Ask investors about emerging trends in technology, and they might mention wearable devices, the connected home, mobile payments, even Bitcoin. But more often than not, they're glossing over cannabis, a multibillion-dollar industry that's only gaining momentum with varying degrees of legalization in 21 states and the District of Columbia.
It's not just growers and dispensaries that stand to make money off Americans hitting the bong. Startups are finding opportunities as more states loosen up their stance on marijuana. The industry scored a major victory when U.S. Attorney General Eric Holder declared in August that the Department of Justice wouldn't challenge laws passed in Washington and Colorado legalizing pot for adult use. But that doesn't mean the war on drugs is over. There's still a haze surrounding ganja: Growing, selling, and possession are considered illegal in the eyes of the federal government.
With shifting attitudes toward cannabis--a majority of Americans are now in favor of legalization--companies are looking to capitalize on the flowering pot industry, estimated to bring in $30 billion a year in the United States. In Canada, which recently launched a medical marijuana free market, the industry is expected to reach $1.3 billion in a decade.
One of the trends Seattle-based Leafly has noticed is an almost connoisseur-like approach to bud. Just as there are foodies who read Yelp, there are stoners who consult Leafly, a cannabis database made up of more than 50,000 strain reviews and 20,000 dispensary reviews. Leafly provides a resource for 2.6 million visitors each month. In August, the company launched an editorial site covering all the Mary Jane news a toker needs to know, from ongoing legalization efforts to how-to guides for first-time users.
But Leafly isn't just for recreational pot smokers. Leafly prides itself on building a website and mobile apps with medical marijuana patients in mind--the site's polished look deviates from other marijuana-themed sites where flashing ads often border on the epileptic. Such base aesthetics might have been fine for potheads of another generation, but today's medical marijuana patients are more sophisticated, seeking a safe place to learn about their medicine.
The brainchild of three former Kelly Blue Book employees, Leafly began as a side project in 2010, shortly after cofounder Scott Vickers received a doctor's recommendation to use medical marijuana to help with his insomnia. As a white-collar professional, he wanted to build a site for people like him. That meant no overt pot symbolism, no girls clad in bikinis, no flashing ads. Originally based in Newport Beach, California, he and his cofounders, Cy Scott and Brian Wansolich, met on weekends to design and build the site, eventually quitting their jobs at the end of 2011 to work full-time on Leafly.
By then, Privateer Holdings, a private equity firm focusing on the cannabis industry, had acquired Leafly for an undisclosed sum, a move that gave the previously bootstrapped startup the resources to grow its engineering and design teams. "Privateer has a bigger vision for this industry that I think Leafly fits into," Christian Groh, Leafly's vice president and a partner at Privateer, told Fast Company. Part of that vision is to "elevate the conversation" in the space, he said. In July, Privateer raised $7 million in a Series A round to invest in cannabis companies with mainstream appeal.
Before Privateer's acquisition, Leafly had clocked about 15,000 marijuana strain reviews. Today, it boasts more than 50,000 from 80,000 registered users, bringing in $100,000 in revenue each month. With its new editorial site, the company hopes to see revenue light up, blooming to $1 million a month in the next year. Leafly's Android and iOS apps are also seeing success, with 200,000 new iOS downloads a month and 5,000 Android installs each week.
Much of its success on the web can be attributed to Leafly's SEO dominance for strain queries, making it a high destination for people to learn about their herbal refreshment. In addition to reviews that range from the eloquent to the typo-ridden (“F#$%ING KILLL-ERRRR!!!!” one user wrote), people also rate how effective strains are for treating certain ailments, such as pain, stress, depression, and insomnia--as well as the drugs' effects, including euphoria, creativity, dry mouth, and paranoia. Leafly landing pages highlight which dispensaries in a vicinity carry particular strains--and their going rates. Leafly also has a feature called Cannabis Strain Explorer to aid with reefer discovery, organizing more than 500 types in a periodic table of sorts that users can filter by effects and nearby availability.
The creation of a news and culture section will surely help Leafly's search rankings, too. Though companies have different motivations for delving into content marketing, a flux of content, especially articles that link back to the main website, often grabs the attention of search engines. It seems to be no coincidence that Leafly hired Rebecca Kelley as content and community manager to lead this effort. Kelley previously worked in content marketing at various companies, including SEOmoz, which makes SEO software. Already, Leafly has noticed budding site engagement, with the average reader visiting three times more pages per visit.
But a steady revenue stream and engaged user base doesn't mean investors are jumping on the weed wagon just yet. Christina Lee, a marketing and communications partner at Kleiner Perkins Caufield & Byers, said she doesn't see a future in which her firm invests in marijuana. "Kleiner Perkins very much cares about its brand," she said. "There are tons of opportunities to make money that we don't invest in because it doesn't fit with our values. I can't imagine in the near term that we'd invest in a business that makes its money off marijuana." Other established venture capitalists have echoed similar sentiments, noting it's difficult to put money in vice when the source of their funds comes partially from universities and corporate pension funds.
