Personal opinions about> the wisdom or morality of marijuana use aside, the business of legal pot is big, and getting bigger. Fourteen states now make the drug available for medicinal use, with more expected to legalize in the near future. And on Tuesday, California voters will decide whether to legalize personal pot use. For investors, opportunities are beginning to sprout.
The legal marijuana business generates an estimated $1 billion in annual revenue in California alone, according to California NORML, a pro-legalization group. There are more than 700 licensed medical marijuana dispensaries in Colorado about one for every 7,000 residents and another 200 or so in California. Maine and New Mexico also have a few licensed dispensaries each, and another seven states and Washington, D.C., are in preliminary stages of legalization. For insiders, the profit potential looks sky-high. I was part of the dot-com boom, and this is the next one, says Troy Dayton, chief executive of the ArcView Group, a marijuana business consulting firm.
In other words, the business is no longer a hook-up from your brother s friend Floyd. Last month, a Harvard professor, a Rhode Island State Senator, and a crowd of interested entrepreneurs gathered at the Marijuana Conference, at a midtown New York City Hilton, to explore business and investment possibilities for the growing industry. Attendees wore suits, possibly khakis, but no tie-dye. The month before, HempCon 2010, an annual trade show for the medical marijuana industry, was heavily attended by lawyers, doctors and insurance companies, says Jerome Handley, an Oakland-based attorney who specializes in cannabis business law. It wasn t the type of show that you would see ten years ago, with music and hippies and dancing. It was all people selling something.
Handley may sound nostalgic, but he s also benefited from the growing professionalization of marijuana production and distribution, and the services that support it. Helping medical marijuana dispensaries incorporate and file their taxes got him through the recession, he says, when his estate planning, trust and probate business dried up. And he s just one of a host of professional service providers and other ancillary businesses that are scrambling to serve this growing market. This is going to be the fifth largest business in America, and the leading positions are being staked out now, says Steve DeAngelo, the executive director of Harborside Health Center, an Oakland medical marijuana dispensary.
So far, the intrepid pioneers have been mainly small business owners. Most dispensaries are financed by their owners or by family or friends willing to serve as angel investors, DeAngelo says. And while hedge funds and private equity funds are investing in ancillary businesses and even sniffing around direct investment in dispensaries, the day when mutual funds will invest in pot is still about five years off, he says. Until then, here are three possible ways to invest in the budding marijuana boom:
Buy pure-play stock
There are only a handful of medical-marijuana-related companies trading on the open market, and they re all tiny, carrying with them the typical risks of microcap stocks: There s little liquidity, high risk of failure and little available financial information about the companies. Still interested? One of the most promising is Converted Organics (COIN),
But investors too focused on the idea of jumping on the medical marijuana train run the risk of getting caught up in an idea and forgetting fundamentals, Leeds says. I d say that of people who invest in medical marijuana at this stage of the game, nine out of 10 of them are going to wind up losing money, he says. Cannabis Science (CBIS),
As dispensaries grow and become more professional in California, Colorado, and other states, they increasingly need the infrastructure of grown-up businesses: accountants, bookkeepers, credit-card machines, uniforms, liability insurance and so on. Dispensaries in California, for example, use Paychex (PAYX)
Among insurers, Lloyds of London (LYG)
Get into the business
Entrepreneurs, take note: WeGrow, which bills itself as the first honest hydro store, is selling franchise opportunities at $25,000 a pop. The store, which sells hydroponic feed solutions, high-intensity lights and drying racks to cannabis producers, opened its first location in Oakland in January, and the company expects to have between 65 and 70 locations open within the next two years, according to a company spokesperson.
Backing a dispensary may appear tempting to some, but keep in mind that Colorado is currently the only state that allows dispensaries to be run as for-profit businesses. That hasn t made much difference in how these businesses operate yet, but it will eventually, says Rob Kampia, the executive director of the Marijuana Policy Project. There s a few ways to make a lot of money in the U.S., and one of them is to start up a business and sell it, he says. You can t do that if you re running a nonprofit dispensary in Maine. Potential investors should also know that if a business that sells marijuana runs into federal legal trouble, anyone connected with the business could not only lose their money but face scrutiny of their other assets a risk that doesn t accrue to selling, say, fertilizer.
Professionals who don t want to get quite that close to the action could consider following in the footsteps of Handley, Woods, Held and other service providers who have found cannabis a profitable niche. Dispensaries need legal and tax advice, HR services and security, among other business services, and providing legal services to legal businesses is completely legit. Just don t accept payment in kind.