Silicon Valley entrepreneurs love to beat their chests about how disruptive they are. As the trope goes, they’re fearless about betting on the next far-out idea, whether it’s driverless cars, private space flight or the Airbnb of parking spots.
But that bravery hasn’t extended to one booming industry that’s experiencing a 68 percent growth rate: the legal cannabis market. When it comes to investing in marijuana – California’s largest cash crop – many venture capitalists are still paranoid.
“You guys are willing to invest all this money, you say you’re all disruptive, but when the rubber meets the road and we’re talking about real, legal disruption, you guys head for the hills,” said Justin Hartfield, one of the nation’s few venture capitalists focused on marijuana-related startups.
Alongside his venture capital firm Ghost Group, Hartfield, of Newport Beach (Orange County), runs the dispensary-locating startup WeedMaps.com. He brags about not accepting “one dime” of Silicon Valley money for any of his marijuana-related enterprises, which he says make “north of $25 million a year.”
“Silicon Valley is totally out of touch,” he said. “There’s no dispensaries on Sand Hill Road.”
Four years ago, Hartfield pitched several of the valley’s top investors. He thought billionaire venture capitalist Tim Draper seemed interested. But a few weeks after they met, Draper told him he was out.
Backing out
Miffed, Hartfield relayed the incident to tech publication TechCrunch, including what he said Draper wrote to him: “I am going to chicken out. You have an awesome business, and it will probably be worth a ton someday, but I can’t pull the trigger. Sorry, Best, Tim.” (A representative for Draper did not return requests for comment.)
Hartfield said he does understand the institutional reticence.
Investors are worried that the federal government classifies marijuana as a Schedule 1 drug on par with heroin, and has been clamping down on medicinal marijuana outlets even in states where they are legal, like California.
They question whether there are enough smart, seasoned entrepreneurs to trust with their money. Analysts say the valley doubts that the legal market – which is predicted to grow to $2.57 billion this year – is big enough to generate mega returns.
And there’s fear about scalability. Medical marijuana is legal in only 22 states and the District of Columbia; recreational pot is permitted for adults over 21 only in Colorado and Washington.
Limited partners at traditional venture firms “are particularly uncomfortable with things that may create legal risk, and this is a big one since most government and financial institutions have strict antidrug and drug testing laws for their own people,” said Lisa Suennen, a longtime health care venture capitalist now with Venture Valkyrie Consulting.
Many firms have outright prohibitions against investing in “sin” products like pornography, alcohol, tobacco, firearms and illegal drugs.
Plus, Suennen said, “It’s not entirely clear that there are good entrepreneurs in the space in large quantity yet, as opposed to grown-up stoners that figured out how to monetize their addiction to things that maximize use of Twinkies and Grateful Dead albums. It’s one thing when the CEO shows up in an ironic hipster T-shirt, quite another when that is their actual wardrobe.”
Little so far
That helps explain why there was $8.5 billion of venture funding in San Francisco and Silicon Valley last year and just $51 million invested in cannabis-related businesses nationwide over the past five years, according to the National Venture Capital Association.
It’s the venture capital equivalent of stems and seeds. But over the past few months, insiders say, things have been slowly, quietly changing. Big money and top talent is starting to smell the green.
Privateer Holdings – a marijuana-focused private-equity fund in Seattle – is led by Brendan Kennedy, a former executive at SVB Analytics, a nonbank affiliate of Silicon Valley Bank. Privateer has raised $22 million, and is now aiming to raise Series B of more than $50 million. Kennedy told Geekwire, a tech industry publication, that the new round will include “several institutional investors.”
Tom Bollich, a co-founder of San Francisco online game company Zynga, just took over as chief executive of Surna, a Boulder, Colo., company that invests in marijuana-related businesses. Serna recently purchased Hydro Innovations, which creates cooling systems for large-scale indoor growers.
Bollich likened the nascent marijuana industry in Colorado to the early days of the tech sector. “This is the Silicon Valley of weed,” Bollich told the Boulder County Business Report this month.
Grassp, a product described as the Uber for cannabis, has gained buzz promising to deliver medical marijuana to qualified patients in 60 minutes with only a few keystrokes.
Analysts say one of the safest spaces to invest is pot-related products – high-tech hardware, like vaporizers.
Uptoke is a San Francisco company that sells sleek, cigar-size vaporizers for $299. Started by Berkeley engineer Jason Levin, the company’s tagline points to its dual roots: “Silicon Valley meets Humboldt County.”
Most of the technology has been done by “the cannabis nerds, much as the tech nerds were the first to delve into Silicon Valley,” said Amanda Reiman, policy manager for the Drug Policy Alliance.
“I predict, however, that as the policies and regulations start to expand and incorporate more ancillary businesses, we will see greater involvement from the traditional tech entrepreneurs,” Reiman said.
Ready to jump
Among them may be Adam Wiggins, a co-founder of San Francisco cloud company Heroku, which was acquired by Salesforce.com for $212 million in 2010.
Wiggins, now a board member at the Marijuana Policy Project, “hasn’t made any investments in the sector, but is looking closely,” said Troy Dayton, CEO of the ArcView Group, a San Francisco firm that counts 200 high-net-worth members like Wiggins who are looking to invest in cannabis-related industries.
“That is what we’re seeing a lot of from the tech world. This is a very nascent industry, so they’re thinking about how they’re going to play,” Dayton said.
Ripe for ingenuity
Just a year ago, ArcView had 30 members. This week, Dayton spoke to the Rockies Venture Club, an angel investors group in Denver, the epicenter of the legal marijuana industry. Next month, ArcView will hold an investors forum at the Denver Center for the Performing Arts, with a reception to follow at the Four Seasons Hotel.
Dayton says the marijuana industry “is so ripe for the kind of ingenuity that comes out of Silicon Valley.”
“There’s all this capital that has shown up and is ready to go, and yet investors are having a tough time to find the right entrepreneurs to back,” Dayton said. “But that’s changing. It’s coming right now.”
Joe Garofoli is a San Francisco Chronicle staff writer. E-mail: jgarofoli@sfchronicle.com Twitter: @joegarofoli
When it comes to marijuana, many VCs still won't inhale
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