 
of what she does for a living.

"I used to be very circumspect about it," she says, laughing. "Now 
when I get bored at a kids' function, I just drop the bomb."
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MAP posted-by: Jay Bergstrom