Pubdate: Sun, 03 Jan 2016
Source: Sacramento Bee (CA)
Copyright: 2016 The Sacramento Bee
Author: Peter Hecht


Silicon Valley Financiers Investing in Marijuana Apps, Services

Venture Capitalists Get Behind Efforts to Legalize Recreational Pot Use

Cannabis Startups Attracting Top Talent From Technology, Finance Sectors

Henderson, Nev. - Isaac Dietrich was smoking marijuana at his best 
friend's college apartment a few years ago when an entrepreneurial 
vision burst forth as heady as the most potent strains of Head Cheese 
or Ghost Train Haze.

"We had an epiphany," he said. "Grandma doesn't want to see me taking 
bong rips on Facebook. So we decided we needed a place where people 
could post about it."

In 2013, Dietrich and his college pal, Tyler Knight, co-founded a 
social media platform that's being hailed as the Instagram for pot 
consumers. And recently, Dietrich, now 23, commanded an audience of 
Silicon Valley financiers and other monied interests who packed a 
conference room at the Hilton Las Vegas Lake Resort to hear what the 
cannabis Internet CEO had to say.

Dietrich, of Virginia Beach, bounded onto the stage to the sounds of 
a new age drum harmony. He was part of the Investor Pitch Forum 
convened by The ArcView Group, an Oakland-based marijuana industry 
market research and capitalization group. ArcView seeks to match 
angel investors, including technology mavericks and money lenders, 
with pot businesses and startups.

Wearing a brown patterned jacket with elbow patches, Dietrich pitched 
with panache in this "Shark Tank" for marijuana ventures. Before 
would-be investors, he touted his Denver-based MassRoots social 
network, an application members use to find pot-smoking buddies, post 
plant and party pics or share marijuana news.

Behind him, a huge screen broadcast the announcement of MassRoots' 
application to become "the first cannabis company" listed on the 
Nasdaq stock exchange.

"We connect cannabis businesses to their target consumers," Dietrich 
said. He asserted that MassRoots, with 625,000 current users, would 
surpass 1 million members this year "and scale up from there," while 
amassing advertisers and valuable market intelligence on customer preferences.

"We know what kinds of strains and what consumption patterns are most 
popular," he said. "And in the next six months, we will begin to 
monetize that data."

Since its launch, MassRoots has picked up $3.5 million in investments 
from 70 individuals and hedge funds, much of it raised through The 
ArcView Group. And on this day in November, Dietrich looked out at 
200 cannabis-curious capitalists and boldly asked for $8 million more.

This is what the new digital-age cannabiz economy looks like.

Marijuana has become the next new new thing for "angels" in Silicon 
Valley and titans of the tech world. People who made fortunes in 
technology are making major investments in social networks, 
applications, business services and other ancillary products for 
marijuana consumers, dispensaries and cultivators. Venture 
capitalists and hedge fund managers also are looking to cash in on 
marijuana enthusiasts, as a half-dozen states, including California, 
are expected to vote on legalizing recreational use in 2016.

$2.7 billion Annual U.S. market for legal cannabis

The anticipated California initiative has the backing of Sean Parker, 
Facebook's first president and the co-founder Napster, and Justin 
Hartfield, an Irvine venture capitalist who struck it rich with 
Weedmaps Media, a website and mobile app that guides consumers to 
marijuana dispensaries.

The ArcView Group, which sells research data to industry investors, 
says legalization of recreational use in California could more than 
double the national marijuana market  currently estimated at $2.7 
billion in annual sales in states with legal medicinal or social use. 
But the Golden State initiative is merely another unfolding chapter 
in the fast-evolving market for marijuana-related businesses in 
California, Colorado, Washington, Oregon, Canada and beyond.

Though many investors remain hesitant to fund marijuana cultivation, 
they're putting money into startups that provide services for 
cannabis businesses. The industry also is attracting top talent from 
technology, banking and finance.

Among the industry upstarts getting funding are people such as Keith 
McCarty. The 30-year-old from Orange County was one of the early 
founders of Yammer, a business social network whose board members 
included Parker. Yammer was sold to Microsoft for $1.2 billion in 
2012. McCarty more recently created an app-driven marijuana delivery 
service, Eaze, that is billed as the Uber for pot.

Eaze, based in San Francisco, neither sells nor handles marijuana, 
and it employs no drivers. But McCarty says tens of thousands of 
California consumers are using the app to order from a menu of 
cannabis selections, with deliveries typically promised within 15 minutes.

Eaze charges service fees to participating marijuana dispensaries, 
which hire drivers to ferry the orders. The company says the app is 
being used by medical marijuana patients in more than 85 cities, 
mostly in the Bay Area and Southern California, with plans to expand 
to Sacramento. "With Eaze, it's all about getting your medicine 
delivered in one click," McCarty said.

