Marijuana firms form investment network for pot-related startups
Legal marijuana's sensational evolution is helping crack open a previously closed door: money to start and grow cannabis businesses.
Marijuana entrepreneurs routinely are turned down for bank loans or deposit accounts and have struggled to attract financing from private investors.
But thanks largely to recreational pot's new legal status in Colorado and Washington and more states approving medical marijuana, checkbooks are opening and investment partnerships are being signed.
Colorado business owners are at the hub of a new national network that matches venture capitalists with budding marijuana entrepreneurs.
At a recent investor conference in Seattle, two Colorado firms with money to invest listened to a pitch from a third local business seeking growth capital. The common ingredient: They sell cannabis products or provide services to the industry.
Finding funds to grow has been a struggle, said Dan Williams, president of Denver-based Canna Security America, a firm that installs security systems at marijuana dispensaries and at grow operations.
Williams and his employees never touch cannabis Ã¢â¬" only electronics Ã¢â¬" yet until last month, they had been shut out of traditional sources of financing.
Williams didn't even bother applying for a bank loan when he started the business in 2009. Banks typically fear regulatory repercussions because of marijuana's still-illegal status under federal law.
"We were a zero-capital startup," Williams said. "We would do a job so that we could go buy a ladder. Then we would do another job so we could buy business cards."
Earlier this year, Canna Security moved its headquarters from Williams' basement to commercial office space in northwest Denver. The company is preparing to launch operations in Washington and several states with recently enacted medical marijuana laws. Williams projects that his staff of five could grow to more than 30 in the next two years.
Instrumental in the growth plans was a recent equity investment from Denver-based marijuana entrepreneur Tripp Keber. He is the owner of Dixie Elixirs, a wholesaler of pot-infused foods and beverages.
Keber watched earlier this year as Canna Security officials pitched their company at the ArcView Investor Network conference in Seattle. Liking what he saw, Keber invested an undisclosed amount in the firm.
Dixie Elixirs is fast-growing and successful with annual sales of more than $3 million, but Keber knows the struggles of trying to start and expand a cannabis-related business.
"I couldn't go to Wells Fargo and get a business loan," he said, instead using personal funds from non-marijuana business ventures and not drawing a paycheck for 2Â½ years.
But Keber sees such strong growth potential in both his own enterprise and other marijuana businesses that he became an investor member of ArcView, a San Francisco-based network that helps link investors with marijuana-related companies seeking funding.
"People are realizing that this is the next great American industry," said Troy Dayton, co-founder and CEO of ArcView.
But even recently, the outlook was not so positive. ArcView was founded in November 2011. Shortly thereafter, federal agents launched a series of raids on California medical marijuana dispensaries. They had a chilling effect on investment in the industry, Dayton said.
ArcView last year decided to schedule a networking meeting in Denver on Nov. 7, the day after Colorado voters were determining the fate of Amendment 64.
"Either we were going to commiserate together or celebrate together," Dayton said. "Before (Amendment 64's passage), we looked like an industry contracting. Now the energy is palpable."
ArcView earlier this month announced its first investments, up to $2 million split among five companies, including Canna Security.
Another Colorado firm, MJ Freeway, has been on both sides of the investment spectrum Ã¢â¬" first pitching to investors for growth capital, and now as an investor member of ArcView.
The firm provides software to businesses for tracking every gram of marijuana from cultivation facility to retail sale. It also helps companies maintain compliance with state regulations.
"It was not easy at all to get started," said co-founder Jessica Billingsley. "We were bootstrapped, self-funded. There were a number of times when we had to double down on our investment."
Like Canna Security, MJ Freeway has no physical contact with marijuana.
"We thought that as software providers, we wouldn't face this degree of (financing) challenges," said co-founder Amy Poinsett.
But now, after three years of operations, MJ Freeway is profitable and growing, with hundreds of clients in 12 states, Washington, D.C., and Canada. Its 2013 revenue is projected at between $1 million and $2 million.
The partners last year had attended ArcView meetings to raise money. This year, they're sitting on the other side of the table as prospective investors. Although they haven't yet invested, they discovered two pitching companies that could be candidates for investment or creation of joint ventures.
Investors say they are pleased that the marijuana industry is moving from niche status to the economic mainstream.
"When you invest in cannabis," Keber said, "you invest in America."
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