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." - --- MAP posted-by: Jay Bergstrom