Eaze was founded in July 2014 and grew with $12.5 million in capital 
from DCM Ventures, a renowned Silicon Valley technology funder on 
Menlo Park's prestigious Sand Hill Road. With 50 employees, Eaze 
recently added another feature: enabling consumers to get medical 
marijuana recommendations through video chats with doctors.

"We want to take this to every state with legal use," McCarty said. 
"This is going to be a global product."

I'm looking at marijuana right now. You can't stop money.

Brendan Kennedy, a former director of the analytics division of 
Silicon Valley Bank in San Francisco, already has taken his cannabis 
ventures global.

Kennedy, 43, has a degree in architecture from UC Berkeley and an MBA 
from Yale; he used to do venture capital valuations for Tesla Motors 
Inc. and numerous tech firms. Now, he is the CEO of Seattle-based 
Privateer Holdings, a private equity firm exclusively funding 
marijuana-related businesses.

Kennedy and his founding team, including former Silicon Valley Bank 
sales director Christian Groh, spent a year researching the marijuana 
industry and concluded it represents "the greatest opportunity" for 
new investment, Kennedy said.

In 2011, Privateer bought, a cannabis news and culture 
site whose user-generated reviews of pot dispensaries and products 
have elevated the site as the Yelp for marijuana. Three years later, 
Privateer announced a partnership with the family of late, 
pot-savoring reggae singer Bob Marley to produce cannabis skin creams 
and accessories in what it bills as the world's first international 
marijuana brand.

Under the agreement, "Marley Natural" marijuana is to be grown and 
processed by small producers and made available for retail sale in 
states where medical or recreational marijuana use is legal. 
Privateer also invested $26 million in a Canadian company, Tilray, 
whose British Columbia production facility produces "pharmaceutical 
grade" marijuana for Canada's medicinal market, Kennedy said.

Soon after the Marley Natural news, Privateer announced in January 
that it had secured $75 million in investment from the San 
Francisco-based Founders Fund of billionaire Peter Thiel, co-founder 
of PayPal and a key financial backer of Facebook. Cannabis industry 
advocates hailed Thiel's participation as the arrival of the first 
major institutional investor in the pot economy.

Privateer Holdings now employs 225 people, including many from the 
tech industry  "smart professionals from places like Amazon and 
T-Mobile and Microsoft that are waking every day to build companies 
and brands to end marijuana prohibition," Kennedy said.

Two years ago, one prospective candidate summoned Kennedy for a 
furtive meeting at a Starbucks in Portland, Ore. The man handed over 
a business card from the Drug Enforcement Administration. "That got 
my heart going a little bit," said Kennedy, who said he felt more 
nervous when the man shoved an envelope his way. It contained a 
resume for Patrick Moen.

Today, the former federal narcotics supervisor in the DEA's Portland 
bureau is the general counsel for Privateer.

Calculated risks

Despite expanding legalization, investment in the pot economy remains 
far from risk-free.

Four years ago, the notion of sinking millions into pot cultivation 
and services seemed particularly daring when a core group of 
marijuana advocates met with some significant business figures at a 
law office in San Francisco. California's Proposition 19, which would 
have legalized recreational marijuana use, had been defeated in 2010. 
In 2011, federal authorities had launched sweeping raids and property 
seizures against medical marijuana dispensaries in California.

And yet in November 2011, The ArcView Group set out to begin 
capitalizing marijuana business startups.

The ArcView co-founders included Steve DeAngelo, CEO of Oakland's 
vast medical marijuana emporium, the Harborside Health Center 
dispensary, and Troy Dayton, a former Colorado renewable energy 
executive who had helped found the pro-legalization Students for a 
Sensible Drug Policy in 1998 while at American University.

They assembled a meeting with a handful of guests, including venture 
capitalist Steve Berg, a former managing director of Wells Fargo 
Bank's capital markets group, and Joby Pritzker, heir to the Hyatt 
Hotels family and a board member for the Washington, D.C., pot 
decriminalization group, the Marijuana Policy Project.

There, the group agreed on a plan to persuade wealthy individuals - 
people with $1 million or more in net worth and companies valued at 
$5 million or more - to invest in a responsible, politically engaged 
and profitable marijuana industry, Dayton said.

Berg, one of ArcView's first investors, is now CEO of a Denver 
company, O.pen Vape, a manufacturer of vaporizers that allow people 
to consume marijuana or hash oil without lighting up.

Pritzker, managing director of Tao Capital Partners in San Francisco, 
this year announced a major investment in a Denver company, MJ 
Freeway, that provides sales tracking and inventory control 
applications for marijuana retailers, processors and food producers 
in legal-use states. Pritzker is also part of the Sean Parker group 
backing California's anticipated 2016 initiative, which would 
legalize possession of an ounce of marijuana and impose a 15 percent 
state tax on recreational pot sales.

