Pubdate: Sun, 01 Jun 2014
Source: San Francisco Chronicle (CA)
Copyright: 2014 Hearst Communications Inc.
Contact: http://www.sfgate.com/chronicle/submissions/#1
Website: http://www.sfgate.com/chronicle/
Details: http://www.mapinc.org/media/388
Author: Joe Garofoli
Page: D1

Marijuana Startups

FOR THIS VC, THE GRASS JUST MIGHT BE GREENER

Silicon Valley entrepreneurs love to beat their chests about how 
disruptive they are. As the trope goes, they're fearless about 
betting on the next far-out idea, whether it's driverless cars, 
private space flight or the Airbnb of parking spots.

But that bravery hasn't extended to one booming industry that's 
experiencing a 68 percent growth rate: the legal cannabis market. 
When it comes to investing in marijuana - California's largest cash 
crop - many venture capitalists are still paranoid.

"You guys are willing to invest all this money, you say you're all 
disruptive, but when the rubber meets the road and we're talking 
about real, legal disruption, you guys head for the hills," said 
Justin Hartfield, one of the nation's few venture capitalists focused 
on marijuana-related startups.

Alongside his venture capital firm Ghost Group, Hartfield, of Newport 
Beach (Orange County), runs the dispensary-locating startup 
WeedMaps.com. He brags about not accepting "one dime" of Silicon 
Valley money for any of his marijuana-related enterprises, which he 
says make "north of $25 million a year."

"Silicon Valley is totally out of touch," he said. "There's no 
dispensaries on Sand Hill Road."

Four years ago, Hartfield pitched several of the valley's top 
investors. He thought billionaire venture capitalist Tim Draper 
seemed interested. But a few weeks after they met, Draper told him he was out.

Backing out

Miffed, Hartfield relayed the incident to tech publication 
TechCrunch, including what he said Draper wrote to him: "I am going 
to chicken out. You have an awesome business, and it will probably be 
worth a ton someday, but I can't pull the trigger. Sorry, Best, Tim." 
(A representative for Draper did not return requests for comment.)

Hartfield said he does understand the institutional reticence.

Investors are worried that the federal government classifies 
marijuana as a Schedule 1 drug on par with heroin, and has been 
clamping down on medicinal marijuana outlets even in states where 
they are legal, like California.

They question whether there are enough smart, seasoned entrepreneurs 
to trust with their money. Analysts say the valley doubts that the 
legal market - which is predicted to grow to $2.57 billion this year 
- - is big enough to generate mega returns.

And there's fear about scalability. Medical marijuana is legal in 
only 22 states and the District of Columbia; recreational pot is 
permitted for adults over 21 only in Colorado and Washington.

Limited partners at traditional venture firms "are particularly 
uncomfortable with things that may create legal risk, and this is a 
big one since most government and financial institutions have strict 
antidrug and drug testing laws for their own people," said Lisa 
Suennen, a longtime health care venture capitalist now with Venture 
Valkyrie Consulting.

Many firms have outright prohibitions against investing in "sin" 
products like pornography, alcohol, tobacco, firearms and illegal drugs.

Plus, Suennen said, "It's not entirely clear that there are good 
entrepreneurs in the space in large quantity yet, as opposed to 
grown-up stoners that figured out how to monetize their addiction to 
things that maximize use of Twinkies and Grateful Dead albums. It's 
one thing when the CEO shows up in an ironic hipster Tshirt, quite 
another when that is their actual wardrobe."

Little so far

That helps explain why there was $8.5 billion of venture funding in 
San Francisco and Silicon Valley last year and just $51 million 
invested in cannabis-related businesses nationwide over the past five 
years, according to the National Venture Capital Association.

It's the venture capital equivalent of stems and seeds. But over the 
past few months, insiders say, things have been slowly, quietly 
changing. Big money and top talent is starting to smell the green.

Privateer Holdings - a marijuana-focused private-equity fund in 
Seattle - is led by Brendan Kennedy, a former executive at SVB 
Analytics, a nonbank affiliate of Silicon Valley Bank. Privateer has 
raised $22 million, and is now aiming to raise Series B of more than 
$50 million. Kennedy told Geekwire, a tech industry publication, that 
the new round will include "several institutional investors."

Tom Bollich, a cofounder of San Francisco online game company Zynga, 
just took over as chief executive of Surna, a Boulder, Colo., company 
that invests in marijuana-related businesses. Serna recently 
purchased Hydro Innovations, which creates cooling systems for 
large-scale indoor growers.

Bollich likened the nascent marijuana industry in Colorado to the 
early days of the tech sector. "This is the Silicon Valley of weed," 
Bollich told the Boulder County Business Report this month.

Grassp, a product described as the Uber for cannabis, has gained buzz 
promising to deliver medical marijuana to qualified patients in 60 
minutes with only a few keystrokes.

Analysts say one of the safest spaces to invest is pot-related 
products - high-tech hardware, like vaporizers.

Uptoke is a San Francisco company that sells sleek, cigar-size 
vaporizers for $299. Started by Berkeley engineer Jason Levin, the 
company's tagline points to its dual roots: "Silicon Valley meets 
Humboldt County."

Most of the technology has been done by "the cannabis nerds, much as 
the tech nerds were the first to delve into Silicon Valley," said 
Amanda Reiman, policy manager for the Drug Policy Alliance.

"I predict, however, that as the policies and regulations start to 
expand and incorporate more ancillary businesses, we will see greater 
involvement from the traditional tech entrepreneurs," Reiman said.

Ready to jump

Among them may be Adam Wiggins, a cofounder of San Francisco cloud 
company Heroku, which was acquired by Salesforce.com for $212 million in 2010.

Wiggins, now a board member at the Marijuana Policy Project, "hasn't 
made any investments in the sector, but is looking closely," said 
Troy Dayton, CEO of the ArcView Group, a San Francisco firm that 
counts 200 high-net-worth members like Wiggins who are looking to 
invest in cannabis-related industries.

"That is what we're seeing a lot of from the tech world. This is a 
very nascent industry, so they're thinking about how they're going to 
play," Dayton said.

Ripe for ingenuity

Just a year ago, ArcView had 30 members. This week, Dayton spoke to 
the Rockies Venture Club, an angel investors group in Denver, the 
epicenter of the legal marijuana industry. Next month, ArcView will 
hold an investors forum at the Denver Center for the Performing Arts, 
with a reception to follow at the Four Seasons Hotel.

Dayton says the marijuana industry "is so ripe for the kind of 
ingenuity that comes out of Silicon Valley."

"There's all this capital that has shown up and is ready to go, and 
yet investors are having a tough time to find the right entrepreneurs 
to back," Dayton said. "But that's changing. It's coming right now."
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MAP posted-by: Jay Bergstrom