High hopes for pot funds as legal backdrop shifts–VCJ report

This month’s cover story is about a smoking hot sector that is starting to gain more attention from venture capitalists–the legal and medical marijuana industry.

As of early September, VCJ found at least four professional investment groups targeting the legal and medical marijuana industry. They are all going after what is estimated to be a $1.7 billion market, according to research firm IBISWorld. And many believe the market could grow larger, considering the push for federal decriminalization of marijuana, even reaching the trillions of dollars.

Justin Hartfield’s Southern California-based venture firm, called Emerald Ocean Capital Group, is starting small. It’s in the process of raising a $10 million venture fund for marijuana startups, with most of the money coming from high-net-worth individuals and family offices. Though the firm has not yet made an investment, it is avoiding companies that grow or distribute marijuana. Instead, Hartfield wants to invest in ancillary businesses that support the industry, such as hydroponic technologies and marijuana gadgets.

Emerald Ocean now has an 8,000-square foot facility in Denver to incubate the most promising pot startups.

Another new group, San Francisco-based ArcView Investor Network, operates as a collection of about 70 private investors who see the opportunity to enter a massive industry on the ground floor. ArcView holds regular investor meetings where cannabis-related startups pitch members and raise capital. The group is comprised of accredited investors “who are all betting on the fact that marijuana prohibition will soon be over, not just in the United States, but across the globe,” said co-founder Troy Dayton.

The tea leaves may be in their favor.

As VCJ contributor Tom Stein reports: A majority of the nation’s adults now favor full legalization, according to the most recent Pew poll. As further evidence of shifting public opinion, Dr. Sanjay Gupta, one of the more influential medical figures in the United States among consumers, recently changed his stance on medical marijuana, coming out in favor of legalization, after earlier saying there is no way he’d support it. Republican Gov. Chris Christie of New Jersey has come out in favor of medical marijuana for sick children.

But how about mainstream healthcare VCs? Would they ever invest in the marijuana industry?

“We’d have to see the laws changed first,” said Lisa Suennen, managing member at Psilos Group. “It’s hard to imagine a VC taking the legal risk knowing that their LPs are often government institutions. But if the federal laws change, then marijuana will become a pharmaceutical product. And VCs certainly do invest in those.”

This story first appeared in Reuters Venture Capital Journal. Subscribers can read the original story here. A perspective piece by Justin Hartfield is located here. To subscribe to VCJ, please email [email protected].

Photo of marijuana leaf in hand from Shutterstock.