Pubdate: Thu, 07 Aug 2014
Source: New York Times (NY)
Copyright: 2014 The New York Times Company
Website: http://www.nytimes.com/
Details: http://www.mapinc.org/media/298
Author: Eilene Zimmerman

START-UPS SEIZE MARIJUANA OPPORTUNITIES AS BIG COMPANIES HOLD BACK

When Garett Fortune's brother was found to have cancer in early 2013,
it was so advanced that all he could do was to try to live out the
remainder of his life in as little pain and discomfort as possible.
That meant taking about 30 pills a day, Mr. Fortune said - until his
brother tried marijuana.

"I saw him go from 30 pills a day to almost zero," he said. "It helped
his appetite and the nausea. He had a way better quality of life at
the end than he would have without the cannabis. It made me a
proponent of the industry."

It also gave Mr. Fortune the idea for a business. With more states
legalizing marijuana for medical uses - and, in Colorado and
Washington, recreational ones - Mr. Fortune identified one of the
industry's challenges: packaging. The old standby, the resealable
plastic bag, was not sufficiently effective, especially for a
regulated industry, and Mr. Fortune already owned OdorNo, a company
that made odor-proof bags for human and animal waste.

Mr. Fortune proposed a new product, odor-proof and child-resistant
marijuana bags, to OdorNo's advisory board. He expected the members to
laugh him out of the room, but they did not. "Every single one of them
told me: 'This is the biggest opportunity on the planet right now.
Follow that.' "

In May he licensed out production and distribution of OdorNo, and he
and his team began building FunkSac in Denver. Although FunkSac bags
are awaiting government approval, Mr. Fortune said he had hundreds of
thousands of orders from cultivators, dispensaries and wholesalers.
The company plans to begin delivering them this month and estimates it
will have first-year revenue of about $2 million.

Mr. Fortune said he had been contacted by dispensaries in 17 of the 22
states where medical marijuana was legal. "Right now," he said, "it's
like drinking from a fire hose."

To many, today's cannabis industry resembles a modern-day Gold Rush.
Troy Dayton, co-founder and chief executive of the ArcView Group in
San Francisco, a network of 250 high-net-worth investors that backs
cannabis start-ups, said more than 30 early-stage companies contact it
every week. In the last year, he said, the group sent about $12
million in funding to 14 companies.

The size of the legal cannabis industry in the United States, measured
by sales of the plant, was $1.5 billion in 2013, according to ArcView,
which projects it will reach $2.6 billion in 2014 and $10 billion by
2018 - figures that do not include the growing numbers of ancillary
businesses. The entire industry is dominated by small businesses, Mr.
Dayton said, both because it is so new and because marijuana's
legality remains murky. Banks, for example, have been reluctant to
take deposits or make loans to dispensaries because the drug is still
illegal under federal law.

"You can't have a national business," Mr. Dayton said, because the
laws vary by state. Opportunities for small businesses also exist
because the stigma associated with the industry has discouraged bigger
companies from getting involved. "You can't find another industry
growing at this clip that doesn't have any major players," he said.
"That gives the little guy a chance to make a run at this."

That potential has spawned a wide array of cannabis start-ups - many
incorporating novel technologies. Potbotics in New York City has
raised almost $3 million from friends and family and has three
cannabis-related products in the works, including a "virtual
budtender" known as Potbot that it expects to be available for sale
next year. A budtender is a dispensary worker who is knowledgeable
about and sells marijuana; Potbot is a robot with a tablet-size
monitor that is meant to replace the budtender.

The plan is to place Potbot robots in dispensaries and medical
facilities where marijuana patients can ask questions and get
information. "Dispensary budtenders almost always have an agenda -
they are trying to sell what they have most in their stock," said
David Goldstein, a founder of the company, which was started in
October. "We created a software and technology platform that is able
to talk to patients and educate them about what strains are actually
best for their ailments."

A San Diego start-up, Herbalizer, makes a small, sleek vaporizer with
a heating system that took three years and two engineers to develop.
Its co-founder and chief executive, Josh Young, previously designed
advanced NASA computer systems and military programs; Bob Pratt, a
co-founder and the chief technology officer, was a designer of stealth
bomber radar systems. And yet, Mr. Young said, the technology behind
the Herbalizer "has been the greatest challenge of our lives."

The vaporizer heats up in seconds and uses a 32-megahertz processor, a
300-watt halogen bulb and a temperature sensor to release active
compounds in the plant selectively, without creating smoke. Ninety
percent of Herbalizer's customers use it for marijuana, Mr. Young
said, although drug paraphernalia laws prevent the device from being
marketed for that purpose (it is sold instead for use with herbs like
peppermint and lavender). The company expects first-year revenue of
more than $2 million.

Fund-raising has been tricky for Herbalizer and similar companies.
Traditional investors remain leery, said Christian Groh, a partner and
the chief operations officer at Privateer Holdings, a private equity
firm in Seattle that invests in cannabis start-ups. "In the U.S.,
marijuana remains a Schedule I narcotic, so you still have this outlaw
mentality within the community," he said. "I know there's a lot of
exuberance now, but I don't think we're at the point where we'll see
real institutional money or a Fortune 500 company making a play in
this space. Not yet."

In 2011, Privateer bought Leafly, a Seattle start-up that provides
consumer ratings and reviews of marijuana strains, dispensaries and
recreational shops. Most dispensaries carry 20 to 50 strains, Mr. Groh
said, and the lack of standardization and consistency is a big issue.
Leafly has about 80,000 reviews in its system.

"That information has to come from the community right now, because
there is no WebMD for marijuana," said Cy Scott, one of Leafly's
founders. The company also offers tools for dispensaries that let them
manage inventory, update menus online and respond to reviews.
Dispensaries and recreational shops pay a monthly subscription fee of
$200 to $2,000 a month, said Mr. Scott, who expects revenue this year
of $3.6 million.

SpeedWeed, a Los Angeles delivery service, allows customers to place
an order online or by phone and have it delivered - depending on
traffic - within 45 minutes. Although there are hundreds of marijuana
delivery services in Los Angeles, AJ Gentile, a founder, said
SpeedWeed was the largest. "Delivery services here are typically guys
driving around in their car with a big box of weed," he said.

Mr. Gentile said that SpeedWeed worked only with cultivators its legal
team had vetted and that along with its delivery service, it planned
to sell proprietary software to dispensaries nationwide. He estimated
that the company had 20,000 legal customers and that revenue would
double this year, up from $1.7 million in 2013.

Biological Advantage, founded in April, has a system of products it
plans to introduce this month that are applied to a marijuana plant's
soil and leaves to enhance photosynthesis. The company's chief
executive, John Kempf, is also founder of Advancing Eco Agriculture, a
crop-nutrition consulting company he started that has invested
$400,000 in Biological Advantage.

Mr. Kempf said his companies were a bit ahead of the game,
anticipating what the market would need. "Growers aren't yet looking
at nutrition as a means for improving the medicinal concentrations in
plants," he said. "But they will."
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MAP posted-by: Matt