Business
2:21 pm
Thu August 1, 2013

Private Equity Fund Eyes The Business Of Pot

Originally published on Thu August 1, 2013 6:40 pm

A couple of guys with serious investment banking experience are moving into the marijuana business. They've launched the first multimillion-dollar private equity fund devoted entirely to what they like to call the "cannabis space."

It started when Brendan Kennedy was working at the Silicon Valley Bank and learned of an entrepreneur who wanted to sell software for marijuana dispensaries. The idea piqued Kennedy's interest. A few days later, a radio show about legalizing pot piqued it even more.

There's an opportunity here, he thought, and picked up the phone and called his Yale business school buddy, Michael Blue. He told Blue he thought his friend needed to quit his job and come start a company in the cannabis industry.

"That's not a call you really ever expect to get," Blue says.

But then Blue and Kennedy had been bouncing ideas off each other for years. "We had always known since business school that we wanted to do something together. And Brendan said, 'Listen, we've talked about a lot of ideas, but I think it's the biggest opportunity we're ever going to see in our lifetimes,' " Blue says.

After more than a year of study, they took the plunge and set up a private equity company that would buy up firms serving the marijuana market. Their company, Privateer Holdings, has just raised $7 million from investors.

Privateer is focused on the so-called medical marijuana industry and the tiny — but potentially huge — market for legal recreational pot. Kennedy cites public opinion polls showing that a majority of Americans now favor legalization and refers to a recent Fox News poll that showed 85 percent of Americans think doctor-prescribed medical marijuana is OK.

"You can't get 85 percent of Americans to agree on anything, but they agree on that. Cannabis is mainstream, and we just need to create mainstream companies now," Kennedy says.

Their firm won't touch the weed itself, but the executives still see a market for ancillary goods and services of perhaps $10 billion a year. Kennedy suggests they're less interested in companies producing grow lights than those offering insurance or specialized software — or perhaps a company making devices to deliver marijuana using steam instead of smoke.

"We're interested in companies that change the conversation," Kennedy says.

Sowing The Seeds Of A New Industry

Change the conversation. It's one of their favorite phrases. Kennedy and Blue — who dress like Wall Street bankers — are trying to catapult the industry above its High Times and Cheech and Chong image. They admit to having some concerns about potential mental health effects of pot on young adults, but believe legalizing and regulating it will make it easier to keep pot out of the hands of minors.

So far, Privateer has made just one acquisition, a company called Leafly. It's a user-driven recommendation site for marijuana strains and dispensaries. Cy Scott, one of Leafly's co-founders, says teaming up with Privateer has enabled his company to grow.

"Now we have a dedicated sales team, and we're growing our engineering staff, we're growing our content staff. They just brought a lot of resources to bear that we really didn't have on our own," Scott says.

Privateer's money adds something else. Wharton professor Ethan Mollick says private equity brings credibility to the business of weed and says scholars of entrepreneurship often consider the question: How does a new industry become legitimate?

"I think you're seeing that process beginning or has already begun but gathering steam in cannabis," Mollick says.

But Harvard economist Jeffrey Miron warns: Not so fast.

Miron is a libertarian who advocates legalizing pot, but he thinks Blue and Kennedy are overstating the size of their potential market. He suggests that until marijuana is legal under federal law, it will be hard for mainstream marijuana businesses to thrive.

"To me, there's still a lot of hurdles that have to be jumped through, and it could be five years, 10 years, 20 years before the federal law actually changes. So my hat's off to them, but I don't think I would invest with them at this point," Miron says.

But others are investing, and Privateer says it will soon be in a position to raise a lot more money for its marijuana-related investment fund.

Copyright 2014 NPR. To see more, visit http://www.npr.org/.

Transcript

AUDIE CORNISH, HOST:

From NPR News, this is ALL THINGS CONSIDERED. I'm Audie Cornish.

MELISSA BLOCK, HOST:

And I'm Melissa Block.

