Pubdate: Fri, 09 Jan 2015
Source: San Francisco Chronicle (CA)
Copyright: 2015 Hearst Communications Inc.
Contact: http://www.sfgate.com/chronicle/submissions/#1
Website: http://www.sfgate.com/chronicle/
Details: http://www.mapinc.org/media/388

BUZZ OVER MARIJUANA EQUITY FIRM'S FUNDING

The legal marijuana industry is estimated to be worth $2 billion to 
$3 billion, says Taylor West of the National Cannabis Industry Association.

Bay Area venture capitalists have built an industry on risky 
investments. But until Thursday, the largest firms have kept their 
distance from one unpredictable market: marijuana.

Founders Fund, a venture capital firm well-known for backing 
Facebook, Palantir Technologies and SpaceX, has changed that by 
investing undisclosed millions in Privateer Holdings, a Seattle 
private equity firm focused on the burgeoning medical and 
recreational marijuana sectors. Privateer called the funding round 
the first of its kind.

"It's a big moment in terms of planting a flag for the industry," 
said Taylor West, deputy director of the National Cannabis Industry 
Association, a trade group. "Up until now, almost all of the 
investment has come from individuals, from private investors - often 
from friends and family of the business owners."

Founders Fund is bigger than that, with a reputation for lucrative 
investments and high-profile names including PayPal co-founder Peter 
Thiel on its payroll.

"In any industry a company would be thrilled to have Founders Fund as 
an investor," said Brendan Kennedy, Privateer's CEO. "In this 
industry, for a lot of people, it's unfathomable."

Privateer has raised $22 million through Series A funding and a 
convertible bridge note. The firm previously raised money from 
wealthy individuals and families. The Founders Fund investment - the 
scale of which Privateer wouldn't confirm - is part of a Series B 
funding round.

Founded in 2010 as a collaboration between three MBAs, Privateer 
became the first private equity firm to invest in the cannabis 
industry in 2011 when it acquired Leafly, a website that allows users 
to rate strains and dispensaries of cannabis.

Geoff Lewis, a Founders Fund partner, said he discovered Privateer 
when a friend with a California medical marijuana card used Leafly to 
find particular marijuana strains whose effects mitigated symptoms of 
an illness.

"I hadn't thought at all about medical cannabis prior to her 
experience, but as a venture capitalist, I always have my investment 
cap on," said Lewis, who first approached Privateer about a deal in 2013.

Privateer generated mainstream buzz in November when it funded Marley 
Natural, a brand of marijuana, with the family of late reggae singer 
Bob Marley.

The legal marijuana industry is estimated to be worth between $2 
billion and $3 billion, West said, and to date, 23 states, including 
California, and the District of Columbia have legalized medical 
marijuana. Four states - Colorado, Oregon, Washington and Alaska - 
also allow recreational marijuana use.

"The entire year of 2014 has been a tipping point," West said. "We've 
really seen dramatic growth in the industry, but also a lot of 
occurrences that make it clear that this is an industry that's here to stay."

Despite states' efforts to legalize medical or recreational cannabis, 
its use is illegal under federal law. Though recent legislation bars 
the feds from interfering with state medical marijuana laws, an 
assistant U.S. attorney wrote in a court filing last week that the 
plant is a psychoactive, addictive drug that is not accepted as safe 
for medical use.

Those legal concerns - along with the drug's social and political 
baggage - were factors that have kept venture capital at bay, 
insiders speculate. But with California voters likely to see a ballot 
measure to legalize recreational marijuana in 2016, more venture 
capital deals could be on the horizon.

Kennedy believes Founders Fund's investment will give the financial 
world - even more conservative investors such as private equity firms 
and investment banks - greater leeway to look at the marijuana industry.

"A big part of it has been reputational risk. People are always 
concerned about their reputations," said Lewis of Founders Fund. "We 
think a lot of the best investments seem a little bit out there when 
they're first made."

Lewis said he believes marijuana will be legalized at the federal 
level in due time, and when that happens, buyers will become attached 
to brand names, expanding the legal market.

In the meantime, Kennedy says Founders Fund's move will show other 
investors they're already behind the curve.

"They're going to wake up in a panic and they're going to say, 'A 
bunch of smart people at Founders Fund have been looking at this 
industry for the past year and a half and made this investment,' " 
Kennedy said. "They will see it as a watershed event on the 
transition from the state of prohibition to a state of legalization."
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