Cannabis Startups Spark Joy For Investors

One year ago, Crunchbase News published a quarterly report on the cannabis industry in the wake of recreational legalization in California—one of the largest markets for adult use in the world. Investors and companies were excited about the future of the industry, yet remained wary of the regulatory challenges that remained for both consumers and entrepreneurs.

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Now one year and a key resignation later, the industry continues to light up. Today, we’ll dive into the new numbers and share insights from experts in the field for a closer look at how the startup and venture world is handling this budding industry.

All The Way Up

It’s important to note that not all cannabis companies are dispensaries. Their work can range from working on biotechnology solutions that focus on THC, to growing plants, to ancillary activities focused on operations and other supporting categories that don’t deal directly with cannabis.

According to Crunchbase data, funding for cannabis companies 1 more than doubled from 2017 to 2018 with more than $1.3 billion directed toward startups and other private companies in the industry last year.

Though dollar volume in Q1 2019 was slightly lower than the immediately preceding quarter, it was still double that of the year ago quarter. However, private market reporting lag may account for the quarter-over-quarter decline.

Taking a closer look at the largest rounds for cannabis startups since 2017, many of the top fifteen rounds were directed toward companies that touch the plant. That includes a $90 million round for Grassroots Cannabis in March 2019, a $75 million round for cannabis brand Caliva, and a $125 million round for cannabis producer and distributor Flow Kana.

According to Managing Partner at Casa Verde Capital Karan Wadhera, it’s not surprising that cannabis startups touching on “cultivation, manufacturing, distribution, and retail” are announcing large funding rounds.

“These are really capital intensive assets that need a lot of dollars,” Wadhera said.

Interstate commerce regulatory requirements also add to the cost of supporting cannabis startups. Cannabis companies that want to distribute to multiple states must have centers in different states, which often means acquiring or starting subsidiaries. In short: regulations are hard and expensive to navigate, but those willing to do so now may see a large pay for their efforts.

“I think a lot of people are investing because they see those barriers eventually disappearing. They feel like now’s the time to get in because these valuations are relatively low, and there’s an opportunity now,” Troy Dayton, the CEO of cannabis-focused investment and market research firm Arcview Group, told Crunchbase News.

There’s also room for institutional investors, who have largely avoided investing in the production of cannabis for legal reasons, to invest in cannabis-adjacent startups.

Cannabis job recruiting platform Vangst, which has raised $12.5 million, is a good example. Metrc, a company that emerged from the wake of legalization with the goal to become the standard for compliance in the cannabis industry, is also another datapoint in the trend’s arc. Founded in 2015, the company raised $50 million last year from Tiger Global Management and Casa Verde Capital.

“They’re just able to scale a lot quicker, with a lot less capital, because they don’t have the same restriction issues that you do when you’re dealing with cultivation, or manufacturing, or retail,” said Casa Verde’s Wadhera. He also pointed to multi-state brands becoming a popular investment, because packaging and branding can be done separate from local supply chain management and distribution.

It’s also a strategy that is leading to the birth of unicorns. Pax Labs, which manufactures vaporizers for inhaling cannabis oil using a device similar to a Juul, is reportedly looking to raise $400 million from its investors. Pax stays one degree away from cannabis itself by making local suppliers produce and distribute the cannabis oil in its pods.

These ancillary companies present a lot of opportunity in terms of scale, with less legal risk than other angles, according to Andrea Hippeau, a principal at Lerer Hippeau, which has invested in companies that are developing CBD and hemp solutions.

“We definitely see a lot of our colleagues at other firms wanting to get into this space,” said Hippeau, adding that it’s tough for bigger funds because many have LPs that are not interested in investing in the industry for various reasons. “They’re just more heavily restricted. So, I think it’s going to take a long time for the bigger funds to get involved.”

But she did say that there is investor interest, particularly from smaller funds with individual LPs or smaller endowments.

I think everyone recognizes that this is going to be a huge market,” Hippeau expressed. “I think as you see people going out to raise new funds, you’ll see them asking for a provision to allow them to invest in cannabis.”

And with more cultivation companies going public in Canada, it’s likely that this interest will grow as private valuations do, too.

Illustration: Li-Anne Dias

  1. Crunchbase News considered cannabis companies to be those in the “cannabis” category on Crunchbase, and those with “cannabis,” “marijuana,” or “cannabinoid” in its Crunchbase description

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