Pubdate: Sat, 01 Dec 2012
Source: Seattle Times (WA)
Copyright: 2012 The Seattle Times Company
Contact:  http://seattletimes.nwsource.com/
Details: http://www.mapinc.org/media/409
Author: Jonathan Martin

INVESTORS SEE PROFIT POTENTIAL IN NEW POT LAW

Two Seattle-based Yale MBAs emerge as the button-down straight men on
the business frontier of marijuana, as legalization in Washington and
Colorado turbocharged pot into a mainstream business
opportunity.

Brendan Kennedy's work at Silicon Valley Bank required him to put a
value on startups and emerging industries. But he quit his job and
became an investor himself when he saw limitless potential in one new
industry. Marijuana.

The industry was fragmented, rife with unprofessional managers, and
the medical-marijuana business couldn't get access to capital.

"And yet, despite all those problems, it had annual revenues" in the
billions, Kennedy said. "I became fascinated with it."

Two and a half years later, Kennedy and Michael Blue, two Yale MBAs
with backgrounds in banking, are emerging as button-down straight men
on the business frontier of marijuana. Their leap into the fledgling
industry seems prescient, especially as marijuana is poised to explode
from the medical niche to mainstream recreation this week.

"It's the biggest opportunity I'm ever going to see in my lifetime,"
said Kennedy, 40.

Their Seattle-based private-equity firm, Privateer Holdings, is
believed to be the first of its kind in the nation to focus
exclusively on marijuana.

But Kennedy and Blue won't be alone for long.

Votes in Washington and Colorado last month to legalize pot for
recreational use turbocharged marijuana as a legitimate business
opportunity.

Business people packed a marijuana-industry conference in Denver the
day after the election, and shares of publicly-traded companies spiked
- - one that sells marijuana vending machines jumped 3,000 percent - on
giddy enthusiasm.

The ripest opportunities are among cannabis-focused businesses
ancillary to direct selling or growing of marijuana - from media to
insurance, from hydroponic suppliers to specialty software.

Kennedy compares it to the corn industry, which is supported by supply
warehouses, makers of high-fructose corn syrup and corn insurers.

"There's whole sub-industries around corn. None of that exists in a
mature fashion around marijuana," he said. "It all needs to be built.
It all needs to be grown."

The decades-old federal ban on marijuana has constricted such
investment, with investors nibbling at the edges.

But the potential size of a recreational marijuana market is now
simply too big to ignore. In Washington alone, more than 360,000
people are projected to buy at state-licensed marijuana stores should
they open in 2013, creating a billion-dollar industry.

Lawmakers in four Northeastern states are planning to introduce
legalization measures.

"The wall of prohibition may crumble sooner than anyone imagined
possible," said Troy Dayton, CEO of a marijuana-industry angel
investor network, The ArcView Group. "If that happens, this is the
next great American industry."

Investors "drool"

Cannabis is already big business. There are at least 20
publicly-traded companies - including indoor farming suppliers,
pharmaceutical labs and financial-services firms - that market
directly to the marijuana industry. Several of the companies have
market capitalizations of $40 million or more.

A 2011 analysis by See Change Strategy estimated the medical-marijuana
industry was $1.7 billion in 2011, and could grow to $8.9 billion by
2016 - and that was before legalization measures.

"Now, people aren't talking about the medical-marijuana industry,
they're talking about the marijuana industry," said Chris Walsh,
editor of Medical Marijuana Business Daily, an online publication that
sponsored the Denver conference.

Medical-marijuana startups have largely relied on private investment
from friends and family. The ability to keep a bank account remains
one of the industry's biggest obstacles because federally insured
banks view marijuana businesses as illegal.

"Businesses don't like uncertainty in general, and this industry has
so much uncertainty," said Walsh, a former business reporter for the
Rocky Mountain News. "It could collapse overnight."

The federal government has not indicated how it will respond to
Washington's Initiative 502 or Colorado's Amendment 64. Govs. Chris
Gregoire and John Hickenlooper of Colorado recently pressed U.S.
Attorney Eric Holder to say if he will intervene, and at least 18
members of Congress signed onto a bill to ensure federal authorities
wouldn't pre-empt the state marijuana laws.

