Biotech, CBD drinks, and a hot vape company: Here’s where all the top marijuana VCs are looking to write checks this year

AP Photo/Steven Senne

Business Insider spoke with some of the top marijuana VCs about their strategies for 2019.
The VCs, including Poseidon’s Morgan Paxhia and Canopy River’s Narbe Alexandrian, pointed to ancillary tech, as well as biotech and ag-tech as hot areas for investment.
Some, however, cautioned that the industry isn’t likely to produce any ‘unicorns’ yet — at least until marijuana is federally legal.

It’s been a hot few weeks for investors looking to ride the upside of the marijuana wave.

In January, marijuana VC piled into analytics startup Headset, California brand Caliva, and vape company Pax Labs, among other deals.

Investors have dumped over $440 million into marijuana companies so far this year, an increase of 37% over the same period last year, according to data from investment bank Viridian Capital Advisors.

On top of that, a number of dedicated cannabis funds have either sprouted up or are in the midst of raising their second or third pools of capital to chase down opportunities in the sector.

Business Insider spoke with a number of VCs investing in the marijuana industry to get a sense of what types of deals they’re looking for — and what trends are on the horizon.

Here’s what they had to say:

We’re in ‘wave three’ of the cannabis industry, and it’s all about CPG. And CBD.

Narbe Alexandrian, the recently-promoted president of the $200 million Canopy Rivers (the venture arm of marijuana cultivation giant Canopy Growth), told Business Insider in a recent interview that we’re in "wave three" of the cannabis industry.

Wave number one was cultivation, wave two is ancillary technology, wave three is CPG [consumer packaged goods], wave four is pharma, and wave five is mass-market, where you have your Coke and Pepsi-type oligopolies in play," he said.

As part of that thesis, Canopy Rivers sank $6.8 million into Greenhouse Juice Company in January. Greenhouse hopes to develop a CBD product line they can market across Canada, and eventually around the world.

CBD, or cannabidiol, is a non-psychoactive compound in marijuana that’s become a trendy ingredient in food and beverages. It’s said to help alleviate pain and anxiety, at least anecdotally, though the science is still shaky on some of these claims.

Since the Farm Bill passed late last year, hemp has been legal throughout the US. While hemp doesn’t contain THC, the compound in marijuana that gets you high, it is a cheap source of CBD.

Expect to see a lot of deals in the hemp and CBD space, as investors look to capitalize on the trendy ingredient’s newfound legality.

states where marijuana legal 2x1 Skye Gould/Business Insider

‘There’s a lot more we can understand about the plant’

One of the next areas that Alexandrian has his eye on: life sciences — and the intellectual property that comes out of sequencing the genes in the marijuana plant or developing technology to extract the plant’s components.

"I don’t want to give away all my deal flow," said Alexandrian. "But there’s a lot more we can understand about the plant, about how to increase yields through genetics and plant sciences. We see tremendous value in those companies."

Micah Tapman, a cannabis industry veteran, is in the process of raising $30 million for a new fund to go after these types of biotech and ag-tech startups.

Tapman told Business Insider his new fund, 7thirty, is interested in backing startups that are solving biochemistry problems: as in, how to grow marijuana plants more efficiently — and with fewer pesticides and an emphasis on organic pest and fungus control.

The opportunity could be immense, even outside of the confines of cannabis.

"Of course if people come up with better organic solutions to these things for cannabis, there’s a 99% chance it can work for other plants as well," said Tapman. "So you can easily go back to lettuce growers or tomato growers and say ‘hey we can solve this problem."

And the timing is right because most mainstream VC funds still won’t touch cannabis companies. That leaves lots of deal flow open to those who willing to stomach the risk, or who aren’t otherwise blocked from investing in the industry by their own investors.

Marijuana ‘unicorns’ will remain as elusive as ever

Marijuana is considered an illegal, Schedule I drug by the US federal government, so most blue-chip VCs — those backed by multibillion-dollar pension funds or sovereign wealth funds — aren’t allowed to participate in the market.

That creates what Bradley Tusk, a partner at Tusk Ventures, says are severe liquidity problems for US cannabis startups looking to raise money.

"There seems to be this automatic linkage of, well, if states are legalizing and society is shifting in this direction, a rising tide lifts all boats and therefore this is good for cannabis tech and a good time to invest in cannabis tech," Tusk said at a recent interview in his New York City office.

"The way I see it, that’s an overly simplistic view," said Tusk. "This is an industry with huge potential — once cannabis is off the list of Schedule I drugs."

Tusk, who first came to prominence as a campaign manager to former Mayor Michael Bloomberg — and then by taking shares in Uber for his help navigating the ride-sharing startup’s entry into New York City — is now in the process of raising a new fund, a portion of which will go to cannabis investments.

VCs like startups that can scale "very, very quickly" by raising tremendous amounts of money, said Tusk. Cannabis companies are hamstrung because there’s a hard ceiling on how much they’re likely able to raise because the biggest funds can’t participate. That means they’re not able to raise money on the pace of, say, the scooter startup Bird.

To Tusk, that means cannabis isn’t going to mint any unicorns that mainstream VCs crave — yet.

"Is there a $10,000,000,000 cannabis tech startup out there somewhere? Absolutely," said Tusk. "Can that company truly exist before every VC can participate in the market? Probably not."

That hasn’t stopped some bigger funds from dipping their toes into the industry.

Lerer Hippeau, which invested in buzzy companies like Allbirds and Casper, has also invested in Leaflink and Vangst, two cannabis tech startups that don’t cultivate or sell THC-containing products directly. These startups provide software, data, or services like staffing support to the rapidly growing industry, without breaking any federal laws.

AP Photo/Carlos Osorio

‘The pressure is building’

For other investors, it’s about getting in these cannabis tech companies early — before they go public.

"So many big funds have blown past this part of the industry, saying, ‘you know, there is no moat there, it’s too complicated to figure out,’" said Morgan Paxhia, a managing partner of Poseidon Asset Management, a San Francisco-based marijuana fund. "But that’s our opportunity."

Paxhia is in the process of raising $75 million for Poseidon’s second marijuana-focused fund. And he’s honing in on companies that he says could list on US stock exchanges — since they don’t produce marijuana directly — like the vape company Pax Labs.

Pax "could absolutely be a NASDAQ company," said Paxhia. "They could live there and they could do very well."

Poseidon’s first fund, for its part, got into Pax early. With his second fund, he and his partner (his sister Emily), are building positions in similar companies before the biggest VC and private equity funds jump in the industry and eat everyone’s lunch.

"It’s been a trickle up to this point, but the pressure is building," said Paxhia. When he goes to marijuana conferences, Paxhia said there are analysts from all the major funds there, snooping around and asking questions. "They’re all doing their homework, or they’re getting personal investments made so that they’re getting educated," he said.

That’s why Paxhia said he’s "so focused" on getting Poseidon’s second fund committed. "We want to get as many positions that we’ve been working on into the funds before all of a sudden we’re going against multibillion-dollar firms."

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Source: Business Insider