Pubdate: Fri, 09 Jan 2015
Source: Los Angeles Times (CA)
Copyright: 2015 Los Angeles Times
Contact:  http://www.latimes.com/
Details: http://www.mapinc.org/media/248
Author: David Pierson

VENTURE CAPITAL FIRM INVESTS IN POT

Founders Fund Puts Millions into a Cannabis-Focused Private Equity Group.

Despite growing momentum toward marijuana legalization, big-name 
investors have largely stayed on the sidelines of the budding 
industry, content to hold out until federal prohibition is one day repealed.

But legal cannabis now has the backing of a major tech investor - one 
that could inspire other established financial players to join the green rush.

Founders Fund, a leading San Francisco venture capital firm partly 
run by PayPal co-founder Peter Thiel, said Thursday that it was 
making a multimillion-dollar investment in a cannabis-focused private 
equity firm called Privateer Holdings.

The announcement gives the legal pot sector a shot of credibility as 
it continues to grapple with conflicting state and federal laws, 
limited access to banks and no shortage of fly-by-night investors who 
have sullied the industry with pump-and-dump schemes.

"This is a milestone," said Taylor West, deputy director of the 
National Cannabis Industry Assn. in Denver. "It says there are real 
opportunities within this industry for outsiders to benefit, and it 
shows the industry is solid enough that an investment firm like this 
is comfortable stepping in."

Founders Fund is a heavyweight in Silicon Valley circles. The firm's 
$2-billion portfolio includes Airbnb, Lyft and Spotify. It's known 
for its moonshot investments - it backs SpaceX, Elon Musk's private 
spaceflight company. Founders Fund partner Geoff Lewis said Privateer 
was chosen because it had broad, long-term ambitions and owned 
vertically integrated brands that handled many aspects of the 
business, including growing marijuana and reviewing strains.

"Privateer Holdings has emerged as the market leader in legal 
cannabis, which we believe will become a massive industry within the 
next decade," Lewis said. "We've been evaluating the cannabis 
industry for several years, and we haven't seen another company that 
comes close to Privateer Holdings in terms of strategy, 
professionalism, talent, expertise and potential for growth."

Privateer's chief brand is Leafly, a website that operates much like 
Yelp by reviewing dispensaries, strains and doctors. Site visitors 
contribute to a valuable trove of growing user data that could help 
market cannabis products down the road.

Privateer, a Seattle company run by three business school graduates 
(two from Yale), has also invested in Marley Natural, a premium 
cannabis brand founded by family of the late reggae legend Bob 
Marley, and Tilray, a Canadian grower, processor and distributor of 
medical marijuana.

Privateer hopes to accumulate more cannabis brands and position 
itself as a market leader if federal prohibition is lifted - exactly 
the kind of gamechanging gamble Founders Fund is banking on.

"The investment into Privateer actually fits pretty closely with 
Founders Fund's M.O.," said Mike Dempsey, an analyst at CB Insights. 
"They used to have a quote on their website that read, 'We wanted 
flying cars, instead we got 140 characters' [a reference to the 
maximum number of characters permitted in a tweet]. That spoke pretty 
well to their penchant for bold investments and disdain for the 
average tech companies of today."

Tech industry expert Jonathan Roubini said Founders Fund typically 
likes to invest in sectors in which there's little established 
knowledge and the regulatory environment is evolving, such as Airbnb and Lyft.

"They invest in companies that are not popular and are difficult to 
assess," he said. "Privateer hasn't been a popular investment among 
large VCs because of marijuana's bad image as well as the difficulty 
in assessing an industry that has been recently legalized in a 
handful of states," he said.

Twenty-seven states and the District of Columbia have some form of 
legalized marijuana or have decriminalized marijuana possession.

Privateer's chief executive, Brendan Kennedy, said momentum has 
shifted toward legalization, and the investment by Founders Fund 
signals greater acceptance of cannabis in the financial sector.

"Six to 12 months from now there will be investment banks who will 
have analysts following cannabis like they follow healthcare or 
agricultural commodities," Kennedy said.

Legal marijuana sales reached $2.6 billion last year, a 68% increase 
from 2013, according to the ArcView Group, an Oakland marijuana 
investment and research group.

By 2018, sales could reach $10.2 billion.

Founders Fund began courting Privateer in 2013 after a friend of 
Lewis' used Leafly to fulfill her doctor's recommendation for medical 
marijuana.

The two firms met for 18 months before deciding to go through with 
the investment.

Lewis said there was serious but brief soul-searching about the 
morality of investing in a cannabis firm. But he and his colleagues 
ultimately decided throwing their weight behind the 
professionalization of the industry was a positive gesture.

"Ending prohibition is a moral imperative for the U.S.," said Lewis, 
who objects to drug laws that crowd prisons and favors legalization 
that creates regulations, labeling and greater tax revenue.

Both Privateer and Founders Fund declined to provide details on the 
investment amount.

Privateer has raised $50 million in its Series-B round so far and is 
aiming for $75 million. The firm previously raised $22 million in 
Series-A fundraising and a convertible bridge note, a type of loan.

Until now, cannabis investors were largely wealthy individuals, 
friends and family.

Troy Dayton, CEO of the ArcView Group, said Founders Fund "is the 
first really high-profile, decent-sized fund to come in." Large, 
institutional funds and investors won't risk putting money into pot 
companies until such firms are safe to list shares publicly - 
something that likely requires federal legalization, Dayton said.

"When it comes to getting the industry to the next phase, you need to 
get out of the private market," he said. "Right now, all the good 
opportunities exist in smaller seed-stage companies that are private. 
There still needs to be some maturation to take place before we see 
Wall Street money."
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MAP posted-by: Jay Bergstrom