Troy Dayton, CEO of the ArcView Group, an investor network focused on cannabis, said he sees less interest from institutional capital in marijuana tech, but his group has attracted high-net-worth individuals who've made their wealth both in and outside of technology, in sectors such as real estate or restaurants. Dayton identified four possible areas of investment when it comes to pot: companies marketing to the cultivator (for example, technology for growing), companies marketing to the end consumer (as Leafly does), companies marketing to retailers (security, point-of-sale software), and companies with licenses to produce and sell cannabis.
There's enough of a stigma attached to marijuana as it is, but investors have been most hesitant about companies that "touch the plant," as they say in the industry. "Where there's risk, there's also rewards," Dayton said. "But a lot of investors are mostly interested in ancillary businesses, the ones that don't touch cannabis directly."
Mark Kleiman, a professor of public policy at the University of California, Los Angeles, is skeptical that legalization will lead to "marijuana millionaires." "Once the legal situation gets straightened out, cannabis is likely to become a low-margin commodity market unless someone establishes powerful brand equity," he said, but he expressed optimism toward companies not involved in the growing or distribution of cannabis. "The best way to make money out of a gold rush is to fleece gold miners. . . . The old advice holds: The surefire way to double your money in this industry is to fold it over and put it back in your pocket," he added.
One ancillary business that stands to profit from today's green rush includes Canna Security America, a Louisville, Colorado, security firm in the ArcView network that provides security systems for dispensaries and cultivators. Canna Security America president Dan Williams had worked for Envision Security before leaving in 2009 to help Colorado's Department of Revenue define security regulations for weed growing operations and dispensaries. "Unless it's done to code, the producers won't receive their licenses," Williams said, noting the red tape includes specifications on camera placement so that states can oversee the operations. "A lot of security companies, they don't take the [marijuana] industry very seriously, and that's what sets us apart. They don't want to deal with the regulations."
As with banks, which have been hesitant to provide business checking accounts to dispensaries, security companies have been reluctant to get involved. "We're happy to take that business," said Williams, who has also played a role in helping Washington develop its own security guidelines. Given the amount of bureaucracy, Williams said there's a high barrier to entry in this business, and his company, which is currently focused on Colorado and Washington, aims to be in 18 states within five years.
While the restrictions make entry difficult, ArcView's Dayton thinks they will help some startups flourish in the space. "I think if it were a free-for-all, if cannabis were being regulated like tomatoes, I don't think there'll be a real opportunity to make a lot of money," he said.
Justin Hartfield, cofounder and CEO of WeedMaps and a general partner at Emerald Ocean Capital, said the Justice Department's announcement gives entrepreneurs a "greenish" light to perhaps start touching the plant. "There are so many things you need the plan for in order to be in the marijuana industry," he said. "Being in ancillary businesses is hard because you're always one step removed. There are some real possibilities in the future."
Hartfield cofounded WeedMaps, a community for people to review strains and dispensaries, with Keith Hoerling in 2008. "I really rode the marijuana wave," he said. Through a shell company, he even managed to take his company public, and the experiment gave Hartfield "an education in public markets--a very expensive education, I might add." When WeedMaps was unable to raise funding, it looked for other options. LC Luxuries Limited, which owned online cosmetic properties including Makeup.com (now part of L'Oreal), purchased WeedMaps under the name General Cannabis in a reverse merger.
"It didn't work out," Hartfield said, reflecting on the experience. "For the best interest of the publicly traded company, it had to shed its assets in marijuana in order to move on to its bigger dream of going to Nasdaq, which it couldn't do with WeedMaps on its books."
Around that time, Hartfield was also growing weary of the regulations that came with operating a public company. "There's so much extra reporting, lawyering, and accounting overhead you have when you run a publicly traded company. We decided it was a good fit to go private," he added. About two years later, in December of 2012, Hartfield and Hoerling bought back the company.
Today, the site makes its money off advertising revenue and has 400,000 users and "millions and millions of eyeballs" on its properties, which also include an app and web show. WeedMaps also owns Marijuana.com, home to the Internet's oldest marijuana forum, a domain it bought for $4.2 million in 2011. If federal laws ever allow for it, Hartfield hopes to relaunch the site into an Amazon for pot, he said.
"The day after legalization hits, we're positioned to sell more marijuana than any other [source]," Hartfield said. But he still has a number of years to figure out the logistics--not more than 10, he predicts. Questions he's pondering include: "Who's going to ship it and get it to the customer? Who's going to supply it? Are we growing it ourselves? How do we test it? What standards do we use? How are we going to brand it? There are all sorts of fascinating questions."
Though Hartfield still oversees WeedMaps, as an investor, he's looking for promising early-stage companies focused on medical marijuana. "We had been focusing exclusively on ancillary businesses, but now that the attorney general has made his statement regarding the enforcement priorities of federal prohibition, we're thinking of engaging in states where this is legal [with] companies that may have a component that touches the marijuana plant."
For companies that aren't afraid to touch the plant, ArcView's Dayton believes the potential to make money is nearly limitless. "If you're one of those people who get a license [to grow or sell marijuana], that could be a license to print money," he said.
[Image: Flickr user Andrew Magill]