Now, a story about a couple of guys with a lot of investment banking experience, but they're not doing your usual investment banking. They want to take the marijuana business to the next level. In Washington State, where recreational pot is now illegal, they've launched the first multi-million dollar private equity fund devoted entirely to what they like to call the Cannabis Space.

NPR's Wendy Kaufman has their story.

WENDY KAUFMAN, BYLINE: While Brendan Kennedy was working at the Silicon Valley Bank, he and learned of an entrepreneur who wanted to sell software for marijuana dispensaries. The idea piqued his interest. A few days later, a radio show about legalizing pot piqued it even more.

BRENDAN KENNEDY: It was just the second data point.

KAUFMAN: There's an opportunity here, he thought, and he picked up the phone and called his Yale business school buddy, Michael Blue. He said, Michael, I think you need to quit your job and come start a company in the cannabis industry.

MICHAEL BLUE: That's not a call you really ever expect to get.

KAUFMAN: But then Michael Blue and Brendan Kennedy had been bouncing ideas off each other for years.

BLUE: We'd always known since business school that we wanted to do something together. And Brendan said, listen, we've talked about a lot of ideas, but I think it's the biggest opportunity we're ever going to see in our lifetimes.

KAUFMAN: After more than a year of study, they took the plunge and set up a private equity company that would acquire firms serving the marijuana market. Their company, Privateer Holdings, has just raised $7 million from investors. Privateer is focused on the so-called medical marijuana industry and the tiny but potentially huge market for legal recreational pot.

Kennedy cites public opinion polls showing that a majority of Americans now favor legalization, and refers to a recent Fox News poll that showed 85 percent of Americans think doctor-prescribed medical marijuana is OK.

KENNEDY: You can't get 85 percent of Americans to agree on anything but they agree on that. Cannabis is mainstream and we just need to create mainstream companies now.

KAUFMAN: Their firm won't touch the weed itself but they still see a market for ancillary goods and services of perhaps $10 billion a year. Kennedy suggests they're less interested in companies producing grow lights than those offering insurance or specialized software, or perhaps a company making devices to deliver marijuana using steam instead of smoke.

KENNEDY: We're interested in companies that change the conversation.

KAUFMAN: It's one of their favorite phrases. Kennedy and Blue - who dress like Wall Street bankers - are trying to catapult the industry above its High Times and Cheech and Chong image. They admit to having some concerns about potential mental health effects of pot on young adults but believe legalizing and regulating it will make it easier to keep pot out of the hands of minors.

So far, their company has made just one acquisition, a company called Leafly. It's a user-driven recommendation site for marijuana strains and dispensaries. Cy Scott, one of Leafly's co-founders, says teaming up with Privateer has enabled them to grow.

CY SCOTT: Now we have a dedicated sales team and we're growing our engineering staff. We're growing our content staff. They just brought a lot of resources to bear that we really didn't have on our own.

KAUFMAN: And Privateer's money adds something else. Wharton professor Ethan Mollick says private equity brings credibility to the business of weed, and says scholars of entrepreneurship often consider this question...

ETHAN MOLLICK: How does a new industry become legitimate? And I think you're seeing that process beginning or has already begun but gathering steam in cannabis.

KAUFMAN: But Harvard economist Jeffrey Miron says not so fast. Miron is a libertarian who advocates legalizing pot, but he thinks Blue and Kennedy are overstating the size of their potential market and suggests that until marijuana is legal under federal law, it will be hard for mainstream marijuana businesses to thrive.

JEFFREY MIRON: To me, there's still a lot of hurdles that have to be jumped through. And it could be five years, 10 years, 20 years before the federal law actually changes. So, you know, my hat's off to them but I don't think I would invest with them at this point.

(LAUGHTER)

KAUFMAN: But others are investing. And Privateer says it will soon be in a position to raise a lot more money for its marijuana-related investment fund.

Wendy Kaufman, NPR News, Seattle. Transcript provided by NPR, Copyright NPR.