Eight Reasons Why Investors Are Backing Cannabis Startups

What can $3.5 million in funding get you? The top slot as the most venture-capitalist-backed company in the cannabis industry.

Last week, Baker, a marketing-automation platform, announced that it had secured a $1.6 million extension to its August 2016 seed round — bringing its total raised capital to $3.5 million. The company's software connects dispensary owners with customers throughout every touchpoint, from online ordering to in-store check-in and interactive shopping menus. Last year, Baker helped more than 250 dispensaries collect a total of $3.1 million in revenue.

"We chose to invest in Baker because of their impressive management team, strong strategic partners and co-investors, scalable business model requiring low [capital expenditure], and critically important tech solution," says Larry Schnurmacher, managing partner at Phyto Partners, which has invested in Baker.

Baker isn't the only cannabis startup gaining traction. The green rush is going strong, and investors who have never before backed a cannabis company are looking to help blaze the trail. We talked to a few experts in the industry about why investors are interested; here are eight reasons they gave.

1. Variety of business and industry opportunities.

You name it, there's an opportunity for it within the cannabis field. Innovative entrepreneurs are looking at new ways to tackle technology, lighting, data management, packaging and everything in between to help develop the bare-bones industry. "I see it as the next great industry, from a number of standpoints," Schnurmacher says. "Cannabis will bring forth medical breakthroughs, health and wellness benefits; society at large will be better off allowing adult use and industrial applications."

There isn't much that cannabis can't touch, and investors certainly see that potential in the emerging and quickly growing market.

2. Rapid valuation shifts.

"Quick valuation shifts are taking place in a very compressed time period," says Leslie Bocskor, president of Electrum Partners. It makes sense, considering the variances that arise with regulatory differences, merger-and-acquisition changes and marketability options. The answer to 'What is this business worth?' changes daily."

But, Bocskor continues, "oftentimes there is liquidity in these markets, whether through the public market or second markets within the businesses and licenses that are the underpinnings of the company or insular businesses that surround them." He adds that this combination gives a "diligent and agile investor" the opportunity to look for good returns — especially when considering the businesses involved and what could happen if they succeed.

3. Personal experience and passion.

The fact that marijuana is illegal federally bars many institutional investors. But many family investment groups and high-net-worth individuals invest because cannabis has effectively helped a relative — whether it's a child with epilepsy, a brother with PTSD or a parent with cerebral palsy. These angel investors are not only extremely invested as a result, but they can make decisions much faster than institutional investors.

4. Opportunity for high-risk management practice.

Investors are well aware of the stigmas and concerns surrounding federal illegality. "Until the perceived clear and present danger is resolved, investors' objections cannot be ignored or set aside," Schnurmacher says.

But the fluidity of the industry draws risk-seekers — especially because of the convergence of a number of issues, including the development of a regulated market, conflict with illegal and legal regulations, and social-justice considerations. Bocskor explains that cannabis investors must "contextualize the risk in a way that will allow them to make decisions that are within their risk tolerance, and yet plan for what those risks mean in terms of how they need to deploy their capital and manage their investments."

Keep reading for more reasons investors are looking at cannabis.

A staff meeting at Baker, a startup that's attracted attention...and investors.
A staff meeting at Baker, a startup that's attracted attention...and investors.
Baker

5. Possibility of bringing capital and expertise from previous businesses.

Cannabis touches a range of enterprises, from marketing to retail, science, agriculture and pharmaceuticals. This gives investors who have experience in other industries an advantage, since they can share their knowledge gained in other areas and serve as both investors and advisors.

"The relationship we have with our investor is different," says Natasha Irizarry, co-founder and CEO of Stashbox. "We have to be open, vulnerable and go to them when we don't know the answer. It's not just about money; it's a mentorship."

6. It's familiar—and it's a money-maker.

"We look for the same thing in a cannabis company that we look for in any company we invest in," Schnurmacher says. "First, a strong and experienced management team that has a passion for the business along with a proprietary solution or product. Next, we want to see a solid business plan along with enough capital and strategic co-investors to execute and get to positive cash flow."

For a small amount of money, an investor can reap big rewards. Putting down $5,000 could easily get you a board seat in a startup. And considering that legal marijuana sales are expected to hit $20.6 billion by 2020, it's a lucrative opportunity many find hard to pass up.

7. But it's also new.

"Investing in cannabis is unlike anything else anyone has ever done," Bocskor says. "Investors must either find the experts to advise them, have relationships with them or become experts themselves on navigating these very dynamic markets."

Investors new to the space must learn and change their practices to the evolving industry. For example, subscription documents and private-placement memorandums must be changed, with added risk disclosures and amended vice clauses. "Cannabis is a new asset class and an emerging market all rolled into one," Schnurmacher says. "The market and pent-up/latent demand does not have to be proven and will most likely surprise on the upside as laws continue to change and acceptance improves amongst consumers and the health-care community at large."

8. Making the world a better place.

"Cannabis allows you to do something where you can feel good about what you're doing every day," Bocskor notes. "You're reducing social injustice. You're creating availability to something that improves people's lives. You're helping to destroy the black market and creating wealth."

To put it simply, investors have the opportunity to make this industry what it should be.

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