To date, ArcView says it has signed up 510 member investors and 
generated $56 million in capital for marijuana-related businesses and services.

And its Pitch Forum near Lake Las Vegas is just one recent example of 
an industry budding with investors. Days later, two other 
pot-business events filled convention centers near the glittering Las 
Vegas Strip. The exuberance at the conferences seemed unbridled, 
despite the fact that some California marijuana advocates were 
advising patience and prudence for investors in what remains a 
largely unregulated economy.

At the Marijuana Business Conference & Expo at the Rio Convention 
Center, a California-themed panel called Big Changes for a $1 Billion 
Market warned that new oversight measures signed into law by Gov. 
Jerry Brown in October will take considerable effort to construct and 
two years to take effect.

"After 20 years of unregulated commerce in California, it's a pretty 
big mess," said panelist Hezakiah Allen, executive director of the 
California Growers Association, which advocates for pot farmers 
seeking access to the regulated market.

The cautious tone didn't deter Jenny Tran, CEO of KHL investment, a 
venture capital firm with offices in Irvine and Beijing that has 
specialized in real estate and technology startups. "I'm looking at 
marijuana right now," she said, adding that she has investors on both 
sides of the Pacific Ocean who want in on the state's cannabis trade. 
"You can't stop money."

Last summer, Bloomberg Intelligence market research identified 55 
publicly traded companies with marijuana-based business interests 
totaling $3 billion in capitalization.

Yet pot stocks, many sold over the counter at valuations from 10 
cents to less than $10, have been notoriously volatile. A year ago, 
after a huge uptick, the market crashed amid reports of penny-stock 
scammers with ill-conceived cannabis ventures.

"The early indexes that are trying to follow this industry are down 
70, 80, 90 percent," said Morgan Paxhia, co-founder of Poseidon Asset 
Management, a San Francisco hedge fund specializing in cannabis 
business investment. "Prices were completely out of whack. Ninety 
percent of companies are going to go to zero. They didn't have 
business models. They had no products. They had press releases."

A private investment portfolio manager and former municipal bond 
trader, Paxhia, 32, founded Poseidon with his sister Emily Paxhia, 
35, a corporate branding consultant. As many speculators fled a 
crashing marijuana investment market, the two corporate professionals 
jumped in. Their upstart Poseidon fund advertises that it "navigates 
uncharted waters" to find "attractive opportunities" where "timid 
souls dare not tread."

Poiseidon, an early investor in MassRoots, has helped capitalize 27 
pot ventures, including marijuana laboratory testing, sales 
technologies and other services in 10 states. It has also invested in 
medical marijuana cultivation in Canada.

So far, Poiseidon had avoided direct ownership in any pot farms in 
California due to lack of state regulations. Yet Morgan Paxhia said 
the firm recently made strategic loans to two Northern California 
cultivation ventures. He said they were selected in anticipation of a 
future state-governed medical marijuana market and potential 
recreational legalization.

"They are well-run operations, forward-thinking, that we think will 
transition through this gray world we're in now," he said.

Budding prospects

Back at the ArcView pitch forum, the only gray world seemed to exist 
in the billowing cloud of cannabis vapor projected onscreen.

That was the backdrop as Neeraj Bhardwaj and Andrew Bleloch took the 
stage. The partners in Loto Labs Inc. in Redwood City were pitching 
their "smart vaporizer" called Evoke, which they said uses patented 
magnetic technology to enhance the inhalation experience.

Bhardwaj is a former business development manager for National 
Semiconductor in Santa Clara. Bleloch is a professor of physics from 
Liverpool University. Their presentation underscored the nascent 
marriage of pot and tech, as inventors and innovators made glitzy 
presentations, using words like "phenomenon," "monetize" and "dominate."

But it was Dietrich from MassRoots who particularly shined on stage. 
This was his fifth appearance before the ArcView investors. Each 
time, he reaped increased capitalization for the social network, in 
which member "buds" with names such as "puffingmama" share photos of 
their crystalline pot strains and risque toking experiences.

MassRoots' over-the-counter stock was then trading at $1.25 (and 
recently hovered near a dollar) and the company had yet to post a 
profit. But Dietrich said he was hiring prized people from technology 
firms, lured by the promise of lucrative stock options. He exhorted 
the gathering: "I need to have an indication tonight as to how much 
you are willing to invest."

His demand for $8 million turned out to be overly audacious. But 
Dietrich wasn't disappointed. He walked away a day later with 
$1,018,000 in new investments, his biggest take to date.

"That's a million dollars, still," he said with a smile. "I'll be 
back on the stage again, and raising more money at a higher valuation."
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MAP posted-by: Jay Bergstrom