Silence is interpreted as a good sign by entrepreneurs such as Sean
Green, a former real-estate agent who opened a dispensary, Pacific
Northwest Medical, in Shoreline, and hopes to expand.

"The longer the feds won't say anything, the more the investors
drool," he said. "Before Nov. 6, it wasn't a good risk-reward ratio.
Now, people are reconsidering."

The ballot measures in both states allow for-profit growers and
retailers, and Washington's law calls for regulating marijuana like
alcohol.

Seattle marijuana-industry attorney Hilary Bricken said mainstream
business people are quickly emerging, in part because voters approved
the initiative by 12 points.

"That margin of victory just wholesaled marijuana to white yuppie
America," she said.

Pot for soccer moms

Kennedy and Blue did their risk analysis two years ago. They won a
business-planning competition at Yale in 2005 before veering off into
business - Kennedy, who'd already started and sold two tech companies,
went to SVB Analytics, valuing startups; and Blue into private-equity
firms in Connecticut and Arkansas.

Blue, 34, said he had no qualms after talking to conservative friends
and family in his native Arkansas. "The feedback was, not only is this
a good opportunity, you guys have the chance to do something really
good," he said.

They brought on a third partner, Christian Groh, and set up shop two
years ago in Seattle, where Kennedy's wife is a Pacific Northwest
Ballet dancer.

Privateer Holdings started small and focused. It is closing a
first-round investment pool of $7 million, and intends to buy existing
marijuana-related businesses with a mainstream profile - "something
that appeals to a soccer mom," Kennedy said. They are currently
considering buying the manufacturer of a marijuana vaporizer.

They are targeting those kinds of ancillary businesses, not those
growing or selling marijuana, because of the federal risk.

Kennedy said their lawyers vetted the strategy, but he said he has not
talked with federal authorities.

Privateer Holdings' approach is the most common approach for the two
dozen investors involved in The ArcView Group, which provides seed
investment for marijuana startups, Dayton said.

"There's the Mark Twain saying, 'When people are looking for gold,
it's a good time to be in the pick and shovel network,' " said Dayton.
"And gold wasn't federally criminally illegal. There's even more
reason to be in picks and shovels."

The first purchase was Leafly.com, a slickly designed website offering
more than 40,000 reviews of about 500 marijuana strains. The website
sorts them for medical use - from anxiety to seizures, and for effect
- - from lazy to tingly.

Medical-marijuana dispensaries in eight states upload their menus to
Leafly so the site can send customers to a nearby retailer.

Kennedy emphasizes the need for professional management in an industry
that is, at times, its own worst enemy.

"I'm waiting for the day when we can go to a conference, and you don't
have to listen to Bob Marley," he said.

He's run six Ironman triathlons, and says he didn't use marijuana for
about 20 years before trying it this year, on the theory that "I have
to practice what I preach."

It has been hard to get this far: They were rejected by nine banks
before finding one willing to do business.

But he and Blue are bullish, especially after the Nov. 6
votes.

"I've seen a lot of small companies that grew to be big companies,"
said Kennedy. "This is unlike anything I have ever seen."

- ------------------

[sidebar]

The law changes Thursday

Initiative 502, approved by voters Nov. 6, legalizes recreational 
marijuana use for adults 21 and up. Some provisions that take effect 
Thursday:

Possession: State criminal penalties for possession of 1 ounce of 
marijuana (or 1 pound in cannabis-infused food, or 72 ounces of 
cannabis-infused drink) are eliminated. Public consumption of marijuana, 
like alcohol, can mean a $50 fine.

Retail stores: Marijuana can be legally sold for recreational use only
at state-licensed marijuana stores; those stores won't open until at
least December 2013. I-502 does not change state medical-marijuana
law.

Employment law: Does not change the right of employers to drug-test
employees.

DUI: 5 nanograms of THC in a driver's blood becomes equivalent to a
.08 blood-alcohol level for driving under the influence.

Federal law: Does not affect the federal ban on marijuana. Federal
authorities have not said if they will intervene.

Source: Initiative 502
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MAP posted-by: Matt